[Federal Register Volume 70, Number 248 (Wednesday, December 28, 2005)]
[Proposed Rules]
[Pages 76938-76961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-24396]



[[Page 76937]]

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Part III





Federal Housing Finance Board





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12 CFR Part 951



Affordable Housing Program Amendments; Proposed Rule

  Federal Register / Vol. 70, No. 248 / Wednesday, December 28, 2005 / 
Proposed Rules  

[[Page 76938]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 951

[No. 2005-23]
RIN 3069-AB26


Affordable Housing Program Amendments

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its Affordable Housing Program regulation to remove 
prescriptive requirements, clarify certain operational requirements, 
remove certain authorities, and otherwise streamline and reorganize the 
regulation.

DATES: The Finance Board will accept written comments on the proposed 
rule that are received on or before April 27, 2006.

ADDRESSES: Submit comments by any of the following methods:
    E-mail: [email protected].
    Fax: 202-408-2580.
    Mail/Hand Delivery: Federal Housing Finance Board, 1625 Eye Street, 
NW., Washington, DC 20006, ATTENTION: Public Comments.
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments. If you submit your comments to 
the Federal eRulemaking Portal, please also send it by e-mail to the 
Finance Board at [email protected] to ensure timely receipt by the 
agency.
    Include the following information in the subject line of your 
submission: Federal Housing Finance Board. Proposed Rule: Affordable 
Housing Program Amendments. RIN Number 3069-AB26. Docket Number 2005-
23.
    We will post all public comments we receive on this rule without 
change, including any personal information you provide, such as your 
name and address, on the Finance Board Web site at http://www.fhfb.gov/pressroom/pressroom_regs.htm.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Associate Director, 
Office of Supervision, by electronic mail at [email protected] or by 
telephone at 202-408-2537; Sylvia C. Martinez, Senior Advisor, Office 
of Supervision, by electronic mail at [email protected] or by 
telephone at 202-408-2825; or Sharon B. Like, Senior Attorney, Office 
of General Counsel, by electronic mail at [email protected] or by 
telephone at 202-408-2930. You can send regular mail to the Federal 
Housing Finance Board, 1625 Eye Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 10(j)(1) of the Federal Home Loan Bank Act (Bank Act) 
requires each Federal Home Loan Bank (Bank) to establish an affordable 
housing program (AHP), the purpose of which is to enable Bank members 
to provide subsidized financing for long-term, low- and moderate-
income, owner-occupied and affordable rental housing. See 12 U.S.C. 
1430(j)(1). The AHP has played an important role in allowing the Banks 
to support their members' efforts to meet the housing needs of their 
communities. Although the AHP is a shallow subsidy program, its 
strength lies in its capacity to leverage additional public and private 
resources for housing. Since the inception of the program in 1990, the 
Banks have awarded more than $2 billion in AHP subsidies to assist 
nearly 437,000 housing units. Seventy percent of the units receiving 
AHP subsidies were for very low-income households. AHP subsidies have 
proven to be useful in financing projects that present underwriting 
challenges, such as projects for the homeless and special needs 
populations, which may include persons with disabilities and the 
elderly. The AHP also has been used effectively with Low-Income Housing 
Tax Credits (LIHTC or tax credits) by filling financing gaps, thereby 
enabling a larger percentage of very low-income households to be 
served.
    The AHP also serves as an important resource for low- or moderate-
income homeowners and first-time homebuyers. From 1990 through 2004, 
the program has assisted in the financing of 102,810 owner-occupied 
units under the Banks' competitive application programs, and 47,813 
units under their homeownership set-aside programs. Some of the units 
address specific housing needs, such as expanding homeownership 
opportunities for underserved households.
    The Finance Board has promulgated regulations implementing these 
provisions of the Bank Act, which are codified at 12 CFR part 951. 
These regulations generally have reflected a prescriptive approach, 
which was appropriate for rules implementing a newly created program. 
As the program has matured, however, the Finance Board has revised the 
AHP regulations a number of times, in part to provide greater 
responsibility to the Banks in managing the program and in part to 
implement improvements based on lessons learned in overseeing the 
operation of the program. The Finance Board believes, based in part on 
its review of the AHP on a Bank System level conducted in 2003-2005, 
Report of the Horizontal Review of the Affordable Housing Programs of 
the Federal Home Loan Banks (March 15, 2005) (Horizontal Review), that 
there are a number of areas in which the regulation can be further 
revised to enhance the success of the program.\1\
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    \1\ The Horizontal Review is available on the Housing Programs 
page of the Finance Board's Web site: http://www.fhfb.gov/Default.aspx?Page=47.
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    In proposing these amendments, the Finance Board intends to address 
seven principal factors. First, additional definitions would be 
incorporated into the regulation at Sec.  951.1. These definitions 
would serve to establish the precise use of key terms that are included 
in the regulation. Second, the proposal would reorganize the regulatory 
text so that operational provisions relating to the competitive 
application program and the homeownership set-aside program, 
respectively, would be fully contained within separate sections of the 
regulation. Proposed Sec.  951.5 would address the competitive 
application program, while Sec.  951.6 would address the homeownership 
set-aside program. The proposed reorganization is intended to make it 
easier for program sponsors and other interested parties to understand 
the operation of the competitive application and homeownership set-
aside programs. Third, the use of AHP subsidy by loan pools and 
revolving loan funds would be permitted under the competitive 
application program, at the discretion of the particular Bank. This 
proposed change is intended to expand the range of eligible means of 
supporting affordable housing through the program. Fourth, restrictions 
on the use of AHP funds by projects located outside a Bank's district 
and scoring preferences for in-district projects, which the current 
regulation permits at the Bank's discretion, would no longer be 
permissible. This proposed change is in response to the expansion of 
interstate banking among Bank member institutions, which has resulted 
in many members serving markets outside a Bank's district boundaries. 
Fifth, provisions in the current regulation that allow a Bank to 
accelerate AHP contributions from the following year into the current 
year would be deleted. The Banks have not often used this authority, 
and it also may present some operational difficulties. Sixth, 
provisions in the regulation that would increase annually the maximum 
allowable dollar amount of a Bank's

