[Federal Register Volume 67, Number 17 (Friday, January 25, 2002)]
[Rules and Regulations]
[Pages 3587-3605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1842]



[[Page 3587]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1777

RIN 2550-AA12


Prompt Supervisory Response and Corrective Action

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final rule.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
issuing a final rule to set forth the procedures by which OFHEO 
administers the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992, under which OFHEO takes prompt corrective action 
in response to specified declines in the capital levels of the Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac) (collectively, the Enterprises). The 
rule also implements a system of prompt supervisory responses to be 
taken whenever developments internal or external to an Enterprise, as 
identified by the agency on a case-by-case basis, may warrant special 
supervisory review by OFHEO. The initiation of a special supervisory 
review pursuant to such a procedure does not of itself indicate that an 
Enterprise is in an unsound condition; rather, it means only that OFHEO 
is undertaking a focused inquiry to ascertain the likely consequences 
of a particular development or developments for the Enterprise.

EFFECTIVE DATE: February 25, 2002.

FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel, 
(202) 414-3788 or David W. Roderer, Deputy General Counsel, (202) 414-
6924 (not toll-free numbers), 1700 G Street NW, Fourth Floor, 
Washington, DC 20552. The telephone number for the Telecommunications 
Device for the Deaf is: (800) 877-8339 (TDD only).

SUPPLEMENTARY INFORMATION:

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Public Law 102-550, entitled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (1992 Act), established OFHEO. OFHEO 
is an independent office within the Department of Housing and Urban 
Development with responsibility for ensuring that the Enterprises are 
adequately capitalized and operate safely and in conformity to the 
requirements of applicable statutes, rules and regulations, including 
their respective charter acts.\1\ The Enterprises were established to 
effect specific public purposes under Federal law, including the 
provision of liquidity to the residential mortgage market and the 
promotion of the availability of mortgage credit benefiting low- and 
moderate-income families and areas that are underserved by lending 
institutions.\2\
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    \1\ 12 U.S.C. 4513(a). See also 12 U.S.C. 4513(b)(1)-(5), 4517, 
4521(a)(2)-(3), 4631(a)(3), 4636(a)(1).
    \2\ See Federal Home Loan Mortgage Corporation Act, 12 U.S.C. 
1451 et seq.; Federal National Mortgage Association Charter Act, 12 
U.S.C. 1716 et seq.; 1992 Act at 12 U.S.C. 4561-4567, 4562 note.
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    The enumerated statutory authorities of the Director explicitly 
include the authority to issue rules to carry out the duties of the 
Director,\3\ as well as other broad supervisory powers essentially 
similar to those of the Federal bank regulatory agencies. OFHEO is 
empowered to conduct examinations of the Enterprises; to require the 
Enterprises to provide reports;\4\ to establish capital standards for 
the Enterprises;\5\ and, in appropriate circumstances, to exercise 
administrative enforcement authority. OFHEO's range of enforcement 
authorities include, among other things, the power to issue temporary 
and permanent cease and desist orders to an Enterprise or its executive 
officers or directors, and to otherwise sanction or impose civil money 
penalties when appropriate.\6\ OFHEO's enforcement regime, addressing 
the scope of these authorities and the applicable rules of practice and 
procedure, is set forth in part 1780 of OFHEO's regulations.\7\
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    \3\ 12 U.S.C. 4513(b)(1).
    \4\ 12 U.S.C. 4514, 4517, 1456(c), 1723a(k).
    \5\ 12 U.S.C. 4611-4614.
    \6\ 12 U.S.C. 4631-4641.
    \7\ 12 CFR part 1780; see 66 FR 18040 (April 5, 2001)(OFHEO 
final rule amending purpose and scope section of part 1780, to 
summarize agency's statutory enforcement powers).
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    In addition, subtitle B of the 1992 Act requires OFHEO to establish 
certain capital thresholds for the Enterprises.\8\ The statute directs 
OFHEO to assign capital classifications to the Enterprises based on 
those capital thresholds, and authorizes OFHEO to reclassify an 
Enterprise notwithstanding the thresholds.\9\ An Enterprise that is not 
classified as ``adequately capitalized'' is required to obtain OFHEO's 
approval for, and carry out, a formal plan to restore the Enterprise's 
capital. Statutory provisions also prohibit an Enterprise from making 
any capital distribution that would result in the Enterprise not 
meeting the capital thresholds, absent OFHEO's approval, and imposes 
additional restrictions on capital distributions so long as the 
Enterprise is not classified as adequately capitalized. An Enterprise 
that is not classified as adequately capitalized may also be subject to 
a variety of regulatory limitations and restrictions as deemed to be 
appropriate by OFHEO.\10\
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    \8\ See 12 U.S.C. 4614-4619, 4622, 4623.
    \9\ Subtitle B of the 1992 Act directs OFHEO to classify the 
Enterprises into one of four capital classifications (``adequately 
capitalized,'' ``undercapitalized,'' ``significantly 
undercapitalized,'' or ``critically undercapitalized,''), based on 
the level of capital maintained by the Enterprise. For these 
purposes, OFHEO assesses the Enterprises' capital by reference to 
two standards. The first capital standard is based on ratios of core 
capital instruments to on balance sheet assets and off balance sheet 
obligations. The ratios are set according to percentages contained 
in 12 U.S.C. 4612 and 4613, subject to certain adjustments by OFHEO, 
and calculated in accordance with guidance from OFHEO under part 
1750 of OFHEO's regulations (12 CFR Part 1750). The statute provides 
for a ``minimum capital'' level based on these ratios, as well as a 
``critical capital'' level, based on lower ratios, that triggers 
additional enforcement requirements and authorities under subtitle B 
of the 1992 Act. The other capital standard is risk-based. On 
September 13, 2001, OFHEO published a final rule amending 12 CFR 
Part 1750 to implement this capital standard. 66 FR 47729. Rather 
than applying leverage ratios, this risk-based capital standard 
requires the Enterprises to hold sufficient total capital to 
maintain a positive capital position during a hypothetical ten-year 
stress period characterized by statutorily prescribed stressful 
credit conditions and large movements in interest rates, plus an 
additional amount to cover management and operations risk. As 
directed by 12 U.S.C. 4611, OFHEO has developed a stress test which, 
when applied to an Enterprise's book of business, will project the 
amount of total capital that would be necessary to survive the 
stresses described in the statute during the stress period. However, 
as provided in 12 U.S.C. 4614(d) and 4615(c), OFHEO is not to 
include consideration of an Enterprise's total capital during the 
classification process, until September 13, 2002.
    \10\ For a more detailed description of the prompt corrective 
action provisions of subtitle B of the 1992 Act, see 66 FR 18696-
18698 (April 10, 2001)(OFHEO's NPR on prompt supervisory response 
and PCA).
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    On April 10, 2001, OFHEO published a notice of proposed rulemaking 
at 66 FR 18694 seeking public comment on a proposal to issue a rule 
describing the scope of the actions the agency is authorized to take 
under certain prompt corrective action statutory provisions applicable 
to the Enterprises at 12 U.S.C. 4614 through 4618, 4619(b) through (e), 
4622 and 4623, as well as the procedures by which such actions will be 
carried out. OFHEO also sought public comment on adopting a proposed 
prompt supervisory response procedure, separate from the capital-based 
prompt corrective action regime, under which OFHEO proposed to monitor 
various supervisory concerns in addition to an

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Enterprise's capital classification, and to pursue early action by an 
Enterprise to preclude losses or possible losses, or to address 
particular threats to safety and soundness. The proposed procedure 
would be part of OFHEO's ongoing supervisory program that includes 
monitoring and examination of Enterprise activities on a continuous 
basis. The prompt supervisory response approach would complement and 
not supplant ongoing review programs. Similar to the procedures under 
the capital-based, prompt corrective action regime, as proposed the 
prompt supervisory response provision would have established a set of 
``tripwires,'' looking to specifically enumerated developments proposed 
to be appropriate junctures for a supervisory review to ascertain the 
financial or operational consequences of such developments upon the 
Enterprise. Under the proposal, the occasion of a specified tripwire 
event or condition would have triggered an automatic supervisory 
response by OFHEO.
    OFHEO received comments on these proposals from Fannie Mae, Freddie 
Mac, and one former senior government official. The three commenters 
questioned the need for the prompt supervisory response regime. They 
similarly asserted that, since OFHEO already conducts continuous and 
comprehensive on-site supervision of the Enterprises and can work with 
the Enterprises informally to resolve any significant supervisory 
issues that arise, the prompt supervisory response approach would add 
nothing to OFHEO's ability to exercise supervisory oversight for the 
Enterprises.
    The prompt supervisory response approach reflects OFHEO's 
commitment to use a broad-based method to effectuate early 
identification of and supervisory action regarding potentially adverse 
developments or conditions affecting the Enterprises, by moving beyond 
the capital-based focus of prompt corrective action in appropriate 
circumstances. The prompt supervisory response approach mandates no 
specific conduct by the Enterprises; indeed, the need for action is to 
be ascertained on a case-by-case basis. In those instances in which the 
Enterprise has already undertaken appropriate steps, OFHEO anticipates 
that no additional action will be necessary. The approach also 
increases the transparency of the procedures and analytical framework 
OFHEO is to use in such matters. The role of OFHEO to ensure the safety 
and soundness of the Enterprises is not restricted to examination and 
capital monitoring functions on the one hand and to an enforcement or 
prompt corrective action procedures on the other. OFHEO's duty to 
ensure the Enterprises are adequately capitalized and operate safely 
\11\ means that the agency is charged by Congress to act to ensure the 
safety and soundness of the Enterprises at all points on the 
supervisory spectrum between examination and enforcement.\12\ Thus, 
OFHEO is also charged with ensuring that each Enterprise acts prudently 
in dealing with perceived problems as they emerge.
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    \11\ See, e.g., 12 U.S.C. 4513(a).
    \12\ See, e.g., 12 U.S.C. 4513(b)(5)(OFHEO authorized to take 
such actions and perform such functions as OFHEO determines 
necessary regarding ``* * * other matters relating to safety and 
soundness'' (emphasis added)).
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    OFHEO has taken the comments provided into consideration and is now 
issuing a final rule, with several modifications. In formulating 
Subpart A, the final prompt supervisory response rule, OFHEO has 
adopted a less rigid approach to identify developments warranting 
specific supervisory response under the rule, while the supervisory 
response process set out in the rule has been adopted as proposed, 
without substantive change. OFHEO has also made certain modifications 
to Subpart B, the prompt corrective action provisions of the rule. The 
final rule, along with the comments and modifications, are described 
below.

Prompt Supervisory Response Provisions of the Proposed Rule

    Subpart A establishes a system of prompt supervisory response to be 
taken when developments internal or external to an Enterprise, as 
identified by OFHEO, warrant special supervisory review. In order to 
provide a broad early intervention regime that addresses both capital-
related and non-capital-related supervisory concerns, the rule 
describes how OFHEO may initiate specified prompt supervisory responses 
to address non-capital considerations that are outside the primary 
focus of the prompt corrective action regime, of Subpart B.

Authority, Purpose, and Scope

    In their comments, each Enterprise asserted that the prompt 
supervisory response rule, as proposed, exceeded OFHEO's statutory 
authority, and should be wholly withdrawn. The rule--as proposed, and 
as adopted in final form here--contemplates that a letter be issued 
directing an Enterprise to respond to OFHEO's inquiry or that OFHEO may 
require an Enterprise to prepare and carry out an acceptable action 
plan. The Enterprises argue that this procedure would bypass specified 
statutory thresholds and procedural protections contained in the 1992 
Act, under which OFHEO may only issue cease and desist orders or 
require capital restoration plans in certain narrowly defined 
circumstances, pursuant to defined due process procedures. Moreover, 
the Enterprises asserted that OFHEO has no explicit statutory mandate 
to establish safety and soundness standards by regulation or other 
guidance.
    As OFHEO discussed in the preamble to the proposed rule, the prompt 
supervisory response approach is simply a procedural framework through 
which OFHEO may employ its current array of supervisory tools and 
regulatory authority to confront special factual scenarios. The 1992 
Act, at 12 U.S.C. 4631(a)(3)(A), sets out OFHEO's authority to order an 
Enterprise to cease and desist unsafe or unsound practices.\13\ By 
identifying and working with an Enterprise to eliminate perceived 
unsafe or unsound conditions or practices through an interactive 
supervisory process, such as is reflected in the prompt supervisory 
response approach, instead of resorting directly to an adjudicative 
enforcement action, OFHEO seeks to carry out its oversight 
responsibilities and neither exceeds its statutory authority nor 
circumvents the procedural scheme contained in 12 U.S.C. 4631. Any 
subsequent use of formal or informal enforcement procedures will be 
dependent, in large part, upon Enterprise action to address supervisory 
concerns, and will be undertaken pursuant to the applicable statutory 
procedures.
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    \13\ OFHEO has responded to Enterprise challenges to its 
authority to institute cease and desist proceedings to address 
unsafe or unsound practices. See 66 Fed. Reg. 18040, 18041 (April 5, 
2001) (discussion of Fannie Mae's and Freddie Mac's comments on 
OFHEO's procedural rules for enforcement actions).
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    OFHEO rejects assertions that the agency has no explicit statutory 
mandate to establish safety and soundness standards by regulation or 
guideline. The 1992 Act, at 12 U.S.C. 4513, particularly 12 U.S.C. 
4513(b)(1) and (b)(5), explicitly establishes such authority without 
reservation. More pertinently, the prompt supervisory response rule 
does not establish supervisory standards or specify remedies; rather, 
it establishes a supervisory process.
    As described in Sec. 1777.1(a) and 1777.1(b) of the final rule, the 
regulation is being issued under OFHEO's broad statutory authority to 
take such actions as the Director of OFHEO deems appropriate to ensure 
that the Enterprises operate in a safe and sound