[[Page 76939]]

allocation to its homeownership set-aside program and maximum allowable 
dollar acceleration amount under a Bank's competitive application 
program, based on the annual inflation rate, would be deleted. This 
change would address the potential for inflation to increase the 
allocation of AHP contributions to the homeownership set-aside program 
relative to the competitive application program. Finally, prescriptive 
monitoring requirements in the current regulation, which detail 
specific monitoring and control processes with which a Bank must 
comply, would be replaced by standards based on required outcomes 
rather than prescribed control processes. The Finance Board invites 
comments on all aspects of the proposed rule.

II. Analysis of the Proposed Rule

A. Definitions: Proposed Sec.  951.1

    The proposed rule would revise certain of the existing AHP 
definitions and would define a number of other terms that are used 
throughout the regulation. See 12 CFR 951.1. Proposed new definitions 
are discussed in the context of specific regulatory requirements. The 
more substantive changes are described below.
    Affordable. The existing definition would be revised by adding a 
reference, consistent with the AHP statutory term, to ``rent charged to 
a household,'' which would be defined to mean the rent that is actually 
paid by the household occupying the unit. See 12 U.S.C. 1430(j)(13)(D). 
The existing regulatory language may not be clear on this point and 
could be read to mean the amount of rent charged by the owner for the 
unit, which would be greater than the rent actually paid by the 
occupants if the occupants receive financial assistance for rent 
payments from other sources.
    The proposed rule also would add a new paragraph (2), which would 
address units that are subsidized with low-income housing assistance 
under the Department of Housing and Urban Development (HUD) Section 8 
program. See 42 U.S.C. 1437f. This provision is intended to clarify 
that rents charged to a household under a Section 8 agreement will be 
deemed to be ``affordable'' for AHP purposes, even if the rent 
increases after initial occupancy, if the rent met the AHP definition 
of ``affordable'' upon initial household occupancy and thereafter has 
continued to comply with the Section 8 agreement for that household. 
This provision would be applicable for purposes of the annual 
adjustment of targeting commitments after initial occupancy under 
proposed Sec.  951.7(a)(3) (which is re-designated from current 
Sec. Sec.  951.10(d) and 951.11(b)).
    AHP project. The proposed rule would add a new definition, which 
would apply to both owner-occupied and rental projects that have been 
awarded or have received AHP subsidy through the competitive 
application program. This is intended to codify existing practice and 
clarify that the term ``project'' does not apply to direct subsidies, 
i.e., grants, to households made pursuant to the homeownership set-
aside program. The term would apply to both single-family and 
multifamily projects. The proposed rule also would make conforming 
changes to the definitions of ``owner-occupied project'' and ``rental 
project.''
    Low- or moderate-income household and very low-income household. 
The existing regulation defines ``low- or moderate-income household'' 
to mean a household that has an income of 80 percent or less of the 
median income for the area, with the income limit adjusted for family 
(i.e., household) size, in a Bank's discretion, in accordance with the 
methodology of the applicable median income standard. The proposed rule 
would amend the household-size adjustment provisions in paragraph (3) 
of the existing definition of ``low- or moderate-income household'' and 
(and similarly for the definition of ``very low-income household'') by 
changing the household-size adjustment from an optional to a mandatory 
requirement, provided that if the source for the area median income 
data has no methodology to adjust the household income limit for 
household size, the Bank is not required to make such an adjustment. 
This change would bring the AHP into conformance with other federal 
programs that adjust for household size.
    As further discussed below, the proposed rule would relocate 
certain provisions of the existing definitions relating to when a 
household's income must be determined, to proposed Sec. Sec.  
951.5(c)(1) and 951.6(c)(2)(i) for the competitive application program 
and the homeownership set-aside program, respectively.
    Median income for the area. The existing definition lists a number 
of median income standards that a Bank may adopt for purposes of 
determining household income eligibility. The regulation also provides 
that a Bank may request Finance Board approval of a median income for 
any definable geographic area, as published by a federal, state, or 
local government entity for purposes of that entity's housing programs. 
The proposed rule would remove the language ``for purposes of that 
entity's housing programs.'' This would enable the Finance Board to 
approve, upon a Bank's request, median income standards from sources, 
such as the Census Bureau, that publish median income data but do not 
have their own housing programs.
    Owner-occupied project and rental project. The proposed rule would 
amend the existing definitions by clarifying that they apply only to 
the competitive application program and by deleting language requiring 
the project to involve ``the purchase, construction, or 
rehabilitation'' of owner-occupied housing or rental housing, 
respectively. That requirement would be relocated to the provisions 
addressing the eligibility requirements for the use of AHP subsidy, at 
proposed Sec.  951.5(c)(1)(i) and (ii). The proposed rule also would 
add manufactured housing to the types of owner-occupied housing and 
emergency shelters and single-room occupancy (SRO) housing as types of 
rental housing, which are explicitly referenced in the rule.
    Retention period. The proposed rule would amend the existing 
definition to clarify that, in the case of rehabilitated units that 
currently are occupied by the owner and do not involve a closing, the 
retention period would commence on the date of completion of the 
rehabilitation.
    Sponsor. The proposed rule would amend the existing definition by 
authorizing a Bank to define certain terms in its AHP Implementation 
Plan and by adding 2 entities to the definition. The terms ``ownership 
interest'' and ``integrally involved'' are key terms in the existing 
definition of ``sponsor.'' The proposed rule would retain those terms 
but would require each Bank to define what they mean in its AHP 
Implementation Plan. Under the existing definition, a Bank must 
consider a ``sponsor'' to include any entity that has an ownership 
interest in a rental project, regardless of how small or temporary such 
ownership interest is. Requiring a Bank to define ``ownership 
interest'' in its AHP Implementation Plan would allow it to address 
concerns that some rental projects may manipulate ownership interests 
in order to receive points as not-for-profit sponsors under the 
competitive application program's scoring system. The proposed rule 
also would expand the definition to include revolving loan funds or 
entities that establish loan pools. Those terms would be used for 
purposes of implementing proposed amendments to the competitive 
application program rules, which would