[[Page 3589]]

manner, together with OFHEO's reporting \14\ and examination \15\ 
authorities. As set out in Sec. 1777.1(b), the purpose of subpart A of 
the rule is to fashion an early intervention regime to address matters 
of supervisory concern to OFHEO under its congressional mandate in 
addition to the capital considerations already focused upon by the 
prompt corrective action regime. However, as stated in Sec. 1777.1(b) 
of the final rule, OFHEO's initiation of the procedures under the rule 
does not necessarily indicate that an unsound condition exists; rather, 
the final rule is consistent with the process that OFHEO employs in 
reviewing the conduct of an Enterprise's affairs as a safety and 
soundness regulator. The possible supervisory responses described 
below, including a supervisory letter, an action plan, or a notice to 
show cause, as they might be used under the rule, do not constitute 
orders under the 1992 Act for purposes of 12 U.S.C. 4631 or 4636. They 
are simply steps in a predictable and organized process under which 
OFHEO will review issues and, as necessary and appropriate, provide 
supervisory guidance to an Enterprise.
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    \14\ 12 U.S.C. 4514, 1456(c), 1723a(k).
    \15\ 12 U.S.C. 4517.
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Developments Prompting Supervisory Response

    In Sec. 1777.10 of the proposed rule, OFHEO proposed to adopt a 
list of nine possible developments that would cause OFHEO to initiate a 
special review under the prompt supervisory response process. The 
proposed list included both external indicators tied to market factors, 
as well as internal indicators tied to factors within a particular 
Enterprise. The Enterprises submitted separate comments objecting to 
each of the nine proposed ``triggers'' on various grounds. In some 
instances, the Enterprises agreed that occurrence of a particular 
trigger event might indicate a potential for financial difficulties for 
the Enterprise, but asserted that the proposed triggers generally 
failed to take into account countervailing factors that could 
ameliorate any supervisory concern about a particular development. The 
Enterprises also asserted that the proposed triggers focused on matters 
that would most often have innocuous underlying causes, and would 
likely have already been subject to identification and assessment by 
the Enterprises and by OFHEO prior to the time that a prompt 
supervisory response inquiry might be initiated under the rule. OFHEO 
does not agree with the Enterprises' conclusions. OFHEO does agree that 
ongoing supervision and examination are central to its regulatory 
oversight, and OFHEO notes that ameliorative actions and prudent 
planning by an Enterprise to address a particular development would be 
relevant to a supervisory inquiry or suggested remedy under the prompt 
supervisory response approach.
    The final version of Sec. 1777.10 revises the approach of the 
proposed rule. In response to the comments, the list of developments 
prompting a supervisory response has been revised by deleting certain 
proposed developments and by retaining others, either as proposed or 
with modifications. The revised list retains proposed Sec. 1777.10(a) 
(relating to declines in the Housing Price Index) and proposed 
paragraph (j) , redesignated as paragraph (e) (as to the discretionary 
authority of the Director to initiate a supervisory letter in other 
circumstances). The final rule modifies Sec. 1777.10(c) to provide only 
that changes in ``publicly reported'' net income are the type of 
development addressed, and similarly paragraph (d) to provide only that 
changes in ``publicly reported'' net interest margin are the type of 
development addressed. The final rule modifies Sec. 1777.10(d) to raise 
the threshold amount of change in delinquent loans contemplated under 
this paragraph from one half of one percent to one percent, more 
appropriately defining the point that prompts a supervisory response. 
Based on comments received, the final rule does not include earlier 
proposed paragraphs (b) (relating to interest rate risk measures), (f) 
(matters related to equity calculations), (g) (matters related to data 
system operational problems), (h) (matters related to external auditor 
changes) and (i) (matters related to board meetings). The deletion of 
those paragraphs does not preclude their consideration as developments 
that might merit a supervisory response either under routine 
examination and supervision procedures of OFHEO or under the 
discretionary authority retained by the Director, under redesignated 
subsection (e).\16\ OFHEO will continue to review and refine the list 
of early warning indicators and to identify additional developments 
that may signal a significant possibility of difficulties so as to 
warrant a prompt supervisory response.
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    \16\ Redesignated Sec. 1777.10(e) provides that a supervisory 
response may be initiated upon the occurrence of ``[a]ny other 
development, including conduct of an activity by an Enterprise, that 
OFHEO determines in its discretion presents a risk to the safety and 
soundness of the Enterprises or is a possible violation of 
applicable law, regulation, or order.''
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    In their comments, both Enterprises noted that proposed 
Sec. 1777.10 (j), redesignated (e) in the final rule, would be 
sufficient to encompass all of the possible developments with which 
OFHEO was concerned under proposed Sec. 1777.10. In addition, Freddie 
Mac noted that proposed Sec. 1777.10 (j) most closely approximates 
OFHEO's existing oversight practices because it incorporates 
discretionary elements and implicitly suggests that OFHEO will consider 
the context of particular developments before initiating the prompt 
supervisory response process. Under Sec. 1777.10 (e) of the final rule, 
the Director of OFHEO has the discretion to initiate the prompt 
supervisory response process whenever he or she is concerned about a 
development or condition relating to an Enterprise's safety and 
soundness, regardless of whether it has manifested an impact on the 
Enterprise's capital level. Developments and conditions of concern to 
the Director under Sec. 1777.10 (e) might be detected by OFHEO in 
connection with an examination of the Enterprises, or in some other 
manner as the agency conducts its continuous supervisory and oversight 
functions.

Supervisory Response

    Section 1777.11 of the final rule sets out the various forms of 
supervisory response that may be taken under the regulation. As noted 
earlier, all elements of the response process are recognized and 
existing elements of OFHEO's oversight authorities. The final rule 
adopts the approach of the proposal with only conforming changes and 
one clarification. Under the procedures set forth under the final rule, 
there are several levels of response.
    In each case, OFHEO is to initiate a Level I supervisory action 
under Sec. 1777.11(a) within five days of OFHEO's determination under 
Sec. 1777.10 that a development or condition warrants supervisory 
response. The Enterprise will receive a supervisory letter advising the 
Enterprise that OFHEO has begun the prompt supervisory response process 
to address the development or condition and setting forth such other 
information and specific directions as the Director deems appropriate 
in light of the circumstances. For example, OFHEO may direct the 
Enterprise to provide information about the situation, to respond to 
OFHEO's specific questions or concerns, to take corrective or remedial 
action, or other preventative action as deemed appropriate.
    Based on the Enterprise's response to the supervisory letter and 
other relevant concerns, OFHEO will promptly

[[Page 3590]]

determine whether additional supervisory response under the rule is 
necessary. The Enterprise's response to the supervisory letter may 
cause OFHEO to conclude that the subject development creates no 
substantial supervisory concern or that the Enterprise's management of 
the risks and concerns presented by the development is adequate. In 
other instances, the supervisory letter process may cause OFHEO to 
conclude that a heightened level of supervisory concern is warranted, 
yet the letter process itself and continuing supervisory dialogue may 
be all that is needed to ensure that the Enterprise undertakes 
sufficient preventative or remedial measures.
    If additional supervisory action is deemed necessary, OFHEO has a 
variety of alternatives under Sec. 1777.11. Level II supervisory 
action, as set out in Sec. 1777.11(b), provides for a special review of 
an Enterprise. A special review may be useful in supplementing 
information already obtained by OFHEO through the examination process, 
and might provide OFHEO with a clearer picture of the situation than 
could otherwise be obtained through letters or reports. Such review 
could be conducted by OFHEO's Office of General Counsel, Office of 
Research and Model Development, Office of Examination and Oversight, 
Office of Policy Analysis and Research, or such other department or 
individual as designated by the Director. In light of such a special 
review, OFHEO will determine whether further supervisory action is 
warranted.
    Under Level III supervisory action set out in Sec. 1777.11(c), 
OFHEO may direct an Enterprise to prepare and submit an action plan 
addressing the development or condition. Among other things, the 
Enterprise's action plan may be required to include information about 
the circumstances leading up to the subject condition or development 
and an assessment of its possible effects upon the Enterprise. The 
Enterprise may also be asked to describe its proposed course of action 
for dealing with the development, including an analysis of available 
alternatives. If OFHEO determines that the action plan is insufficient 
to resolve the supervisory issues created by the development, OFHEO may 
direct the Enterprise to revise the plan. However, if OFHEO determines 
that the supervisory issues will not be resolved even under a revised 
plan, OFHEO may determine to initiate other supervisory responses.
    Under Level IV supervisory action, as set out in Sec. 1777.11(d), 
OFHEO will require the Enterprise to show cause why OFHEO should not 
initiate formal enforcement action against the Enterprise. OFHEO is 
not, however, required to issue a show cause notice prior to initiating 
an administrative enforcement action.
    The three commenters alleged that the prompt supervisory response 
process represents a ``one-size-fits-all'' approach that would 
unnecessarily limit OFHEO's flexibility and discretion, as well as the 
agency's ability to formulate timely, fact-specific, and flexible 
responses to emerging supervisory issues. OFHEO disagrees with that 
characterization. OFHEO is well aware of the necessity for a regulatory 
agency to apply its expertise to specific supervisory problems in light 
of the particular attendant facts, and to do so swiftly. Nothing in the 
prompt supervisory response process limits the flexibility necessary 
for OFHEO to meet its supervisory responsibilities. As the exclusive 
safety and soundness regulator of the Enterprises, OFHEO has been 
constituted with broad supervisory authorities in order to detect and 
address any safety and soundness concerns that may arise, and has broad 
enforcement powers to ensure that any safety and soundness deficiency 
or violation of law is promptly remedied, possibly long before harm to 
an Enterprise reaches the level of capital impairment. OFHEO's concerns 
may include an array of considerations--ranging, for example, from 
matters such as declining collateral values to asset quality, 
liquidity, and operational difficulties--that could result in 
substantial harm to an Enterprise before capital is impaired. OFHEO 
will analyze the totality of each situation, rather than awaiting a 
decline in capital to initiate agency action. If an analysis reveals a 
supervisory concern, then OFHEO's response might reasonably include a 
mixture of early warning and early action initiatives that would be 
effective before specific problems seriously affect an Enterprise.
    OFHEO designed the prompt supervisory response process to provide 
it flexibility as a supervisor, both in structuring the scope of the 
review and in overseeing the Enterprise's implementation of responsive 
measures. Under Sec. 1777.11(a), OFHEO will issue a supervisory letter 
commencing the prompt supervisory response review, but the content of 
the letter will depend entirely on the ``particular circumstances and 
the nature of the development.'' There are then three additional levels 
of available supervisory responses under Sec. 1777.11(b) through (d), 
but OFHEO's decision as to which, if any, of the levels to use will be 
based on the Enterprise's ``response to the supervisory letter and 
other appropriate factors.'' At every level of supervisory response in 
Sec. 1777.11(b) through (d), the rule expressly states that OFHEO will 
assess the effectiveness of actions as well as other relevant factors 
in determining whether additional supervisory action is appropriate. As 
stated in the preamble to the proposed rule, the levels of supervisory 
response need not be carried out sequentially, and OFHEO may pursue 
simultaneous actions. In the final rule, OFHEO has expanded the text of 
the rule at Sec. 1777.11(a)(4), so as to avoid confusion on this 
point.\17\ In addition, as reflected in Sec. 1777.2 and Sec. 1777.12, 
the prompt supervisory response process in no way limits OFHEO's 
discretion to use any of its other supervisory tools and authorities to 
respond to the particular situation. OFHEO also rejects the suggestion 
that the prompt supervisory response process would not be rapid. The 
supervisory letter is to be issued within five days after OFHEO 
determines that a development or condition warrants review under the 
rule, and the text of Sec. 1777.11 requires OFHEO to implement any 
additional levels of supervisory response promptly and review the 
effectiveness of such response promptly.
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    \17\ With the exception of nonsubstantive changes made to 
conform Sec. 1777.11 of the final rule to the revised Sec. 1777.10, 
OFHEO has made no other alterations to Sec. 1777.11.
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    Finally, the commenters expressed concerns that, if the prompt 
supervisory response approach results in public disclosure of 
supervisory actions, discussions, or correspondence, the contents could 
be misunderstood by the public and could cause the markets to lose 
confidence in the Enterprises. However, as reflected in Sec. 1777.2(b), 
supervisory responses issued under Sec. 1777.11 do not constitute 
public orders enforceable under 12 U.S.C. 1371 or 1376, and, as noted 
in Sec. 1777.1(b), OFHEO's initiation of procedures under the prompt 
supervisory response regime does not necessarily indicate that an 
unsound condition exists.