[[Page 76940]]

deal with revolving loan funds and loan pools, respectively.
    Subsidy. The proposed rule would revise the existing definition, 
principally by deleting the provisions that specify the dates as of 
which the amount of the subsidy is to be determined. The substance of 
those provisions would be incorporated into the section that sets forth 
the eligibility requirements relating to the competitive application 
program, at proposed Sec.  951.5(c)(12). The proposed rule also would 
remove the term ``homeownership set-aside funds'' from the definition 
of ``subsidy'' because they are direct subsidies, which are included 
within the definition of ``subsidy.''

B. Required Annual AHP Contributions; Allocation of Contributions: 
Proposed Sec.  951.2

    Annual AHP contributions: Proposed Sec.  951.2(a). Under the Bank 
Act, each Bank annually must contribute to its AHP an amount equal to 
the greater of 10 percent of the Bank's previous year's net income or 
such prorated amount as is required to assure that the aggregate 
contribution of the 12 Banks is no less than $100 million. 12 U.S.C. 
1430(j)(5)(C). In recent years, the Banks have not used the pro rata 
allocation method because the annual contributions based on the 10 
percent of income formula have exceeded $100 million. Nonetheless, 
proposed Sec.  951.2(a)(2) would revise the existing provisions to 
clarify that if the pro rata formula were to be used in any future 
year, the required annual contribution for any Bank could not exceed 
its net earnings for the previous year. This is primarily intended as a 
safety and soundness measure to avoid the possibility that a Bank might 
otherwise be required to contribute an amount in excess of its income, 
thereby reducing its regulatory capital.
    Net earnings of a Bank. Proposed Sec.  951.1 would revise the 
existing definition to clarify existing practice with respect to how a 
Bank's earnings are determined for purposes of calculating its required 
AHP contribution. See 12 CFR 951.1. Pursuant to registration of its 
equity securities with the Securities and Exchange Commission (SEC), 
each Bank must present its financial statements in its SEC filings in 
accordance with Generally Accepted Accounting Principles in the United 
States (GAAP). The application of Statement of Financial Accounting 
Standards No. 150, Accounting for Certain Financial Instruments with 
Characteristics of Both Liabilities and Equity (SFAS 150), to the Banks 
requires them to categorize capital stock subject to a mandatory 
redemption request as a liability on the statement of condition and 
requires that they treat the dividends on capital stock subject to a 
mandatory redemption request as interest expense. The Bank Act 
provisions related to the AHP provide that each Bank shall make an 
annual contribution equal to 10 percent of its net earnings for the 
previous year after reduction for any payment required under 12 U.S.C. 
1441b (regarding the Resolution Funding Corporation) and before 
declaring any dividend. 12 U.S.C. 1430(j)(8). Because the Bank Act 
requires that the AHP contribution be calculated before the declaration 
of dividends, net earnings for purposes of calculating the AHP 
contribution should not be reduced by any dividend declaration, 
including those associated with mandatorily-redeemable stock, even 
though those dividends may be treated as interest expense in the 
calculation of GAAP net income.
    Allocation of contributions: Proposed Sec.  951.2(b). The proposed 
rule would relocate the allocation of contributions provisions for the 
competitive application program and homeownership set-aside program in 
existing Sec.  951.3(a) to proposed Sec.  951.2(b), as they relate to 
the requirements for AHP contributions, which are set forth in proposed 
Sec.  951.2.
    Homeownership set-aside allocation: Proposed Sec.  951.2(b)(2). AHP 
subsidies are disbursed through a Bank's competitive application 
program and its homeownership set-aside program. Under the existing 
rules, a Bank may set aside annually up to the greater of $3 million or 
25 percent of its annual required AHP contribution to provide funds to 
members through its homeownership set-aside programs. See 12 CFR 
951.3(a)(1)(i). If member demand in a given year exceeds the AHP 
subsidy amount available for that year, a Bank may accelerate or 
``borrow'' additional amounts from the following year's AHP 
contribution, up to the greater of $3 million or 25 percent of the 
Bank's projected contribution for the following year, to the current 
year's set-aside program.
    In addition to those amounts, a Bank may set aside annually up to 
the greater of $1.5 million or 10 percent of its annual required AHP 
contribution to fund a set-aside program to be used solely to provide 
financial assistance to first-time homebuyers. See 12 CFR 
951.3(a)(1)(ii). If member demand for that set-aside program exceeds 
the amount of available AHP subsidy for a particular year, a Bank may 
accelerate or ``borrow'' additional amounts from the following year's 
AHP contribution, up to the greater of $1.5 million or 10 percent of 
the Bank's projected contribution for the following year, to the 
current year's first-time homebuyer set-aside program. These maximum 
allowable dollar amounts are adjusted annually by the Finance Board to 
reflect any percentage increase in the preceding year's Consumer Price 
Index (CPI). See 12 CFR 951.3(a)(1)(iii).
    The proposed rule would remove the annual CPI adjustment of the 
caps on the dollar amounts that may be allocated to the set-aside 
programs, principally because it has the potential over time to 
increase the amounts allocated to the set-aside programs at the expense 
of the competitive application program. As such, the CPI adjustment 
could potentially affect the balance between amounts allocated to 
owner-occupied housing and rental housing, respectively. Similarly, 
because the provision allowing acceleration of the maximum allowable 
dollar allocation under the competitive application program into the 
current year from the subsequent year would be eliminated, the 
provision authorizing a CPI adjustment of the accelerated amount, as 
provided under existing Sec.  951.3(a)(2), would be eliminated as a 
conforming amendment.
    The Finance Board is proposing to make a number of other changes 
regarding the allocation of AHP funds to the homeownership set-aside 
programs, as noted below.
    Consolidation of separate program authorities: Proposed Sec.  
951.2(b)(2). Proposed Sec.  951.2(b)(2) would retain the maximum 
allowable aggregate allocation of AHP dollars to the homeownership set-
aside programs, i.e., the greater of $4.5 million or 35 percent of a 
Bank's annual required AHP contribution, but would eliminate the first-
time homebuyer set-aside program authority as a separate and distinct 
authority. See 12 CFR 951.3(a)(1). The proposed rule would replace the 
separate first-time homebuyer set-aside program provision with a 
requirement that at least one-third of a Bank's aggregate annual 
homeownership set-aside allocation be targeted for first-time 
homebuyers, which should be functionally equivalent to the results 
under the current structure. The Finance Board understands that most of 
the Banks currently dedicate a substantial portion of their general 
homeownership set-aside allocation to first-time homebuyers before 
setting aside funds under the separate homeownership set-aside 
authority that specifically targets first-time homebuyers. Therefore, 
the Finance