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

    Subpart B of the final rule describes the scope of actions OFHEO is 
authorized to take under the prompt corrective action provisions 
applicable to the Enterprises under the 1992 Act at 12 U.S.C. 4614 
through 4618, 4619(b) through (e), 4622 and 4623, as well as the 
procedures by which such an actions are to be carried out. The

[[Page 3591]]

following is an overview of the provisions of the final rule and the 
statutory authorities implemented thereby. Freddie Mac and Fannie Mae 
submitted numerous comments on proposed Subpart B, which OFHEO has 
taken into account in formulating the final rule. These comments are 
addressed below, as part of the description of the section of the final 
rule to which each comment pertains.

Authority, Purpose, Scope, and Implementation Dates

    The authority, purpose, and scope of subpart B are set out in 
Sec. 1777.1(a) and (c), which briefly review the statutes underlying 
the rule. Subpart B is issued under OFHEO's broad authorities to take 
such actions as are deemed appropriate by the Director of OFHEO to 
ensure that the Enterprises maintain adequate capital and operate in a 
safe and sound manner, as established by 12 U.S.C. 4513, 4631, 4632, 
and 4636, as well as under the specific prompt corrective action 
provisions contained in subtitle B of the 1992 Act (12 U.S.C. 4611 
through 4623), the Federal Home Loan Mortgage Corporation Act at 12 
U.S.C. 1452(b)(2), and the Federal National Mortgage Association 
Charter Act at 12 U.S.C. 1718(c)(2). These provisions authorize OFHEO 
to administer certain capital requirements for the Enterprises, to 
classify the capital of the Enterprises based on capital levels 
specified in the 1992 Act, and, in appropriate circumstances, to 
exercise discretion to reclassify an Enterprise into a lower capital 
category. Under these provisions, there are also automatic consequences 
for an Enterprise that is not classified as adequately capitalized, as 
well as discretionary authority for OFHEO to require an Enterprise to 
take remedial actions.
    As discussed in Sec. 1777.1(d), the 1992 Act directs OFHEO to 
determine capital classifications for the Enterprises by reference to 
three capital ``triggers'' (the minimum capital level, the critical 
capital level, and the risk-based capital level). Notably, however, 12 
U.S.C. 4614(d) delays consideration of the risk-based capital level 
until one year after OFHEO's risk-based capital rule becomes effective, 
that is, September 13, 2001. Section 4615 of Title 12, which sets out 
the supervisory actions to be taken as applicable to an Enterprise that 
is classified as undercapitalized, similarly provides that its 
provisions will not take effect until one year after OFHEO's risk-based 
capital rule becomes effective. Section 4614(d) provides that, until 
that time, an Enterprise shall be classified as adequately capitalized 
if the Enterprise maintains an amount of capital that equals or exceeds 
the minimum capital level.
    Therefore, under subpart B of the final rule at Sec. 1777.20, 
different sets of capital classifications will apply before and after 
September 13, 2002. Section 1777.20(a) contains the ``permanent'' set 
of capital classifications taking the risk-based capital level into 
account as well as the minimum capital level and critical capital 
level. This set of capital classifications will apply any time after 
September 13, 2002.
    The currently applicable ``temporary'' set of capital 
classifications is contained in Sec. 1777.20(c) as an exception to 
Sec. 1777.20(a) that applies until September 13, 2002. This currently 
applicable set of classifications is based on an Enterprise's minimum 
capital level and critical capital level, reflecting the classification 
criteria presently used by OFHEO. Section 4614(a) of Title 12, when 
read together with 12 U.S.C. 4616(c) \18\ and 12 U.S.C. 4617(d),\19\ 
indicates that Congress intended OFHEO to classify the Enterprises for 
prompt corrective action purposes by reference to minimum capital and 
critical capital levels, pending expiration of the one-year post-
effectiveness period for the risk-based capital test.
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 4616(c) provides that statutory provisions 
requiring prompt corrective action with regard to a significantly 
undercapitalized Enterprise are to be effective from the time the 
Enterprise is first classified under 12 U.S.C. 4614.
    \19\ 12 U.S.C. 4617(d) provides that statutory provisions 
requiring prompt corrective action with regard to a critically 
undercapitalized Enterprise are to be effective from the time the 
Enterprise is first classified under 12 U.S.C. 4614.
---------------------------------------------------------------------------

Preservation of Other Authority

    As set forth in Sec. 1777.2(b) through (c), the prompt corrective 
action provisions are but one aspect of OFHEO's broad supervisory 
authority to ensure that each Enterprise maintains capital that is 
adequate for its safe and sound operation. In their comments, the 
Enterprises objected to language in Sec. 1777.2(b) that states OFHEO 
has authority to require an Enterprise to hold capital in addition to 
that necessary to comply with the minimum and risk-based capital 
levels, when in OFHEO's judgment circumstances indicate additional 
capital is necessary or appropriate in light of the overall strength of 
the Enterprise and market conditions. The Enterprises argue that the 
minimum and risk-based capital levels defined by the statute are 
exclusive, and OFHEO is not vested under law with discretion to require 
the Enterprises to hold additional capital.
    OFHEO disagrees and has adopted Sec. 1777.2(b) without change. 
Subtitle B of the 1992 Act, establishing the minimum and risk-based 
capital levels, contains no language to the effect that such levels are 
exclusive. The 1992 Act taken as a whole demonstrates congressional 
understanding that capital by itself is but one indicator of the 
financial health or weakness of an Enterprise. All circumstances must 
be weighed in determining the capital adequacy of an Enterprise. That 
is, differing conditions may warrant greater capital to ensure the 
strength and viability of an Enterprise. Thus, under 12 U.S.C. 4513(a), 
it is the supervisory responsibility of OFHEO to ensure that the 
Enterprises are adequately capitalized and operating safely. Under 12 
U.S.C. 4513(b), OFHEO has exclusive authority to take such actions as 
it determines necessary regarding the safety and soundness of the 
Enterprises.
    An Enterprise's maintenance of capital sufficient to meet the 
minimum capital level and risk-based capital level does not alone 
establish that the Enterprise possesses sufficient capital to operate 
safely and soundly in all circumstances. The legislative history of the 
1992 Act indicates that Congress specifically debated whether subtitle 
B established the exclusive capital levels for the Enterprises or 
instead represented a minimum ``floor'' level. In the end, Congress 
concluded that subtitle B takes the ``floor'' approach, and that 
OFHEO's safety and soundness authority includes the ability to require 
an Enterprise to hold additional capital whenever circumstances 
indicate supplementary capital is appropriate in consideration of the 
Enterprise's overall safety and soundness.\20\ Similarly, the language 
of 12 U.S.C. 4614(a)(1) provides that, for an Enterprise to be 
classified as adequately capitalized, the Enterprise should ``meet or 
exceed'' the minimum and risk-based capital levels (emphasis added).
---------------------------------------------------------------------------

    \20\ See, e.g., 138 Cong. Rec. S9353-54 (July 1, 1992)(colloquy 
between Senator Metzenbaum and Senator Reigle concerning the effect 
of section 202 of S. 2733, which is substantially the same as 12 
U.S.C. 1362); 138 Cong. Rec. H11102 (Oct. 3, 1992)(colloquy between 
Mr. Gonzalez, Mr. Frank, and Mr. Leach).
---------------------------------------------------------------------------

    In addition to its authority to require the Enterprises to maintain 
additional capital as a safety and soundness matter, OFHEO is 
authorized, as reflected in Sec. 1777.2(c) of the final rule, to take 
various kinds of supervisory action to deal with capital deficiencies 
at an Enterprise, other than or in addition to the prompt corrective 
action provisions. The 1992 Act grants OFHEO broad discretion to take 
other supervisory

[[Page 3592]]

actions as may be deemed by OFHEO to be appropriate, including issuing 
temporary and permanent cease and desist orders, imposing civil money 
penalties, appointing a conservator, entering into a written agreement 
the violation of which is actionable through enforcement proceedings, 
or entering into any other formal or informal agreement with an 
Enterprise. Moreover, the initiation of a particular action or a 
combination of actions does not foreclose OFHEO from pursuing any other 
action.

Definitions

    The definitions in Sec. 1777.3 cross-reference to OFHEO's capital 
rules at 12 CFR part 1750 in defining core and total capital. Section 
1777.3 defines the minimum capital level as the minimum amount of core 
capital specified for an Enterprise pursuant to 12 U.S.C. 4612, as 
determined under OFHEO's capital rules at Sec. 1750.4. The definition 
of the critical capital level in Sec. 1777.3 refers to the calculation 
of core capital required to meet the minimum capital level under 
Sec. 1750.4 of OFHEO's capital rules, making the appropriate 
adjustments thereto in order to implement the lower percentages 
specified in 12 U.S.C. 4613 as compared to 12 U.S.C. 4612. Thus, 
Sec. 1777.3 defines the critical capital level as the amount of core 
capital that is equal to the sum of one half of the amount determined 
under Sec. 1750.4(a)(1) and five-ninths of the amounts determined under 
Sec. 1750.4(a)(2) through Sec. 1750.4(a)(7). Section 1777.3 defines the 
risk-based capital level to mean the amount of total capital specified 
for an Enterprise pursuant to 12 U.S.C. 4611, as determined under 
OFHEO's risk-based capital regulations in 12 CFR part 1750.\21\
---------------------------------------------------------------------------

    \21\ OFHEO has recently published such rules at 66 FR 47729 
(Sept. 13, 2001).
---------------------------------------------------------------------------

    The definitions of ``affiliate'' and ``Enterprise'' are taken from 
12 U.S.C. 4502(1) and 4502(6), respectively. The 1992 Act, in defining 
an Enterprise to include the Enterprise's affiliates, vests OFHEO with 
the same broad jurisdiction over the supervision and regulation of such 
affiliates as the agency has over the operations and activities of the 
federally chartered entity. Section 4502(1) defines an affiliate to be 
any entity that controls, is controlled by, or is under common control 
with an Enterprise. The 1992 Act does not, however, define control, 
thereby leaving the term to be interpreted by OFHEO in light of the 
context in which the term is to be used and the particular provision of 
the 1992 Act at issue.\22\ In its comments, Freddie Mac disagreed with 
OFHEO's statement to this effect in the preamble to the proposed rule, 
and instead asserted that the term should be interpreted to have a 
single meaning throughout the 1992 Act. However, as seen in other laws, 
when Congress intends that an agency use a single definition of 
``control'' throughout an entire act in connection with an 
``affiliate'' definition, Congress enacts a statutory definition of 
``control,'' including language in the definition that specifies the 
test to be applied. See, e.g., 12 U.S.C. 1813(w)(5); 12 U.S.C. 
1841(a)(2). Where, as is the case in the 1992 Act, the term is not 
defined, Congress leaves the term to be defined by the expert agency in 
light of the particular context in which it is to be used and the 
particular substantive provision at issue.
---------------------------------------------------------------------------

    \22\ In determining whether control exists for the purposes of 
exercising jurisdiction over an affiliate of an Enterprise under any 
particular provision of the 1992 Act, OFHEO considers the nature of 
the particular provision and the facts and circumstances involved. 
Among other things, OFHEO considers whether an Enterprise or other 
entity exercises a controlling influence over the management and 
policies of a particular entity, by ownership of, or the power to 
vote, a substantial percentage of any class of voting securities, by 
the ability to elect or appoint members of the board of directors or 
officers of the entity, or by other means.
---------------------------------------------------------------------------

    The term ``capital distribution'' as defined in the rule is taken 
from 12 U.S.C. 4502(2). Both Enterprises' comments included objections 
to one aspect of OFHEO's proposed definition, under which an 
Enterprise's payment to repurchase its shares for the purpose of 
fulfilling an obligation of the Enterprise under an employee stock 
ownership plan that is qualified under section 401 of the Internal 
Revenue Code of 1986 (26 U.S.C. 401 et seq.) or any substantially 
equivalent plan would not be treated as a capital distribution so long 
as it was approved in writing by OFHEO in advance. The Enterprises 
argue that, under 12 U.S.C. 4502(2)(B), OFHEO's only proper approval 
function goes to the issue of whether an employee stock ownership plan 
is substantially equivalent to a plan that is qualified under section 
401 of the Internal Revenue Code, and the Enterprises are not required 
to obtain OFHEO's approval of payments made to fulfill the Enterprises' 
repurchase obligations under the plan.
    The language of 12 U.S.C. 4502(2)(B) is susceptible to either the 
proposed or the subsequently suggested interpretation. Upon further 
review, OFHEO has modified the final version of Sec. 1777.3 to 
eliminate the requirement that the Enterprises obtain OFHEO's prior 
written approval for stock repurchases by employee stock ownership 
plans and such substantially equivalent plans. Under the revised 
language, payments made by an Enterprise to repurchase its shares for 
the purpose of fulfilling the Enterprise's obligation under an ESOP 
that is qualified under IRC 401 will not be defined as capital 
distributions. The same types of payments made to ESOPs that are 
substantially equivalent to 401-qualified ESOPs will also enjoy the 
exception, so long as OFHEO determines that the plan in question is 
substantially equivalent to a 401-qualified ESOP.
    Section 4502(2) authorizes OFHEO to define additional transactions 
as capital distributions by regulation for these purposes. OFHEO has at 
this time identified no other transactions to be deemed capital 
distributions beyond those listed in the statutory definition.

Capital Classifications and Discretionary Reclassification

    Section 1777.20(a) sets out the capital classifications that, as 
discussed above, will be applicable to the Enterprises after September 
13, 2002, taking the risk-based capital level into account as well as 
the minimum and critical capital levels. Until then, the 
classifications under Sec. 1777.20(c), discussed below, apply to the 
Enterprises. Section 1777.20(a) sets out the capital classifications as 
follows:
     Adequately capitalized: An Enterprise will be classified 
as adequately capitalized if the Enterprise meets the risk-based 
capital level and the minimum capital level, unless OFHEO has exercised 
its discretion to reclassify the Enterprise into a lower capital 
classification;
     Undercapitalized: An Enterprise will be classified as 
undercapitalized if it meets the minimum capital level but does not 
meet the risk-based capital level, unless OFHEO has exercised its 
discretion to reclassify the Enterprise into a lower capital 
classification;
     Significantly undercapitalized: An Enterprise will be 
classified as significantly undercapitalized if the Enterprise meets 
the critical capital level but fails to meet the minimum capital level, 
unless OFHEO has exercised its discretion to reclassify the Enterprise 
as critically undercapitalized;
     Critically undercapitalized: An Enterprise will be 
classified as critically undercapitalized if the Enterprise does not 
meet the critical capital level; and
     Discretionary reclassification: As is set out in more 
detail below, 12 U.S.C. 4614(b) authorizes OFHEO to reclassify an 
Enterprise into the next lower capital classification at any time, in 
the

[[Page 3593]]

discretion of the Director of OFHEO. Appropriate grounds for 
reclassification include a finding by the Director that the Enterprise 
is either engaging in conduct that could result in a rapid depletion of 
the Enterprise's core capital, or that the value of property subject to 
mortgages held or securitized by the Enterprise has decreased 
significantly. Other reclassifications, based on other sections of 
subtitle B of the 1992 Act pertaining to failure to submit an 
acceptable capital restoration plan or implement it, are located in 
Sec. 1777.7, the section addressing capital restoration plans.
    Under Sec. 1777.20(a), the minimum and critical capital levels are 
the determinative standards for assessing whether an Enterprise falls 
into the significantly undercapitalized or critically undercapitalized 
classification based on capital, without regard to whether the 
Enterprise maintains total capital at or above its risk-based capital 
level. Under the 1992 Act, the minimum and critical capital levels act 
as the ``tripwires'' for the prompt corrective actions specified in 12 
U.S.C. 4616 and 4617. The amount of capital an Enterprise is required 
to hold to meet its risk-based capital level could be either less or 
more than the amount of the capital required to meet its minimum 
capital level or even its critical capital level. The rule therefore 
avoids a result under which an Enterprise that fails to meet its 
minimum capital level or critical capital level might avoid 
classification as significantly undercapitalized or critically 
undercapitalized by maintaining total capital in compliance with its 
risk-based capital level.
    The final version of Sec. 1777.20(a)(5) sets forth the grounds for 
reclassification of an Enterprise. Under section 4614(b), grounds for 
reclassification include a finding by the Director that the Enterprise 
is either engaging in action or inaction (including a failure to 
respond appropriately to changes in circumstances or unforeseen events) 
that could result in a rapid depletion of the Enterprise's core 
capital, or that the value of property subject to mortgages held or 
securitized by the Enterprise has decreased significantly. In their 
comments, the Enterprises objected to language proposed in 
Sec. 1777.20(a)(5) to the effect that OFHEO could also issue a 
discretionary reclassification if OFHEO deems it to be necessary to 
ensure that the Enterprise holds adequate capital and operates safely. 
OFHEO disagrees. Section 4614(b) recites that OFHEO may issue a 
discretionary reclassification if the Director determines that an 
Enterprise is engaging in conduct that could result in a rapid 
depletion of core capital, or that the value of the Enterprise's 
mortgage collateral has decreased significantly. Notably, section 
4614(b) is silent with regard to whether the statutorily recited 
grounds for reclassification are exclusive. Section 4513(b) empowers 
the Director of OFHEO to make other determinations, including those 
necessary to determine the capital classification of an Enterprise and 
those necessary for other matters that the Enterprises are adequately 
capitalized and operating safely.
    Taken together, the above-referenced statutory provisions evidence 
a Congressional purpose that the Director of OFHEO have the 
discretionary authority to reclassify Enterprise if the Director 
determines that the Enterprise's capital position is not deemed by the 
Director to be sufficient to ensure its safety and soundness. OFHEO is 
therefore adopting Sec. 1777.20 (a)(5) as proposed.
    For purposes of OFHEO's discretionary authority to reclassify an 
Enterprise based on ``conduct that could result in a rapid depletion of 
core capital'' under 12 U.S.C. 4614(b), OFHEO interprets the term 
``conduct'' to include action or inaction (including a failure to 
respond appropriately to changes in circumstances or unforeseen 
events). In its comments, Fannie Mae objected to inclusion of this 
language in proposed Sec. 1777.20(a)(5)(i). However, the regulatory 
language is well within the ordinary meaning of the term ``conduct,'' 
and OFHEO has included it in the final version of Sec. 1777.20(a)(5) 
without change. Freddie Mac also objected to OFHEO's assertion in the 
preamble to the proposed rule that the rapid depletion of core capital 
referred to in section 4614(b) and Sec. 1777.20(a)(5) need only be a 
possible consequence of the conduct in question. Freddie Mac argues 
that OFHEO appears to be implementing too liberal a standard in light 
of the more extreme formulation contained in section 4614(b) itself. 
OFHEO reiterates the point, as stated in the preamble to the proposed 
rule, that the statutory language under section 4614(b) does not 
require OFHEO to find that the rapid depletion is underway or imminent, 
but requires only that OFHEO determine that such rapid depletion 
``could result,'' i.e., that it is a possible outcome or result of the 
conduct in question, or that the conduct could contribute significantly 
to deepening losses. Congress, having already established the capital 
classifications based on capital levels to address cases in which an 
Enterprise's capital has already declined, established a broad standard 
for discretionary reclassification, to authorize early intervention by 
OFHEO when appropriate.
    Section 1777.20(d) of the final rule provides that OFHEO will not 
reclassify an Enterprise for conduct that was previously approved by 
the Director of OFHEO in connection with the Director's approval of the 
Enterprise's capital restoration plan or of a written agreement that is 
enforceable in accordance with 12 U.S.C. 4631. The Enterprises argued 
in their comments that OFHEO proposal impermissibly would narrow 
section 4614(b), and that the statutory language thereunder immunizes 
any conduct however approved by the Director.
    Section 4614(b) provides that OFHEO may reclassify an Enterprise 
that engages in conduct ``not approved by the Director'' that could 
result in a rapid depletion of core capital. However, the statute is 
silent as to what constitutes an approval for these purposes, leaving 
OFHEO to define the term by regulation pursuant to the authority 
granted by section 4513(b). An administrative agency is entitled under 
law to establish reasonable procedures in such manner as to enable the 
agency to channel and manage its approval processes.
    The Enterprises suggest that the only reasonable interpretation of 
section 4614(b) is that it immunizes all conduct ``approved by the 
Director'' of OFHEO in any context or manner. However, such 
interpretation is so open-ended as to be unreasonable. In light of the 
significance of an approval for purposes of section 4614(b), the 
statute can be reasonably read to require an approval to be made 
through a formal mechanism, in a context in which OFHEO can evaluate 
the consequences thereof for purposes of capital classification. Thus, 
it is reasonable to define the approvals exception under section 
4614(b) as referring to approvals made as part of a capital restoration 
plan under subtitle B and to formal supervisory agreements. The 
inclusion of formal written agreements serves the underlying purpose of 
fairness to the Enterprise, particularly since such written agreements 
may be used simultaneously with a capital restoration plan.
    As provided in Sec. 1777.20(b), if an Enterprise is reclassified by 
OFHEO on grounds that the Enterprise is engaging in action or inaction 
that could result in a rapid depletion of core capital, OFHEO will 
continue to take such conduct into account for each subsequent 
determination of the Enterprise's capital classification, until

[[Page 3594]]

OFHEO determines that the action, inaction, or condition in question 
has ceased and been remedied to OFHEO's satisfaction. For example, if 
OFHEO reclassified an Enterprise from adequately capitalized to 
undercapitalized based on such conduct, and during the pendency of such 
conduct, the Enterprise's total capital declined below the risk based 
capital level (which, standing alone, would result in classification in 
the undercapitalized category), the resulting classification could be 
to the significantly undercapitalized category. In addition, as 
provided in Sec. 1777.20(b), nothing in 12 U.S.C. 4614(b) prohibits 
OFHEO from subsequently reclassifying an Enterprise again if the 
action, inaction or condition has not ceased or been eliminated and 
remedied to OFHEO's satisfaction within a reasonable time. The 
foregoing would also apply for a discretionary reclassification under 
Sec. 1777.20(a)(5), based on a decline in collateral values.
    The Enterprises also objected to proposed Sec. 1777.20(b), on 
various grounds. Freddie Mac argues that once OFHEO has issued a 
reclassification based on conduct and the Enterprise has submitted an 
acceptable capital restoration plan, OFHEO may not subsequently 
reclassify the Enterprise for failure to eliminate the objectionable 
conduct within a reasonable time, so long as the Enterprise continues 
to make good faith reasonable efforts to comply with the capital 
restoration plan. However, section 4614(b) contains no explicit 
restriction or limitation on reasonable successive reclassifications, 
and such a limit could inhibit OFHEO's ability to meet its supervisory 
obligations under evolving circumstances. Thus, OFHEO is adopting the 
text of Sec. 1777.20(b)(2) without change.
    Fannie Mae suggests Sec. 1777.20(b)(2) should be revised to ensure 
the Enterprises are given advance notice of what constitutes a 
reasonable period to remedy or eliminate conduct or conditions forming 
the basis of a discretionary reclassification. However, this issue is 
too fact-driven for OFHEO to specify by rule. The question of timing 
will be resolved as it arises. OFHEO would specify such timing matters 
reasonably and fairly, in light of relevant circumstances.
    Fannie Mae further suggests that it would be unfair that OFHEO 
might attempt to exercise unbridled discretion over so significant a 
question as to when a discretionary reclassification should be 
terminated. Fannie Mae suggests discretionary reclassifications should 
be presumptively terminated fifteen days after an executive officer 
certifies that the condition that led to reclassification has been 
corrected for at least one calendar quarter. However, given that 
initiation of a reclassification under section 4614(b) is vested in 
OFHEO's discretion, as is approval of the capital restoration plan 
designed to restore the Enterprise to a secure condition, OFHEO rejects 
Fannie Mae's assertion that OFHEO's discretion over termination of such 
reclassification is somehow unfair, or of such significance to be 
beyond the agency's supervisory authority. Moreover, the quarterly 
classification process gives the Enterprise formal written notice of 
OFHEO's intention with regard to continuation or termination of a 
discretionary reclassification; provides the Enterprise with an 
opportunity to submit information that OFHEO might take into 
consideration; and provides the Enterprise with the opportunity for 
judicial review (if the Enterprise is not classified as critically 
undercapitalized). The Enterprises are thus adequately insulated from 
possible unfair treatment by the agency.
    As noted above, Sec. 1777.20(c) contains a set of capital 
classifications based on an Enterprise's minimum capital level and 
critical capital level, reflecting the classification criteria 
presently used by OFHEO. These classifications apply until September 
13, 2002, which is one year following the initial effective date of 
OFHEO's regulations establishing the risk-based test:
     Adequately capitalized: Until September 13, 2002, an 
Enterprise is deemed to be classified as adequately capitalized so long 
as it meets the minimum capital level, as required by 12 U.S.C. 
4614(d);
     Undercapitalized: Until September 13, 2002, 12 U.S.C. 
4614(d) provides that an Enterprise that meets the minimum capital 
level is to be classified as adequately classified, notwithstanding 
whether the Enterprise maintains an amount of total capital that equals 
or exceeds the risk-based capital level as otherwise required by 12 
U.S.C. 4614(a)(2)(A);
     Significantly undercapitalized: An Enterprise will be 
classified as significantly undercapitalized if it meets the critical 
capital level but fails to meet the minimum capital level, unless OFHEO 
has exercised its discretion to reclassify the Enterprise as critically 
undercapitalized;
     Critically undercapitalized: An Enterprise will be 
classified as critically undercapitalized if it does not meet the 
critical capital level; and
     Discretionary reclassification: As set out above, 12 
U.S.C. 4614(b) authorizes OFHEO to reclassify an Enterprise into a 
lower capital classification in certain circumstances, in the 
discretion of the Director of OFHEO.
    The Enterprises specifically objected to proposed 
Sec. 1777.20(c)(5)(i)(A) and (B), under which OFHEO notes that the 
agency can reclassify an Enterprise that otherwise meets the minimum 
capital requirement. The Enterprises assert that, during the one-year 
transition period following the effective date of OFHEO's risk-based 
capital rules, OFHEO may not make a discretionary reclassification of 
an Enterprise otherwise classified as ``adequately capitalized,'' 
because 12 U.S.C. 4614(d) and 4615(c) prohibit OHFEO from issuing such 
a reclassification.
    OFHEO disagrees. Sections 4614(d) and 4615(c) are merely transition 
provisions designed to give the Enterprises one year to optimize their 
operations in light of the new risk-based capital rules before OFHEO 
begins periodically issuing capital classifications based on risk-based 
capital as well as minimum capital. Nothing in the law or its 
legislative history indicates a Congressional intention to make the 
OFHEO powerless to confront circumstances that might threaten the 
viability of the Enterprises during the transition period. Nor were the 
referenced sections intended by Congress to immunize an Enterprise 
engaged in conduct that might result in rapid depletion of core 
capital. OFHEO is therefore adopting Sec. 1777.20(c)(5) as proposed.
    The Enterprises' comments on proposed Sec. 1777.20(a)(5)(i), 
concerning the scope of the conduct included therein, and on proposed 
Sec. 1777.20(a)(5)(ii), concerning the scope of conduct approved by the 
Director, as well as OFHEO's responses to those comments as discussed 
above, apply equally to Sec. 1777.20(c)(5) of the final rule. The 
Enterprise's comments on Sec. 1777.20(b), concerning successive 
reclassifications, specification of reasonable periods to remedy 
conduct upon which reclassification was based, and OFHEO's discretion 
over termination of reclassifications, as well as OFHEO's response to 
these comments as discussed above, apply equally to reclassifications 
under Sec. 1777.20(a)(5) as they do to reclassifications under 
Sec. 1777.20(c)(5) of the final rule.