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Board believes the proposed change would simplify the regulation but 
would not cause a substantive change in the allocation of homeownership 
set-aside funds to first-time homebuyers.
    Removal of acceleration authority. The Finance Board also is 
proposing to remove the existing provisions that permit a Bank to 
accelerate or ``borrow'' AHP funds from the subsequent year to fund the 
current year's homeownership set-aside programs. See 12 CFR 
951.3(a)(1)(i) and (ii). The Banks have not often used that authority 
(in 2004 only two Banks did so) and it presents operational 
difficulties because it requires the Banks to project future earnings 
in order to determine how much they may accelerate into the current 
year, and these projections may not prove to be accurate. Deleting this 
provision would eliminate some unnecessary complexity to the 
administration and monitoring of the AHP fund as well as to a Bank's 
balance sheet. For much the same reason, the Finance Board is proposing 
to eliminate the provision allowing acceleration of competitive 
application program allocations, as provided under existing Sec.  
951.3(a)(2).

C. AHP Implementation Plan: Proposed Sec.  951.3

    Proposed Sec.  951.3(a) would reorganize and streamline 
requirements for a Bank's AHP Implementation Plan to conform them to 
amendments that are being proposed to other parts of the AHP 
regulation. See 12 CFR 951.3(b). The proposed amendments to the 
specific program operating requirements for AHP Implementation Plans 
are discussed elsewhere in this preamble in the context of the 
particular operating requirements. The proposed rule also would add a 
requirement that the AHP Implementation Plan include the Banks' 
retention agreement requirements.
    Proposed Sec.  951.3(c) would require a Bank to notify the Finance 
Board within 30 days of amending its AHP Implementation Plan and 
proposed Sec.  951.3(d) would require a Bank to make the amended Plan 
publicly available through its Web site within 30 days after adoption 
of the amendments. Under the current rules, the Bank must submit all 
amendments to the Finance Board and must make its Plan available to 
members of the public upon request. See 12 CFR 951.3(b)(4)-(5). Making 
the AHP Implementation Plan available through the Banks' websites is 
intended to provide the public with easy access to important 
information about the AHP as well as to promote greater transparency 
and accountability in the program.

D. Advisory Councils: Proposed Sec.  951.4

    The proposed rule would make a number of revisions to the 
provisions dealing with the Advisory Councils of the Banks, many of 
which are intended to clarify but not change the substance of the 
existing rule. See 12 CFR 951.4. The provisions that have a substantive 
effect are described below.
    Terms of Advisory Council members: Proposed Sec.  951.4(b). Section 
951.4(b) of the proposed rule is intended to enhance the effectiveness 
of the Advisory Councils by lessening the likelihood that the terms of 
more than one-third of the Advisory Council members will expire in any 
1 year. To that end, the proposed rule would require each Bank to adopt 
policies governing how it would conduct the appointment process and 
would require each Bank to appoint members to terms of ``up to'' 3 
years. The intent of the latter change is to allow the Banks to appoint 
some individuals to terms of 1 or 2 years as a means of ensuring an 
appropriate balance of experience and service among members of the 
Council as a whole. Under the current rules, the Banks must appoint 
members of the Council for a 3 year term. See 12 CFR 951.4(d).
    Election of officers: Proposed Sec.  951.4(c). Section 951.4(c) 
would impose on the Advisory Council an affirmative obligation to elect 
certain officers, which is intended to ensure that each Advisory 
Council has in place a chairman and vice chairman. The current rule 
permits, but does not require, such officers. See 12 CFR 951.4(e).
    Duties: meetings with the Banks: Proposed Sec.  951.4(d)(1). 
Section 951.4(d)(1) of the proposed rule would revise the duties of the 
Advisory Council principally by adding a list of specific matters on 
which the Advisory Council must provide recommendations to the Bank's 
board of directors. See 12 CFR 951.4(f)(1). Those matters include: the 
relative allocation of AHP subsidy between the competitive application 
and homeownership set-aside programs; eligibility criteria for each 
program; scoring criteria and related definitions for the competitive 
application program; any priority criteria for the homeownership set-
aside program; and the AHP Implementation Plan.
    Proposed Sec.  951.4(d)(3) also would extend the deadline by which 
the Advisory Council must submit its annual analysis of the low- and 
moderate-income housing and community lending activity of the Bank to 
the Finance Board. See 12 CFR 951.4(f)(3). The proposed rule would 
extend that deadline from March 1 to May 1 and would require each Bank 
to publish the analysis on a publicly available website within 30 days 
of its submission to the Finance Board. The proposed change in the due 
date responds to requests received from some of the Advisory Councils, 
which meet quarterly, for additional time after the end of each 
calendar year to prepare, review, and approve their report. Making the 
Advisory Councils' analyses available to the public through the Banks' 
websites is intended to promote greater transparency and accountability 
in the Banks' AHP and in the work of the Banks' Advisory Councils.
    No delegation: Proposed Sec.  951.4(f). Proposed Sec.  951.4(f) 
would prohibit a Bank's board of directors from delegating to Bank 
officers or other Bank employees its responsibility for appointing 
Advisory Council members or for meeting with the Advisory Council. This 
provision is intended to ensure that each board of directors fulfills 
its statutory obligations with regard to its interaction with the 
Advisory Council and is consistent with findings of the Finance Board's 
Horizontal Review, which indicated that Bank boards in general could 
improve how they interact with their Advisory Councils. See 12 U.S.C. 
1430(j)(11).