Classification Procedures

    Section 1777.21, implementing 12 U.S.C. 4618, sets out the 
procedure by which OFHEO classifies the Enterprises. These procedures 
apply to routine classifications that OFHEO issues for

[[Page 3595]]

each Enterprise at least once a quarter based on capital reports from 
the Enterprise and any other additional relevant information. These 
procedures would also be used by OFHEO to reclassify an Enterprise 
pursuant to its discretionary authority to do so under subtitle B of 
the 1992 Act, or if OFHEO otherwise determines that a new 
classification would be appropriate. OFHEO's current classification 
procedures at 12 CFR 1750.5 are terminated as part of this rulemaking, 
but procedures for submitting capital reports to OFHEO will continue to 
be addressed in part 1750.
    OFHEO may determine capital classifications using different ``as 
of'' dates for the Enterprise's risk-based capital level and minimum 
and critical capital levels. The respective ``as of'' dates will be 
specifically identified in the proposed and final capital 
classifications. Thus, OFHEO may assess compliance by an Enterprise 
with the minimum capital level more often than it would calculate the 
Enterprise's risk-based capital level.
    As Sec. 1777.21(a)(4) provides, OFHEO may initiate a capital 
classification proceeding at any time. If another proposed capital 
classification is pending at such time, OFHEO will advise the 
Enterprise whether the later proposed classification supersedes the 
pending one.
    Under the classification procedure in 12 U.S.C. 4618, OFHEO is to 
deliver written information to the Enterprise describing the proposed 
capital classification and the agency's basis for such classification, 
as described in Sec. 1777.21(a)(1) of the final rule. In their 
comments, the Enterprises argued that OFHEO's proposed procedure in 
Sec. 1777.21(a)(1)(ii), for reclassifying an Enterprise for failure to 
file an acceptable capital plan, without additional notice, is 
inconsistent with 12 U.S.C. 4618(a) and (b), under which an Enterprise 
is entitled to additional notice when OFHEO takes new action. The 
Enterprises assert that OFHEO may not combine notices in this way.
    OFHEO disagrees. 12 U.S.C. 4618(b) evidences Congress' express 
authorization that the notice required under 12 U.S.C. 4618(a) may be a 
combined notice. Section 4618(b) states that, in providing notice under 
12 U.S.C. 4618(a), OFHEO may combine a notice of classification or 
reclassification under 12 U.S.C. 4614 (classifications based on capital 
levels or discretionary reclassification based on conduct or housing 
prices) with a notice of discretionary supervisory action under 12 
U.S.C. 4615 (reclassification from undercapitalized to significantly 
undercapitalized for failure to file an acceptable capital plan or to 
comply with an approved plan). The statute's language can be given 
meaning only if a notice of proposed classification as undercapitalized 
is permitted to be combined with a notice of proposing to reclassify 
the Enterprise as significantly undercapitalized in the event the 
Enterprise fails to submit an acceptable capital plan. Similarly, 12 
U.S.C. 4618(b) provides that OFHEO may combine notice of discretionary 
supervisory action under 12 U.S.C. 4616 (issuance of certain orders to 
the Enterprise, as well as reclassification from significantly 
undercapitalized to critically undercapitalized based on failure to 
file an acceptable plan or comply with an approved plan) with notices 
of classification or reclassification under 12 U.S.C. 4614.
    Contrary to Freddie Mac's comments, such a notice is also 
consistent with the remainder of 12 U.S.C. 4618. It satisfies the 
requirements of 12 U.S.C. 4618(a), since the combined notice describes 
both proposed actions, the reasons therefore, and the information upon 
which they are based. During the Enterprise's response period under 12 
U.S.C. 4618(c), the Enterprise has an opportunity to submit information 
and arguments as to why the Enterprise should not be further 
reclassified. OFHEO's notice to Congress under 12 U.S.C. 4618(d) will 
provide all information required therein. OFHEO is therefore adopting 
proposed Sec. 1777.21(a)(1)(ii), as well as Sec. 1777.23(c)(1) and 
Sec. 1777.23(c)(3), without change.
    As described in Sec. 1777.21(a)(2), an Enterprise is to have thirty 
days from the date it is provided notice of capital classification to 
submit any relevant information in response to a notice. 12 U.S.C. 4618 
authorizes OFHEO to extend the response period up to an additional 
thirty days for good cause or to reduce the response period if the 
condition of the Enterprise so requires; the Enterprise may also 
consent to an abbreviated response period. In exigent circumstances, 
the response period afforded to an Enterprise may be quite brief. In 
its comments, Fannie Mae objected to proposed Sec. 1777.21(a)(2)(i), to 
the extent the proposed rule suggests that OFHEO can shorten an 
Enterprise's response period to less than thirty days as OFHEO 
determines to be appropriate. Fannie Mae points out that the statutory 
standard, at 12 U.S.C. 4618(c)(3), is that the condition of the 
Enterprise requires the period to be shortened. OFHEO's determination 
as to whether an curtailment is ``appropriate,'' as under the language 
of proposed Sec. 1777.21(a)(2)(i), is to be made in consideration of 
the statutory standard under 12 U.S.C. 4618(c)(3). In light of the 
comment, OFHEO has changed the language of the final version of 
Sec. 1777.21(a)(2)(i) to reflect the language of 12 U.S.C. 4618(c)(3).
    An Enterprise's failure to respond within the applicable period 
waives the opportunity to comment on the proposed classification. Once 
the response period has closed, OFHEO will make a final determination 
of the Enterprise's capital classification. OFHEO will take into 
consideration any relevant information submitted by the Enterprise 
during the response period in reaching the final decision. The final 
capital classification is to be provided to the Enterprise in writing, 
including a description of OFHEO's basis for the classification.
    OFHEO proposed a requirement under Sec. 1777.21(b)(1) that the 
Enterprise notify OFHEO of any material event that may reasonably be 
expected to cause the Enterprise's minimum, critical, or risk-based 
capital level to fall to a point that could result in a capital 
classification lower than the Enterprise's existing or proposed capital 
classifications. In their comments, the Enterprises objected to this 
requirement as being overly vague. Freddie Mac suggested it be 
narrowed, to require notice only when the Enterprise has reason to 
believe it has failed to meet a capital requirement. Fannie Mae called 
for elimination of any such notice requirement. In response to the 
Enterprises' expressed concerns about vagueness, OFHEO has decided to 
model its standard on a similar standard successfully used by the 
Federal bank regulatory agencies under their PCA system. See, e.g., 12 
CFR 325.102(c)(1). Thus, OFHEO has revised final Sec. 1777.21(b)(1) to 
require notice of any material development that would cause the 
Enterprise's core or total capital to fall to a point that would cause 
the Enterprise to be placed in a lower capital classification.
    As suggested by one commenter, OFHEO has deleted the words ``as 
appropriate'' from the proposed version of Sec. 1777.21(a)(1)(i), as 
unnecessary. In addition, various erroneous citations and cross-
references have been corrected in the final rule.\23\
---------------------------------------------------------------------------

    \23\ Freddie Mac's comments on the prompt corrective action 
proposal also expressly incorporated by reference certain comments 
Freddie Mac made to OFHEO in a submission dated March 10, 2000, as 
to OFHEO's second risk-based capital proposal. Those comments 
addressed the proposed risk-based capital reporting procedure and 
other matters unrelated to the classification procedure, and have 
been responded to in the agency's disposition of the final risk-
based capital rule at 66 FR 47730 (September 13, 2001).

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[[Page 3596]]

Capital Distribution Restrictions

    Section 1777.22 sets forth statutory capital distribution 
restrictions, including those provisions of the Enterprise's respective 
charter acts \24\ prohibiting, without regard to capital 
classification, an Enterprise from making a capital distribution that 
would decrease the capital of the Enterprise to an amount less than the 
risk-based capital level or the minimum capital level, except as 
explicitly approved by OFHEO. Section 1777.22(a) reflects these 
statutory restrictions.\25\ Under Sec. 1777.22(b)(1), any Enterprise 
that is not classified as adequately capitalized is prohibited from 
making a capital distribution that would result in classification into 
a lower capital classification as provided by 12 U.S.C. 4615(a)(2) and 
4616(a)(2). Under Sec. 1777.22(b)(2), a significantly undercapitalized 
Enterprise is prohibited from making a capital distribution absent 
OFHEO's prior approval, as provided by 12 U.S.C. 4616(a)(2). Section 
1777.22(b)(2) also applies in the case of an Enterprise classified as 
critically undercapitalized. The final rule recites, in a manner 
consistent with 12 U.S.C. 4617(b) through (c), OFHEO's authority to 
take actions authorized by 12 U.S.C. 4616 in the case of a critically 
undercapitalized Enterprise. Under the same authority, Sec. 1777.23 
requires an Enterprise classified as critically undercapitalized to 
submit a complete and acceptable capital restoration plan to OFHEO.
---------------------------------------------------------------------------

    \24\ The Federal Home Loan Mortgage Corporation Act at 12 U.S.C. 
1452(b)(2), and the Federal National Mortgage Association Charter 
Act at 12 U.S.C. 1718(c)(2).
    \25\ The proposed rule contained Sec. 1777.22(c), implementing 
these statutory provisions prior to the initial date of OFHEO's 
risk-based capital rules. With the publication of such rules on 
September 13, 2001, Sec. 1777.22(c) is unnecessary and has been 
dropped from the final rule.
---------------------------------------------------------------------------

Capital Restoration Plans

    Under Sec. 1777.23(a)(1), an Enterprise is required to file a 
complete capital restoration plan with OFHEO within ten days of 
receiving final notice of capital classification indicating that the 
Enterprise is classified as undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless OFHEO extends 
the period. In its comments, Fannie Mae objected to this ten-day period 
as being too short. However, the time period is consistent with 12 
U.S.C. 4622(b). OFHEO has set the deadline at ten days as a general 
rule to allow sufficient time for the Enterprise to articulate its 
responsive business plans, which, absent catastrophe, would likely have 
been developed over some time before a written submission is required. 
At the very least, the Enterprise and OFHEO will likely be aware of any 
impending threat and need for a capital restoration strategy by the 
time a notice of proposed classification is issued. In light of the 
serious implications of an adverse classification under subtitle B of 
the 1992 Act, swift implementation of a required capital plan is 
crucial. If it appears to OFHEO that additional time is appropriate 
under the particular circumstances, Sec. 1777.23(a)(1) provides that 
OFHEO may extend the timeframe.
    Under Sec. 1777.23(a)(2), an Enterprise that is already operating 
under an approved capital restoration plan need not submit a new plan 
each time the Enterprise receives subsequent notices of capital 
classification, unless OFHEO notifies the Enterprise to the contrary. 
As a general matter, OFHEO would likely direct an Enterprise to submit 
a new or amended plan if subsequent notices of capital classification 
are on grounds different from or in addition to the grounds underlying 
previous notices, or if changes in circumstances underlying the 
original plan necessitate a revised plan, or if the original plan is 
not effective within a reasonable period.
    Section 1777.23(b) requires an Enterprise's capital restoration 
plan to include the information specified in by 12 U.S.C. 4622(a) and 
such other information as directed by OFHEO. If the Enterprise does not 
submit a complete plan by the specified deadline, OFHEO may in its 
discretion lower the Enterprise's capital classification, as set forth 
in Sec. 1777.23(c). If a complete and timely capital restoration plan 
is not filed by an Enterprise, OFHEO may reclassify the Enterprise 
under Sec. 1777.21(a)(3) immediately upon expiration of the filing 
deadline, without further notice. As further provided in 
Sec. 1777.23(c), an Enterprise's failure to submit a complete and 
timely plan may be considered in the determination of each subsequent 
capital classification of the Enterprise, until the Enterprise files a 
plan that obtains OFHEO's approval. If the Enterprise has not corrected 
its failure to file an acceptable plan after a reasonable period, OFHEO 
may reclassify the Enterprise, without further written notice.\26\
---------------------------------------------------------------------------

    \26\ As is discussed above in connection with 
Sec. 1777.21(a)(1)(ii), the Enterprises object to this combined 
notice under Sec. 1777.23(c)(1) and Sec. 1777.23(c)(3), but this 
approach is specifically authorized under 12 U.S.C. 4618(b).
---------------------------------------------------------------------------

    As specified in Sec. 1777.23(d), OFHEO is to review the 
Enterprise's capital plan and issue an order within thirty days either 
approving or disapproving the plan, subject to extension for an 
additional thirty days as OFHEO deems necessary. If the plan is 
disapproved, the Enterprise must then submit an amended plan acceptable 
to OFHEO within thirty days or such longer period as OFHEO specifies. 
Notably, the thirty-day period is longer than the ten-day period for 
submission of the initial plan in order to facilitate dialogue with the 
Enterprise as to how the Enterprise may rehabilitate a disapproved 
plan. However, as provided in Sec. 1777.23(c), OFHEO may reclassify the 
Enterprise into a lower capital classification, without additional 
notice, at any time before the Enterprise files an amended capital plan 
and OFHEO approves it.
    Once a capital plan is approved, it may be amended only with the 
prior written approval of OFHEO, as provided in Sec. 1777.23(f). As 
that section provides, the Enterprise's obligations under an approved 
plan remain in place except to the extent the plan itself identifies 
dates, events, or conditions upon which the obligations terminate. To 
the extent the plan is silent in regard to a particular obligation, the 
obligation remains in place until OFHEO issues an order terminating the 
obligation. An Enterprise may seek such termination orders from OFHEO 
under Sec. 1777.23(g)(2).
    In its comments, Fannie Mae objected to proposed Sec. 1777.23(g), 
on the grounds that leaving a decision as significant as termination of 
a capital plan to the unlimited discretion of OFHEO would be 
fundamentally unfair.\27\ Fannie Mae asserted that the plan should 
terminate upon the Enterprise's certification that the measures in the 
plan have been fulfilled, absent specific written findings to the 
contrary by OFHEO.
---------------------------------------------------------------------------

    \27\ Fannie Mae also requested, under similar arguments of 
potential unfairness, that OFHEO create an ombudsman function within 
OFHEO, and that OFHEO also establish a formal appeals process 
whereby the Enterprises would have an avenue to appeal any 
significant supervisory decision to a senior agency official who was 
not involved in the original decision making process. Fannie Mae 
notes that the Federal bank regulatory agencies are required by the 
FDI Act to maintain such an appellate procedure. OFHEO has not 
implemented these suggestions because key differences between OFHEO 
and the bank regulatory agencies render such functions superfluous. 
Among such differences, because OFHEO supervises only two entities 
it lacks a large, decentralized supervisory structure, common among 
the banking agencies. The significantly smaller size of OFHEO makes 
it impracticable to provide a senior supervisory officer to act as 
ombudsman in such matters. The Enterprises have greater 
opportunities to provide input into the prompt corrective action 
classification and order process under the 1992 Act than is provided 
for insured depository institutions under the Federal Deposit 
Insurance Act.

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

[[Page 3597]]

    OFHEO disagrees. The initial approval of the capital restoration 
plan (including its duration) is vested wholly in OFHEO's discretion. 
No reason supports a contention that OFHEO's parallel discretion over 
termination of a capital restoration plan is somehow otherwise unfair, 
or of such significance as to be beyond the agency's supervisory 
purview. Furthermore, an Enterprise can request that its obligations 
under an approved plan be terminated. In addition, as noted in 
Sec. 1777.23(g)(1), to the extent particular provisions of a particular 
plan may be appropriately subject to termination by reference to 
specified dates, events, or conditions, the plan may be structured 
accordingly.
    If an Enterprise fails to take timely action reasonably necessary 
to comply with an approved plan, OFHEO may exercise its authority under 
12 U.S.C. 4615(b)(2) and 4616(b)(5) to reclassify the Enterprise. In 
their comments, the Enterprises objected to the language of proposed 
Sec. 1777.23(h)(1), under which an Enterprise must make efforts 
reasonably necessary to comply with the capital restoration plan and to 
fulfill the schedule thereunder, as not being consistent with the 
statutory standard. OFHEO interprets the ``good faith, reasonable 
efforts necessary to comply with the capital restoration plan and 
fulfill the schedule for the plan'' language in sections 4615(b) and 
4616(b) to mean that the Enterprise must make all reasonable efforts as 
are necessary to comply with the plan. OFHEO would consider it a 
demonstration of a lack of good faith if an Enterprise fails to attempt 
to carry out one or more efforts contemplated by an approved capital 
restoration plan. OFHEO would not deem an Enterprise's efforts to be in 
bad faith simply because such efforts fail to effect a desired result.
    In light of the Enterprise's comments that OFHEO's proposed 
formulation does not adequately express the statutory standard, 
Sec. 1777.23(h)(1)(i) has been revised to expressly refer to good 
faith, and to note that it is incumbent upon the Enterprise to make all 
reasonable efforts necessary to comply with an approved plan. The final 
rule provides that OFHEO may reclassify the Enterprise if, in the 
agency's discretion, the Enterprise has failed to make, in good faith, 
reasonable efforts necessary to comply with a capital restoration plan 
and to fulfill the schedule thereunder.
    As is provided in Sec. 1777.23(h)(1)(ii) through (iii), an 
Enterprise's failure to implement an approved capital plan may be 
considered in the determination of each subsequent capital 
classification of the Enterprise until OFHEO determines the Enterprise 
is making reasonable efforts. The Enterprise may face successive 
reclassifications for failure to make such efforts after a reasonable 
period.
    As is noted in Sec. 1777.23(h)(2), a capital plan that has received 
an approval order by OFHEO shall be deemed an order under the 1992 Act 
for enforcement purposes, and an Enterprise in any capital 
classification, its executive officers, and directors may be subject to 
action by OFHEO under 12 U.S.C. 4631, 4632, and 4636 and 12 CFR part 
1780 for failure to comply with an approved plan. In its comments, 
Fannie Mae objects to such characterization. Fannie Mae asserts that 
the terms of an approved capital plan are not enforceable under OFHEO's 
cease and desist authority or civil money penalties, and that such an 
action by OFHEO would exceed its authority under the 1992 Act.
    OFHEO disagrees and is adopting Sec. 1777.23(h)(2) without change. 
Fannie Mae improperly infers that the only ``orders'' susceptible to 
enforcement action under these statutes are OFHEO determinations that 
are designated as ``orders'' by the 1992 Act itself. However, the 1992 
Act does not designate any particular OFHEO determination with respect 
to an Enterprise or its directors or executive officers as an 
``order,'' thereby begging the question under Fannie Mae's reasoning as 
to what would constitute an ``order'' for purposes of sections 4631, 
4632, and 4636. While the 1992 Act describes OFHEO's decisions under 
sections 4631, 4632, and 4636 as ``orders,'' to argue that these are 
the exclusive ``orders'' to which such sections refer is not 
convincing. It would be circular to interpret these sections to mean 
that the only order the violation of which is redressable by a cease 
and desist order is another cease and desist order or an order imposing 
civil money penalties. While circumstances may occur in which a 
regulatory agency that is faced with noncompliance with a formal 
enforcement order may appropriately resort to further administrative 
enforcement action, more often a judicial enforcement of the 
enforcement order is likely to be sought. Cf. 12 U.S.C. 4635(a) 
(judicial actions to enforce orders and notice issued under subtitles B 
and C of the 1992 Act). Moreover, the statutory language in section 
4361(a)(3)(A) and section 4636(a)(1) broadly refers to any order under 
the 1992 Act or the charter acts, without restriction as to particular 
sections of such acts.

Orders Under Section 4616

    Section 1777.24 of the final rule implements OFHEO's discretionary 
authority under 12 U.S.C. 4616(b)(1) through (4), to issue orders 
requiring a significantly undercapitalized Enterprise to take remedial 
and corrective actions. OFHEO may fashion such remedy or require 
supervisory action as appropriate including, but not limited to, any of 
the following:
     Limit an increase in, or require a reduction of, any 
borrowings and other types of obligations of an Enterprise, including 
off-balance sheet obligations;
     Limit or prohibit the growth of assets of an Enterprise or 
require reduction of its assets;
     Require an Enterprise to obtain additional capital in such 
form and amount as specified by OFHEO; and
     Require an Enterprise to terminate, reduce, or modify a 
program or activity that entails excessive risk to the Enterprise.

    As indicated by Sec. 1777.24, OFHEO may also issue orders to an 
Enterprise that has been classified as critically undercapitalized 
under authority provided by 12 U.S.C. 4617(b) through (c).
    The procedures under which such orders may be issued are similar to 
the procedures for issuance of capital classifications, and are set out 
in Secs. 1777.24 through 1777.26. Similar to the treatment of approved 
capital plans discussed above, the provisions contained in these orders 
will bind the Enterprise until such provisions terminate under the 
terms of the order or OFHEO modifies the order, as discussed in 
Sec. 1777.26(b). As indicated in Sec. 1777.26(c), such orders 
constitute orders under the 1992 Act, and an Enterprise in any capital 
classification, its executive officers, and directors may be subject to 
administrative enforcement action by OFHEO under 12 U.S.C. 4631, 4632, 
and 4636 and 12 CFR part 1780 for failure to comply with such orders. 
Moreover, 12 U.S.C. 4635 provides jurisdiction in the United States 
District Court of the District of Columbia for direct enforcement of 
such orders.

Administrative Exhaustion

    Section 1777.27 summarizes 12 U.S.C. 4623, which provides that an 
Enterprise not classified as critically undercapitalized may seek 
judicial review of OFHEO's final notice of its capital classification, 
or a final notice of order issued under 12 U.S.C. 4616(b)(1) through 
(4). For any issue raised by such Enterprise in connection with such 
review, the Enterprise must have first exhausted its administrative 
remedies,

[[Page 3598]]

by presenting its objections, arguments, and information relating to 
such issue for OFHEO's consideration in the Enterprise's response to 
OFHEO's notice of capital classification or notice of intent to issue 
an order. The Enterprise's judicial action will not operate as a stay 
of a capital classification or order by OFHEO.
    In its comments, Freddie Mac asserted that OFHEO's requirement in 
proposed Sec. 1777.27(b) that the Enterprise assert its objections 
concerning a classification to OFHEO before raising them before the 
D.C. Circuit would be inconsistent with applicable judicial doctrine. 
OFHEO disagrees. Section 1777.27 is consistent with controlling 
judicial precedent on exhaustion and review, and has been adopted in 
the final rule without change.

Appointment of a Conservator for a Significantly or Critically 
Undercapitalized Enterprise

    Section 1777.28 addresses appointment of a conservator for a 
significantly undercapitalized or critically undercapitalized 
Enterprise.\28\ As is described in Sec. 1777.28(a), 12 U.S.C. 4616 
empowers OFHEO to appoint a conservator for a significantly 
undercapitalized Enterprise, if OFHEO determines the Enterprise's core 
capital is less than the minimum capital level and the alternative 
remedies available to OFHEO under the 1992 Act are not satisfactory. As 
is described in Sec. 1777.28(b), 12 U.S.C. 4617 requires the Director 
to appoint a conservator for a critically undercapitalized Enterprise, 
unless the Director makes a written determination, and the Secretary of 
the Treasury concurs in writing, that the appointment of a conservator 
is likely to have serious adverse effects on economic conditions of 
national financial markets or on the financial stability of the housing 
finance market, and that the public interest would be better served by 
taking some other enforcement action authorized by the 1992 Act. In 
response to a comment, OFHEO has revised the final version of 
Sec. 1777.28(b)(2), to clarify that the written determination described 
therein is to be in support of the agency's determination not to 
appoint a conservator.
---------------------------------------------------------------------------

    \28\ OFHEO also has authority under 12 U.S.C. 4619(a)(1) through 
(2) to appoint conservators on various grounds, regardless of an 
Enterprise's capital classification.
---------------------------------------------------------------------------

    Under 12 U.S.C. 4619(e)(2), a conservatorship appointment under 
either Sec. 1777.28(a) or 1777.28(b) is to be terminated by OFHEO upon 
determining that the Enterprise has maintained an amount of core 
capital that is equal to or exceeds the minimum capital level. OFHEO is 
also vested with discretion, under 12 U.S.C. 4619(e)(1), to terminate 
such a conservatorship appointment based upon determining that such 
termination is in the public interest and may safely be accomplished. 
These termination provisions are reflected in Sec. 1777.28(d).

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

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

Unfunded Mandates Reform Act of 1995

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

Regulatory Flexibility Act

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

Paperwork Reduction Act of 1995

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

List of Subjects in 12 CFR Part 1777

    Administrative practice and procedure, Capital classification, 
Mortgages.