E. Competitive Application Program: Proposed Sec.  951.5

    The proposed rule would consolidate existing regulatory provisions 
governing the operation of the competitive application program into a 
single section of the AHP rule--proposed Sec.  951.5. Under the current 
regulation, a number of those provisions are located in different 
sections of the AHP regulations. The principal revisions to the 
existing regulatory structure are described below.
    Eligible applicants: Proposed Sec.  951.5(b)(2). Section 
951.5(b)(2) of the proposed rule would eliminate the current provision 
that allows a Bank to accept AHP applications from institutions that 
are not members of the Bank, but that have applied for membership. See 
12 CFR 951.6(b)(1). At one time, that provision may have encouraged 
institutions to become members of their district Bank but the Finance 
Board believes that given the growth in membership in recent years such 
an incentive is no longer necessary.
    Eligibility requirements: Proposed Sec.  951.5(c). Under the 
proposed rule, Sec.  951.5(c) would set out all of the various 
eligibility requirements that may apply in connection with the

[[Page 76942]]

receipt of AHP subsidies under the competitive application program.
    Timing of household income-eligibility determination: Proposed 
Sec.  951.5(c)(1). With regard to the timing of when a household's 
income eligibility must be determined, the proposed rule would relocate 
the current provisions from the definitions of ``low- or moderate-
income household'' and ``very low-income household'' in Sec.  951.1 to 
proposed Sec.  951.5(c)(1). The proposed rule also would incorporate 
into this section, without change, the requirements in the existing 
definitions of ``owner-occupied project'' and ``rental project'' that 
the AHP subsidy be used for the purchase, construction, or 
rehabilitation of owner-occupied or rental housing.
    Need for subsidy, project costs, project feasibility: Proposed 
Sec. Sec.  951.5(c)(2), 951.5(c)(3), and 951.5(c)(4). The proposed rule 
would make several changes to the project eligibility requirements 
applicable to the Banks in determining whether a project is eligible 
for funding. The Banks currently review projects to assess their ``need 
for subsidy,'' reasonableness of ``project costs,'' and 
``feasibility.'' In determining a project's eligibility, the existing 
regulation requires that the project demonstrate a need for the 
subsidy, based on its estimated total sources and uses of funds. See 12 
CFR 951.5(b)(2). The proposed rule would maintain this requirement but 
eliminate a related requirement that the estimated sources and uses of 
funds analysis include estimates of the market value of in-kind 
donations and volunteer professional labor or services. See 12 CFR 
951.5(b)(2)(i)(B). Experience since 1998 indicates that estimates of 
non-cash costs generally do not affect the amount of subsidy needed for 
a project. Elimination of this requirement also would obviate the need 
for the Finance Board's Regulatory Interpretation 1999-03, which 
addresses non-cash sources and uses.\2\ The proposed rule also would 
make the need for subsidy requirement independent of the project 
developmental and operational feasibility requirements. The changes are 
intended to provide the Banks with more opportunities to assist smaller 
projects and projects with higher production or operating costs, such 
as projects with services or more common space.
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    \2\ Regulatory Interpretation 199-03 is available in the Freedom 
of Information Act Reading Room on the Finance Board's Web site: 
http://www.thib.gov/Default.aspx?Page=59&ListCategory=8#8.
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    Section 951.5(c)(3)(i) of the proposed rule would clarify that the 
determination of project costs is a separate eligibility requirement 
and would remove a requirement that project costs be ``customary'' and 
determined according to ``industry standards'' in accordance with the 
Bank's project feasibility guidelines. See 12 CFR 951.5(b)(2)(ii). In 
lieu of that requirement, the proposal would require a Bank to 
determine whether a project's costs are reasonable by taking into 
account the location of the project, development conditions, and other 
non-financial household or project characteristics, such as housing for 
the elderly or for persons with disabilities. The changes are intended 
to make the eligibility review process more adaptive to deeply 
subsidized projects such as those serving special needs populations.
    The existing regulation does not differentiate between the 
developmental feasibility of a project and, in the case of rental 
housing, the operational feasibility of the project over time. The 
proposed rule, at Sec.  951.5(c)(4), would separate these two aspects 
of project feasibility. Proposed Sec.  951.5(c)(4)(i) would require 
that a project be developmentally feasible, which is defined as the 
likelihood that the project will be completed and occupied, based on 
relevant factors contained in the Bank's project feasibility 
guidelines, including the project's development budget, market 
analysis, and the sponsor's experience in providing the requested 
assistance to households. Proposed Sec.  951.5(c)(4)(ii) would require 
that a rental project be operationally feasible, which is defined as 
the ability of the project to operate in a financially sound manner, in 
accordance with the Bank's project feasibility guidelines, as projected 
in the project's operating pro forma or similar statement of 
operational feasibility.
    Financing costs: Proposed Sec.  951.5(c)(5). The proposed rule 
would make a technical reorganizing change by relocating the provision 
regarding interest rates, points, fees, and other charges for loans 
financing the project from existing Sec.  951.5(b)(2)(iii) to proposed 
Sec.  951.5(c)(5). See 12 CFR 951.5(b)(2)(iii).
    Refinancing: Proposed Sec.  951.5(c)(8). Proposed Sec.  951.5(c)(8) 
would make a technical change regarding the use of AHP subsidies in 
connection with a refinancing of a project. See 12 CFR 951.5(b)(6). The 
proposal would clarify that such refinancing is permitted only if it 
generated equity proceeds and if the proceeds are used to purchase, 
construct, or rehabilitate eligible housing units. The proposal also 
would clarify that the requirement regarding use of the equity proceeds 
applies only to an amount of equity proceeds that is at least equal to 
the amount of AHP subsidy in the project.
    Project sponsor qualifications: Proposed Sec.  951.5(c)(10). 
Proposed Sec.  951.5(c)(10) would revise existing Sec.  951.5(b)(8) by 
requiring a Bank to adopt written policies regarding the project 
sponsor qualifications for revolving loan funds and loan pools, which 
issues are discussed separately below. See 12 CFR 951.5(b)(8).
    Calculation of AHP subsidy: Proposed Sec.  951.5(c)(12). Proposed 
Sec.  951.5(c)(12), which relates to the calculation of the AHP 
subsidy, would incorporate, without change, the provisions regarding 
the time at which the calculation of subsidy is to be made. Those 
provisions are currently included as part of the definition of 
``subsidy'' in Sec.  951.1.
    Use of AHP subsidy by revolving loan funds and loan pools: Proposed 
Sec. Sec.  951.5(c)(13) and 951.5(c)(14). The proposed rule would 
explicitly authorize the Banks, at their discretion, to allow two uses 
of AHP subsidy under their competitive application program, which would 
be for revolving loans funds and loan pools. The current rule defines 
the term ``sponsor'' to include certain organizations or public 
entities that have an ownership interest in a rental project, or that 
are integrally involved in an owner-occupied project. See 12 CFR 951.1. 
As noted previously, the proposed rule would expand that definition to 
add revolving loan funds and entities that establish loan pools to the 
list of eligible sponsors. A revolving loan fund is a capital fund that 
makes loans that comply with the requirements of the AHP rule, and then 
uses the proceeds received from principal payments on those loans to 
make additional loans to other borrowers. A loan pool is a group of 
AHP-eligible loans that are purchased, held in trust, and pledged as 
security for a financial instrument, such as a mortgage-backed 
security. Definitions of the two terms would be added in proposed Sec.  
951.1. Such entities that specialize in community development lending 
are able to leverage additional funds for low-income borrowers or bring 
added value to the services provided by non-profit corporations and 
local governments. These entities also may provide technical assistance 
in packaging loans, or may service loans, manage affordable housing 
revolving loan funds, or purchase and sell loans that cannot otherwise 
be sold in the mainstream secondary market due to their unique 
characteristics. Proposed