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

PART 1777--PROMPT CORRECTIVE ACTION

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

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


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

    (a) Authority. This part is issued by the Office of Federal Housing 
Enterprise Oversight (OFHEO) pursuant to sections 1313, 1371, 1372, and 
1376 of the Federal Housing Enterprises Financial Safety and Soundness 
Act (1992 Act) (12 U.S.C. 4513, 4631, 4632, and 4636). These provisions 
broadly authorize OFHEO to take such actions as are deemed appropriate 
by the Director of OFHEO to ensure that the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation 
(collectively, the

[[Page 3599]]

Enterprises) maintain adequate capital and operate in a safe and sound 
manner.
    (b) Authority, purpose and scope of subpart A. In addition to the 
authority set forth in paragraph (a) of this section, subpart A of this 
part is also issued pursuant to section 1314 of the 1992 Act (12 U.S.C. 
4514), section 307(c) of the Federal Home Loan Mortgage Corporation Act 
(12 U.S.C. 1456(c)), and section 309(k) of the Federal National 
Mortgage Association Charter Act (12 U.S.C. 1723a(k)), requiring each 
Enterprise to submit such reports to OFHEO as the Director of OFHEO 
determines, in his or her judgment, are necessary to carry out the 
purposes of the 1992 Act. Subpart A of this part is also issued in 
reliance on section 1317 of the 1992 Act (12 U.S.C. 4517) authorizing 
OFHEO to conduct examinations of the Enterprises. The purpose of 
subpart A of this part is to set forth a framework of early 
intervention supervisory measures, other than formal enforcement 
actions, that OFHEO may take to address emerging developments that 
merit supervisory review to ensure they do not pose a current or future 
threat to the safety and soundness of an Enterprise. OFHEO's initiation 
of procedures under subpart A does not necessarily indicate that any 
unsound condition exists. The supervisory responses enumerated in 
Sec. 1777.11 do not constitute orders under the 1992 Act for purposes 
of sections 1371 and 1376 thereof (12 U.S.C. 4631 and 4636).
    (c) Authority, purpose, and scope of subpart B. In addition to the 
authority set forth in paragraph (a) of this section, subpart B of this 
part is also issued pursuant to subtitle B of the 1992 Act (12 U.S.C. 
4611 through 4623), section 303(b)(2) of the Federal Home Loan Mortgage 
Corporation Act (12 U.S.C. 1452(b)(2)), and section 303(c)(2) of the 
Federal National Mortgage Association Charter Act (12 U.S.C. 
1718(c)(2)). These provisions authorize OFHEO to administer certain 
capital requirements for the Enterprises, to classify the capital of 
the Enterprises based on capital levels specified in the 1992 Act, and, 
in appropriate circumstances, to exercise discretion to reclassify an 
Enterprise into a lower capital category. Under these provisions, there 
are also automatic consequences for an Enterprise that is not 
classified as adequately capitalized, as well as discretionary 
authority for OFHEO to require an Enterprise to take remedial actions. 
Subpart B implements the provisions of sections 1364 through 1368, 
1369(b) through (e), 1369C, and 1369D of the 1992 Act as they apply to 
the Enterprises (12 U.S.C. 4614 through 4618, 4619(b) through (e), 4622 
and 4623). The principal purposes of subpart B are to identify the 
capital measures and capital levels that OFHEO uses in determining the 
capital classification of an Enterprise; to set out the procedures 
OFHEO uses in determining such capital classifications; to establish 
procedures for submission and review of capital restoration plans of an 
Enterprise that is not classified as adequately capitalized; and to 
establish procedures under which OFHEO issues orders pursuant to 
section 1366(b)(1) through (4) of the 1992 Act (12 U.S.C. 4616(b)(1) 
through (4)).
    (d) Effective dates of capital classifications. Section 1364 of the 
1992 Act (12 U.S.C. 4614(d)) directs OFHEO to determine capital 
classifications for the Enterprises by reference to two capital 
standards, consisting of the minimum or critical capital level on the 
one hand, and the risk-based capital level on the other. Section 
1364(d) of the 1992 Act (12 U.S.C. 4614(d)) excludes consideration of 
whether the Enterprises meet the risk-based capital level in 
determining capital classifications or reclassifications under 1364, 
until one year after the effective date of OFHEO's regulation 
implementing OFHEO's risk-based capital test (issued under section 
1361(e) of the 1992 Act (12 U.S.C. 4611(e)), until such time, section 
1364(d) provides that an Enterprise is to be classified as adequately 
capitalized so long as it meets the minimum capital level. Subpart B 
contains a currently effective set of capital classifications omitting 
consideration of the risk-based capital level, as well as another set 
of capital classifications which will take effect, and displace the 
current set of capital classifications, on September 13, 2002 that is, 
one year after the effective date of OFHEO's risk-based capital rule 
published at 66 FR 47730, September 13, 2001.


Sec. 1777.2  Preservation of other authority.

    (a) Supervisory standards. Notwithstanding the existence of 
procedures in Sec. 1777.10 for the Director of OFHEO to designate 
certain developments for supervisory response under subpart A of this 
part, nothing in this part in any way limits the authority of OFHEO 
otherwise to take such actions with respect to any issue as is deemed 
appropriate by the Director of OFHEO to ensure that the Enterprises 
maintain adequate capital, operate in a safe and sound manner, and 
comply with the 1992 Act and regulations, orders, and agreements 
thereunder.
    (b) Capital floor. Classification of an Enterprise as adequately 
capitalized in accordance with subtitle B of the 1992 Act and subpart B 
of this part indicates that the Enterprise meets the capital levels 
under sections 1361 and 1362 of the 1992 Act (12 U.S.C. 4611 and 4612) 
and regulations promulgated thereunder as of the times specified in the 
classification determination. Nothing in subpart B of this part or 
subtitle B of the 1992 Act limits OFHEO's authority otherwise to 
address circumstances that would require additional capital through 
regulations, orders, notices, guidance, or other actions.
    (c) Form of supervisory action or response. In addition to the 
supervisory responses contemplated under subpart A of this part, and 
the authority to classify and reclassify the Enterprises, to issue 
orders, and to appoint conservators under subpart B of this part, the 
1992 Act grants OFHEO broad discretion to take such other supervisory 
actions as may be deemed by OFHEO to be appropriate, including issuing 
temporary and permanent cease and desist orders, imposing civil money 
penalties, appointing a conservator under section 1369(a)(1) through 
(2) of the 1992 Act (12 U.S.C. 4619(a)(1) through (2)), entering into a 
written agreement the violation of which is actionable through 
enforcement proceedings, or entering into any other formal or informal 
agreement with an Enterprise. Neither the 1992 Act nor this part in any 
way limit OFHEO's discretion over the selection of the type of these 
actions, and the selection of one type of action under this part or 
under these other statutory authorities, or a combination thereof, does 
not foreclose OFHEO from pursuing any other action.


Sec. 1777.3  Definitions.

    For purposes of this part, the following definitions will apply:
    1992 Act means the Federal Housing Enterprises Financial Safety and 
Soundness Act, 12 U.S.C. 4501 et seq.
    Affiliate means an entity that controls an Enterprise, is 
controlled by an Enterprise, or is under common control with an 
Enterprise.
    Capital distribution means:
    (1) Any dividend or other distribution in cash or in kind made with 
respect to any shares of, or other ownership interest in, an 
Enterprise, except a dividend consisting only of shares of the 
Enterprise; and
    (2) Any payment made by an Enterprise to repurchase, redeem, 
retire, or otherwise acquire any of its shares or other ownership 
interests, including any extension of credit made to finance an 
acquisition by the Enterprise of such shares or other ownership 
interests, except to the extent the Enterprise

[[Page 3600]]

makes a payment to repurchase its shares for the purpose of fulfilling 
an obligation of the Enterprise under an employee stock ownership plan 
that is qualified under section 401 of the Internal Revenue Code of 
1986 (26 U.S.C. 401 et seq.) or any substantially equivalent plan as 
determined by the Director of OFHEO in writing in advance.
    Core capital has the same meaning as provided in 12 CFR 1750.2.
    Critical capital level means the amount of core capital that is 
equal to the sum of one half of the amount determined under 12 CFR 
1750.4(a)(1) and five-ninths of the amounts determined under 12 CFR 
1750.4(a)(2) through 1750.4(a)(7).
    Enterprise means the Federal National Mortgage Association and any 
affiliate thereof, and the Federal Home Loan Mortgage Corporation and 
any affiliate thereof.
    Minimum capital level means the minimum amount of core capital 
specified for an Enterprise pursuant to section 1362 of the 1992 Act 
(12 U.S.C. 4612), as determined under 12 CFR 1750.4.
    OFHEO means the Office of Federal Housing Enterprise Oversight.
    Risk-based capital level means the amount of total capital 
specified for an Enterprise pursuant to section 1361 of the 1992 Act 
(12 U.S.C. 4611), as determined under OFHEO's regulations implementing 
section 1361.
    Total capital has the same meaning as provided at 12 CFR 
1750.11(n).

Subpart A--Prompt Supervisory Response


Sec. 1777.10  Developments prompting supervisory response.

    In the event of any of the following developments, OFHEO shall 
undertake one of the supervisory responses enumerated in Sec. 1777.11, 
or a combination thereof:
    (a) OFHEO's national House Price Index (HPI) for the most recent 
quarter is more than two percent less than the national HPI four 
quarters previously, or for any Census Division or Divisions in which 
are located properties securing more than 25 percent of single-family 
mortgages owned or securing securities guaranteed by an enterprise, the 
HPI for the most recent quarter for such Division or Divisions is more 
than five percent less than the HPI for that Division or Divisions four 
quarters previously;
    (b) An Enterprise's publicly reported net income for the most 
recent calendar quarter is less than one-half of its average quarterly 
net income for any four-quarter period during the prior eight quarters;
    (c) An Enterprise's publicly reported net interest margin (NIM) for 
the most recent quarter is less than one-half of its average NIM for 
any four-quarter period during the prior eight quarters;
    (d) For single-family mortgage loans owned or securities by an 
Enterprise that are delinquent ninety days or more or in foreclosure, 
the proportion of such loans in the most recent quarter has increased 
more than one percentage point compared to the lowest proportion of 
such loans in any of the prior four quarters; or
    (e) Any other development, including conduct of an activity by an 
Enterprise, that OFHEO determines in its discretion presents a risk to 
the safety and soundness of the Enterprise or a possible violation of 
applicable law, regulation, or order.


Sec. 1777.11  Supervisory response.

    (a) Level I supervisory response--(1) Supervisory letter. Not later 
than five business days after OFHEO determines that a development 
enumerated in Sec. 1777.10 has transpired, OFHEO shall deliver a 
supervisory letter alerting the chief executive officer or the board of 
directors of the Enterprise to OFHEO's determination.
    (2) Contents of supervisory letter. The supervisory letter shall 
notify the Enterprise that, pursuant to this subpart, OFHEO is 
commencing review of a potentially adverse development. As is 
appropriate under the particular circumstances and the nature of the 
potentially adverse development, the letter may direct the Enterprise 
to undertake one or more of the following actions, as of such time as 
OFHEO directs:
    (i) Provide OFHEO with any relevant information known to the 
Enterprise about the potentially adverse development, in such format as 
OFHEO directs;
    (ii) Respond to specific questions and concerns that OFHEO poses 
about the potentially adverse development; and
    (iii) Take appropriate action.
    (3) Review; further action. Based on the Enterprise's response to 
the supervisory letter and consideration of other relevant factors, 
OFHEO shall promptly determine whether the Level I supervisory response 
is adequate to resolve any supervisory issues implicated by the 
potentially adverse development, or whether additional supervisory 
response under this section is warranted.
    (4) Sequence of supervisory responses. The Level II through Level 
IV supervisory responses in paragraphs (b) through (d) of this section 
may be carried out in any sequence, including simultaneous performance 
of two or more such responses. OFHEO may also carry out one or more 
such responses simultaneously with a Level I supervisory response 
pursuant to this paragraph (a).
    (b) Level II supervisory response--(1) Special review. In addition 
to any other supervisory response described in this section, OFHEO may 
conduct a special review of an Enterprise in order to assess the impact 
of the potentially adverse development on the Enterprise.
    (2) Review; further action. Based on the results of the special 
review and consideration of other factors deemed by OFHEO to be 
relevant, OFHEO shall promptly determine whether additional supervisory 
response under this section is warranted.
    (c) Level III supervisory response--(1) Action plan. In addition to 
any other supervisory response described in this section, OFHEO may 
direct the Enterprise to prepare and submit an action plan to OFHEO, in 
such format and at such time as OFHEO directs.
    (2) Contents of action plan. Such action plan shall include, 
subject to additional direction by OFHEO, the following:
    (i) In the case of any potentially adverse development arising from 
conditions or practices internal to the Enterprise, any relevant 
information known to the Enterprise about the circumstances that led to 
the potentially adverse development;
    (ii) An assessment of likely consequences that the potentially 
adverse development may have for the Enterprise; and
    (iii) The proposed course of action the Enterprise will undertake 
in response to the potentially adverse development, including an 
explanation as to why such approach is preferred to any other 
alternative actions by the Enterprise and how such approach will 
address the concerns of OFHEO.
    (3) Review; further action. If OFHEO in its discretion determines 
that the information, assessment, or proposed course of action 
contained in the action plan is incomplete or inadequate, OFHEO shall 
promptly direct the Enterprise to correct such deficiencies to the 
extent OFHEO determines such corrections will aid in resolving 
supervisory issues implicated by the potentially adverse development, 
and will promptly determine whether additional supervisory response 
under this section is warranted.
    (d) Level IV supervisory response--(1) Notice to show cause. In 
addition to any other supervisory response described in

[[Page 3601]]

this section, OFHEO may issue written notice to the chief executive 
officer or the board of directors of the Enterprise directing the 
Enterprise to show cause, on or before the date specified in the 
notice, why OFHEO should not issue one or more of the following:
    (i) A notice of charges to the Enterprise under section 1371 of the 
1992 Act (12 U.S.C. 4631) and the procedures in 12 CFR part 1780 
commencing an action to order the Enterprise to cease and desist 
conduct, conditions, or violations specified in the notice to show 
cause;
    (ii) A temporary order to the Enterprise under section 1372 of the 
1992 Act (12 U.S.C. 4632) and the procedures in 12 CFR part 1780 to 
cease and desist from, and take affirmative actions to prevent or 
remedy harm from, conduct, conditions, or violations specified in the 
notice to show cause;
    (iii) A notice of charges under section 1376 of the 1992 Act (12 
U.S.C. 4636) and the procedures in 12 CFR part 1780 commencing 
imposition of a civil money penalty against the Enterprise; or
    (iv) A notice of discretionary reclassification of the Enterprise's 
capital classification under section 1364(b) of the 1992 Act (12 U.S.C. 
4614(b)) and subpart B of this part.
    (2) Review; further action. Based on the Enterprise's response to 
the notice to show cause and consideration of other relevant factors, 
OFHEO shall promptly determine whether to commence the actions 
described in the notice, and whether additional supervisory response 
under this section is warranted.