[[Page 76943]]

Sec.  951.5(c)(13) and (c)(14) would establish limitations on how such 
revolving loan funds and loan pools, respectively, may use the AHP 
subsidies, as described below.
    Use of AHP subsidy by revolving loan funds: Proposed Sec.  
951.5(c)(13). The proposal would authorize the Banks to accept 
applications from members for projects in which the sponsor would use 
the AHP subsidy in a revolving loan fund, which in turn would make AHP 
loans to eligible projects. In order to exercise this authority, a Bank 
first must consult with its Advisory Council and then must adopt 
written policies and procedures governing the disbursement of the AHP 
subsidy through this type of entity. Both the initial loans made by the 
revolving loan fund, as well as any subsequent loans made with amounts 
received from repayments of the initial loans, must meet all of the 
applicable AHP eligibility requirements. The intent in referring to 
``applicable'' AHP eligibility requirements is to make clear that those 
regulatory requirements that apply to AHP applications that involve a 
specific project, such as cost and feasibility requirements, will not 
automatically be applied to an AHP application from a revolving loan 
fund, which may not have identified a specific project at the outset.
    The revolving loan fund also must assure that the initial loans are 
made to projects and households that meet the commitments in the 
approved AHP application and that they will be met for the full AHP 
retention period. Any subsequent lending of repaid AHP subsidy must be 
used for low-or moderate-income households (in the case of owner-
occupied projects) or for rental projects where 20 percent or more of 
the units are occupied by and affordable for very low-income 
households, subject to the AHP retention period, monitoring and 
recapture requirements that the Bank must adopt. As a result of those 
requirements, AHP funds disbursed through a revolving loan fund may not 
be used for other purposes, such as to pay for operating costs or other 
uses unrelated to the purchase, construction, or rehabilitation of 
housing. In general, the Finance Board requests comment on how the 
revolving loan fund authority could be used within the requirements of 
the AHP.
    Use of AHP subsidy in loan pools: Proposed Sec.  951.5(c)(14). The 
proposed rule would authorize a Bank to provide AHP subsidies to its 
members under circumstances in which another entity would receive the 
subsidy and then commit to purchase AHP-eligible loans in order to pool 
them and sell interests in the pool of loans, such as through loan 
participations or a mortgage-backed security. For example, the proposed 
rule would allow a Bank to make a subsidized advance to a member with 
the understanding that the member would make a subsidized loan to 
another entity, which would commit to purchase similarly subsidized 
loans from other originators. In order to exercise this authority, a 
Bank first must consult with its Advisory Council, and then must adopt 
written policies and procedures governing the disbursement of the AHP 
subsidy through this type of arrangement. The proposed rule includes a 
number of provisions that are intended to ensure that subsidies 
disbursed through a loan pool actually benefit AHP-eligible households. 
Specifically, the proposal would require that a loan pool sponsor 
demonstrate that its use of the subsidy will meet all applicable 
eligibility requirements under the AHP regulation. The loan pool 
sponsor must provide to the Bank the acceptance standards that it 
intends to use in determining which loans to include in the pool, as 
well as the underwriting characteristics for such loans, and the number 
of eligible households (including their income levels) that have 
obtained loans over a given time period. The proposal would prohibit 
the use of AHP funds for the loan pool's operating costs, for secondary 
market transaction costs, or for providing liquidity to the originators 
or holders of the purchased loans.
    In order to ensure that the AHP subsidy benefits eligible 
households, the proposed rule would require that the manager or trustee 
of the loan pool purchase the loans pursuant to a forward commitment 
that identifies the characteristics of the loans to be originated with 
principal or interest rate reductions, as specified in the approved AHP 
application. Where AHP direct subsidy is being used, the AHP subsidy 
must be used for a standard upfront buy-down of the interest rate or a 
reduction in the principal of the loans in the pool, as specified in 
the approved AHP application. All loans purchased by the loan pool, 
including both the initial loans and any subsequent loans that are 
intended to replace loans that have been paid off, must conform to the 
terms of the forward commitment. In general, the Finance Board requests 
comment on how the loan pool authority could be used within the 
requirements of the AHP. The proposed rule is silent on the length of 
time that a project sponsor would have, as specified in the forward 
commitment, for the sponsor to expend the full amount of the AHP 
subsidy. The Finance Board requests comment on whether it is preferable 
to establish a time limit by regulation and if so, the duration of that 
time limit, or to allow a Bank to establish a time limit as part of its 
AHP Implementation Plan, as proposed.
    In the alternative, the loan pool would be permitted to purchase an 
initial round of loans that are not purchased pursuant to a forward 
commitment, provided that the entities from which the loans are 
purchased are required to use the proceeds from the initial loan 
purchases within time limits specified in the Bank's AHP Implementation 
Plan. The proceeds must assist households that are income-eligible 
under the approved AHP application during subsequent rounds of lending, 
and the assistance must be provided in the form of a principal 
reduction or a below-market AHP subsidized interest rate, as specified 
in the approved AHP application.
    In addition, each AHP-assisted owner-occupied unit receiving AHP 
direct subsidy would be required to be subject to an AHP 5-year 
retention agreement. As currently written, the proposed rule explicitly 
permits the use of AHP subsidy in loan pools backed by owner-occupied 
units. The Finance Board requests comment on whether, in addition to 
loans for AHP-assisted owner-occupied units, rental housing loans 
should also be eligible under the AHP loan pool authority, and if so, 
what kinds of loans and activities, consistent with the AHP 
requirements, should be eligible.
    Out-of-district projects eligibility requirement: Proposed Sec.  
951.5(c)(15). The proposed rule would remove the existing provision 
that allows a Bank, at its discretion, to require as an eligibility 
requirement that a project assisted with AHP subsidy must be located in 
the Bank's district. See 12 CFR 951.5(b)(10)(i)(B). Proposed Sec.  
951.5(c)(17) also would prohibit a Bank from establishing an 
eligibility requirement that a project must be located in the Bank's 
district. See the further discussion of this issue below, under AHP 
projects outside the district.
    Minimum Bank credit product usage requirement: Proposed Sec.  
951.5(c)(15). The current rule authorizes a Bank to require its members 
to have used a minimum amount of the Bank's other credit products 
within the previous 12 months as a condition to applying for additional 
amounts of AHP subsidy. See 12 CFR 951.5(b)(10)(i)(C). The Finance 
Board is proposing to remove this requirement in the belief that AHP 
funding should go, without restriction,

[[Page 76944]]

to applications from members that score highest under a Bank's 
competitive application scoring criteria.
    Counseling requirement: Proposed Sec.  951.5(c)(15)(ii). The 
proposed rule would authorize a Bank to require homebuyer or homeowner 
counseling as an optional eligibility requirement for owner-occupied 
projects under the competitive application program. Under such a 
requirement, the Banks could limit AHP subsidies to owner-occupied 
projects that provide this resource for low- or moderate-income 
households. Such counseling can contribute to successful, long-term 
homeownership, which the Finance Board has recognized in supporting 
such counseling for low- or moderate-income households receiving home 
purchase assistance under the AHP homeownership set-aside program. See 
12 CFR 951.5(a)(2)(ii).
    Prohibited use of AHP subsidy: prepayment fees: Proposed Sec.  
951.5(c)(16)(i). The current rule allows a project to use AHP subsidy 
to pay prepayment fees imposed by a Bank on a member if the member 
prepays a subsidized advance, provided that the project continues to 
comply with the terms of the approved AHP application for the duration 
of the original retention period and any unused AHP subsidy is returned 
to the Bank and made available for other AHP projects. See 12 CFR 
951.5(b)(4)(i). The proposed rule would eliminate this provision, 
consistent with the principle that AHP funds should be used for 
purchase, construction, or rehabilitation of housing.
    Changes to the scoring system: Proposed Sec.  951.5(d). The 
proposed rule would retain the current provisions that require each 
Bank to adopt written scoring guidelines for its AHP applications and 
to allocate 100 points among 9 scoring criteria. See 12 CFR 
951.6(b)(4). The proposal would not make any substantive changes to 
those criteria, except for those relating to disaster areas and out-of-
district projects, but would make a number of technical revisions to 
the current rules and would codify certain staff interpretations.
    The proposed rule would retain the provisions relating to fixed-
point and variable-point scoring criteria, but would make technical 
changes to the latter, the effect of which would be to codify a current 
staff interpretation that allows a Bank to implement variable-point 
scoring criteria either through a fixed scale or on a scale relative to 
the other applications that are to be scored in the same funding round. 
See 12 CFR 951.6(b)(4)(iii). That provision would be located at Sec.  
951.5(d)(3)(ii) of the proposed rule.
    Section 951.5(d)(5)(iii)(A) of the proposed rule would remove a 
provision of the existing rule, which allows a Bank to score rental 
projects according to the targeting commitments made by the project to 
a governmental or tax-credit allocating entity that provides funds or 
tax credits, respectively, to the project. See 12 CFR 
951.6(b)(4)(iv)(C)(1). That provision would no longer be necessary 
because of other proposed changes to the rule, to be located at Sec.  
951.7(a)(2)(ii)(B), discussed further below, which would allow a Bank 
to rely on monitoring by governmental or tax-credit monitoring 
agencies.
    The proposed rule also would clarify regulatory practice relating 
to the scoring criterion for income targeting in owner-occupied 
projects. That provision, which would be located at Sec.  
951.5(d)(5)(iii)(B), would clarify that a Bank may determine in its AHP 
Implementation Plan how to award scoring points on a declining scale, 
taking into consideration the percentages of units and targeted income 
levels.
    Disaster areas and displaced households scoring criterion: Proposed 
Sec.  951.5(d)(5)(vi)(E). The current regulation permits the Banks to 
award scoring points to the financing of housing that is located in 
federally declared disaster areas. See 12 CFR 951.6(b)(4)(iv)(F)(5). 
Because disasters may displace families from their homes, the Finance 
Board believes that this criterion should be expanded to address such 
situations. Accordingly, in order to accommodate families that have 
been displaced from a disaster area, Sec.  951.5(d)(5)(vi)(E) of the 
proposed rule would permit a Bank to award scoring points for 
applications that would provide housing for persons located in a 
disaster area, as well as for applications proposing to provide housing 
for low- or moderate-income households that have been displaced from a 
federally declared disaster area due to a disaster, irrespective of the 
household's current residential location.
    AHP projects outside the district: Proposed Sec. Sec.  951.5(c)(17) 