Sec. 1777.12  Other supervisory action.

    Notwithstanding the pendency or completion of one or more 
supervisory responses described in Sec. 1777.11, OFHEO may at any time 
undertake additional supervisory steps and actions in the form of any 
informal or formal supervisory tool available to OFHEO under the 1992 
Act, including, but not limited to, issuing guidance or directives 
under section 1313 (12 U.S.C. 4513), requiring reports under section 
1314 (12 U.S.C. 4514), conducting other examinations under section 1317 
(12 U.S.C. 4517), issuing discretionary reclassification under section 
1364 (12 U.S.C. 4614), initiating discretionary action under section 
1366(b) (12 U.S.C. 4616(b)), appointing a conservator under section 
1369(a) (12 U.S.C. 4619(a)), or initiating administrative enforcement 
action under sections 1371, 1372, and 1376 (12 U.S.C. 4631, 4632 and 
4636). In addition, OFHEO may take any such steps or actions with 
respect to an Enterprise that fails to make a submission or comply with 
a directive as required by Sec. 1777.11, or to address an Enterprise's 
failure to implement an appropriate action in response to a supervisory 
letter or under an action plan under Sec. 1777.11.

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


Sec. 1777.20  Capital classifications.

    (a) Capital classifications after the effective date of section 
1365 of the 1992 Act. The capital classification of an Enterprise for 
purposes of subpart B of this part is as follows:
    (1) Adequately capitalized. Except as otherwise provided under 
paragraph (a)(5) of this section, an Enterprise will be classified as 
adequately capitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, holds total capital equaling or exceeding the risk-
based capital level; and
    (ii) As of the date specified in the notice of proposed capital 
classification, holds core capital equaling or exceeding the minimum 
capital level.
    (2) Undercapitalized. Except as otherwise provided under paragraph 
(a)(5) of this section or Sec. 1777.23(c) or Sec. 1777.23(h), an 
Enterprise will be classified as undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, holds total capital less than the risk-based capital 
level; and
    (ii) As of the date specified in the notice of proposed capital 
classification, holds core capital equaling or exceeding the minimum 
capital level.
    (3) Significantly undercapitalized. Except as otherwise provided 
under paragraph (a)(5) of this section or Sec. 1777.23(c) or 
Sec. 1777.23(h), an Enterprise will be classified as significantly 
undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, holds core capital less than the minimum capital level; 
and
    (ii) As of the date specified in the notice of proposed capital 
classification, holds core capital equaling or exceeding the critical 
capital level.
    (4) Critically undercapitalized. An Enterprise will be classified 
as critically undercapitalized if, as of the date specified in the 
notice of proposed capital classification, the Enterprise holds core 
capital less than the critical capital level.
    (5) Discretionary reclassification--determination to reclassify. If 
OFHEO determines in writing that an Enterprise is engaging in action or 
inaction (including a failure to respond appropriately to changes in 
circumstances or unforeseen events) that could result in a rapid 
depletion of core capital, or that the value of property subject to 
mortgages held or securitized by the Enterprise has decreased 
significantly, or that reclassification is otherwise deemed necessary 
to ensure that the Enterprise holds adequate capital and operates 
safely, OFHEO may reclassify the Enterprise as:
    (i) Undercapitalized if the Enterprise is otherwise classified as 
adequately capitalized;
    (ii) Significantly undercapitalized if the Enterprise is otherwise 
classified as undercapitalized; or
    (iii) Critically undercapitalized if the Enterprise is otherwise 
classified as significantly undercapitalized.
    (b) Duration of reclassification; successive reclassifications. (1) 
A reclassification of an Enterprise based on action, inaction, or 
conditions under paragraph (a)(5) or (c)(5) of this section shall be 
considered in the determination of each subsequent capital 
classification of the Enterprise, and shall only cease being considered 
in the determination of the Enterprise's capital classification after 
OFHEO determines that the action, inaction or condition upon which the 
reclassification was based has ceased or been eliminated and remedied 
to OFHEO's satisfaction.
    (2) If the action, inaction, or condition upon which a 
reclassification was based under paragraph (a)(5) or (c)(5) of this 
section has not ceased or been eliminated and remedied to OFHEO's 
satisfaction within such reasonable time as is determined by OFHEO to 
be appropriate, OFHEO may consider such failure to be the basis for 
additional reclassification under such paragraph (a)(5) or (c)(5) of 
this section into a lower capital classification.
    (c) Capital classifications before the effective date of section 
1365 of the 1992 Act. Notwithstanding paragraph (a) of this section, 
until September 13, 2002, the capital classification of an Enterprise 
for purposes of subpart B of this part is as follows:
    (1) Adequately capitalized. Except as otherwise provided in 
paragraph (c)(5) of this section, an Enterprise will be classified as 
adequately capitalized if the Enterprise, as of the date specified in 
the notice of proposed capital classification, holds core capital 
equaling or exceeding the minimum capital level.
    (2) Undercapitalized. An Enterprise will be classified as 
undercapitalized if the Enterprise:

[[Page 3602]]

    (i) As of the date specified in the notice of proposed capital 
classification, holds core capital equaling or exceeding the minimum 
capital level; and
    (ii) Is reclassified as undercapitalized by OFHEO under paragraph 
(c)(5) of this section.
    (3) Significantly undercapitalized. Except as otherwise provided 
under paragraph (c)(5) of this section or Sec. 1777.23(c) or 
Sec. 1777.23(h), an Enterprise will be classified as significantly 
undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held core capital less than the minimum capital level; 
and
    (ii) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the critical 
capital level.
    (4) Critically undercapitalized. An Enterprise will be classified 
as critically undercapitalized if, as of the date specified in the 
notice of proposed capital classification, the Enterprise held core 
capital less than the critical capital level.
    (5) Discretionary reclassification. If OFHEO determines in writing 
that an Enterprise is engaging in action or inaction (including a 
failure to respond appropriately to changes in circumstances or 
unforeseen events) that could result a rapid depletion of core capital, 
or that the value of the property subject to mortgages held or 
securitized by the Enterprise has decreased significantly or that 
reclassification is deemed necessary to ensure that the Enterprise 
holds adequate capital and operates safely, OFHEO may reclassify the 
Enterprise as:
    (i) Undercapitalized if the Enterprise is otherwise classified as 
adequately capitalized:
    (ii) Significantly undercapitalized if the Enterprise is otherwise 
classified as undercapitalized; or
    (iii) Critically undercapitalized if the Enterprise is otherwise 
classified as significantly undercapitalized.
    (d) Prior approvals. In making a determination to reclassify an 
Enterprise under paragraph (a)(5) or (c)(5) of this section, OFHEO will 
not base its decision to reclassify solely on action or inaction that 
previously was given specific approval by the Director of OFHEO in 
connection with the Director's approval of the Enterprise's capital 
restoration plan under section 1369C of the 1992 Act (12 U.S.C. 4622), 
or of a written agreement with the Enterprise that is enforceable in 
accordance with section 1371 of the 1992 Act.


Sec. 1777.21  Notice of capital category, and adjustments.

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


Sec. 1777.22  Limitation on capital distributions.

    (a) Capital distributions in general. An Enterprise shall make no 
capital distribution that would decrease the total capital of the 
Enterprise to an amount less than the risk-based capital level or the 
core capital of the Enterprise to an amount less than the minimum 
capital level without the prior written approval of OFHEO.
    (b) Capital distributions by an Enterprise that is not adequately 
capitalized--(1) Prohibited distributions. An Enterprise that is not

[[Page 3603]]

classified as adequately capitalized shall make no capital distribution 
that would result in the Enterprise being classified into a lower 
capital classification than the one to which it is classified at the 
time of such distribution.
    (2) Restricted distributions. An Enterprise classified as 
significantly or critically undercapitalized shall make no capital 
distribution without the prior written approval of OFHEO. OFHEO may 
grant a request for such a capital distribution only if OFHEO 
determines, in its discretion, that the distribution:
    (i) Will enhance the ability of the Enterprise to meet the risk-
based capital level and the minimum capital level promptly;
    (ii) Will contribute to the long-term financial safety and 
soundness of the Enterprise; or
    (iii) Is otherwise in the public interest.


Sec. 1777.23  Capital restoration plans.

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

[[Page 3604]]

    (i) If OFHEO determines, in its discretion, that an Enterprise has 
failed to make, in good faith, reasonable efforts necessary to comply 
with the capital restoration plan and fulfill the schedule thereunder, 
OFHEO may reclassify the Enterprise:
    (A) As significantly undercapitalized if it is otherwise classified 
as undercapitalized; or
    (B) As critically undercapitalized if it is otherwise classified as 
significantly undercapitalized.
    (ii) Duration of reclassification. An Enterprise's failure to 
implement an approved capital restoration plan as described in 
paragraph (h)(1)(i) of this section shall continue to be grounds for 
reclassification at each subsequent capital classification of the 
Enterprise, and shall only cease being considered grounds for 
reclassification after OFHEO determines, in its discretion, that the 
Enterprise is making such efforts as are reasonably necessary to comply 
with the capital restoration plan and fulfill the schedule thereunder.
    (iii) Successive reclassifications. If an Enterprise has not 
remedied its failure to implement an approved capital restoration plan 
within such period as is determined by OFHEO to be appropriate, OFHEO 
may consider such failure to be the basis for additional 
reclassification under paragraph (h)(1)(i) of this section into a lower 
capital classification.
    (2) Administrative enforcement action. A capital plan that has 
received an approval order from OFHEO under this section shall 
constitute an order under the 1992 Act. An Enterprise, regardless of 
its capital classification, as well as its executive officers, and 
directors may be subject to action by OFHEO under sections 1371, 1372, 
and 1376 of the 1992 Act (12 U.S.C. 4631, 4632, and 4636) and 12 CFR 
part 1780 for failure to comply with such plan.


Sec. 1777.24  Notice of intent to issue an order.

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


Sec. 1777.25  Response to notice.

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


Sec. 1777.26  Final notice of order.

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


Sec. 1777.27  Exhaustion and review.

    (a) Judicial review--(1) Review of certain actions. An Enterprise 
that is not classified as critically undercapitalized may seek judicial 
review of a final notice of capital classification issued pursuant to 
Sec. 1777.21(a)(3) or a final notice of order issued pursuant to 
Sec. 1777.26(a) in accordance with section 1369D of the 1992 Act (12 
U.S.C. 4623)
    (2) Other review barred. Except as set out in paragraph (a)(1) of 
this section, or review of conservatorship appointments to the limited 
extent provided in section 1369(b) of the 1992 Act (12 U.S.C. 4619(b)) 
and Sec. 1777.28(c), no court shall

[[Page 3605]]

have jurisdiction to affect, by injunction or otherwise, the issuance 
or effectiveness of a capital classification or any other action of 
OFHEO pursuant to this subpart B, as provided in section 1369D of the 
1992 Act (12 U.S.C. 4623).
    (b) Exhaustion of administrative remedies. In connection with any 
issue for which an Enterprise seeks judicial review in connection with 
an action described in paragraph (a)(1) of this section, the Enterprise 
must have first exhausted its administrative remedies, by presenting 
all its objections, arguments, and information relating to such issue 
for OFHEO's consideration pursuant to Sec. 1777.21(a)(2), as part of 
the Enterprise's response to OFHEO's notice of capital classification, 
or pursuant to Sec. 1777.25, as part of the Enterprise's response to 
OFHEO's notice of intent to issue an order.
    (c) No stay pending review. The commencement of proceedings for 
judicial review of a final capital classification or order as described 
in paragraph (a)(1) of this section shall not operate as a stay 
thereof.


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

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

    Dated: January 18, 2002.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 02-1842 Filed 1-24-02; 8:45 am]
BILLING CODE 4220-01-P