and 951.5(d)(5)(vii). Under the current regulation, a Bank may, at its 
discretion, deny consideration of applications to the AHP competitive 
application program from members proposing to fund projects located 
outside a Bank's district. Another provision of the current rule 
permits a Bank to give scoring point preference to the creation of 
housing located within the Bank's district. See 12 CFR 
951.5(b)(10)(i)(B) and 951.6(b)(4)(iv)(F)(12). The proposed rule would 
rescind the Banks'' authority to prohibit or restrict applications to 
fund projects located outside a Bank's district. This authority may 
have been appropriate when all Bank members did business only within 
the boundaries of a state within the Bank's district. As a result of 
interstate branching, however, many members now do business in 
communities outside their Bank district. The authority to restrict AHP 
projects to the Bank's district, if exercised, would limit a member's 
ability to support otherwise eligible AHP projects in certain of the 
communities that it serves solely because those communities were 
located outside the Bank's district boundaries.
    The Bank Act does not set up the AHP as a geographically targeted 
program. Rather, it requires each Bank to establish a program to 
provide subsidized funding to its members. See 12 U.S.C. 1430(j)(1). 
Restrictions on out-of-district projects can disadvantage members with 
geographically dispersed operations to the extent the Bank limits 
funding of projects outside of its boundaries, irrespective of the 
market areas served by its members. Such restrictions could also serve 
to disadvantage communities that are served by financial institutions 
headquartered in a state located in a different Bank district. The 
Finance Board believes that AHP projects should be awarded funds based 
on the merits of each particular application. If an application has 
sufficient merit to compete successfully, it should be awarded AHP 
funds irrespective of the project location, so long as the project is 
within a community served by a member.
    Finally, the existing authority in the current AHP regulation has 
not been extensively invoked by the Banks. In 2004, only one Bank 
prohibited the use of AHP funds for out-of-district projects and only 
two Banks elected to give scoring preference to in-district projects. 
Nor has there been a significant outflow of AHP funds as a result of 
member financing of projects outside the district. Out of 10,391 AHP 
projects funded since the beginning of the program in 1990, only 323 
projects, or 3.1 percent, have been located outside a Bank's district. 
These findings support a conclusion that funding of out-of-district 
projects has a minimal impact on the AHP. Therefore, a prohibition 
against out-of-district projects or a preference for projects within a 
district may not be warranted.
    As a result of all these considerations, the proposed rule would 
eliminate the two provisions in the existing regulation

[[Page 76945]]

that preclude or limit the ability of a member to receive AHP subsidies 
for projects located outside its district, and proposed Sec.  
951.5(c)(17) would expressly prohibit a Bank from requiring that a 
project be located within its district. In addition, proposed Sec.  
951.5(d)(5)(vii) would prohibit a Bank from adopting as its Second 
District Priority a scoring preference for projects located in the 
Bank's district. See 12 CFR 951.6(b)(4)(iv)(G).
    Modifications of approved applications: Proposed Sec.  951.5(f). 
The proposed rule would codify current practice by adding a requirement 
that a Bank must document in writing its analysis and justification for 
any modification of a previously approved project. See 12 CFR 951.7(a).
    Progress towards use of AHP subsidies: Proposed Sec.  951.5(g)(2). 
The proposed rule would require each Bank to establish policies and 
procedures, such as time limits, for determining whether progress is 
being made towards drawdown and use of AHP subsidies by approved 
projects, and whether to cancel an application approval for lack of 
such progress. Progress requirements must be included in the Bank's AHP 
Implementation Plan. Affordable housing projects often may encounter 
delays due to changes in funding, legal, or community challenges, or 
other events. These delays may affect the ability of a project to 
progress towards its scheduled drawdown and use of the AHP subsidy. The 
current AHP regulation requires a Bank to specify a time period in its 
AHP Implementation Plan for the drawdown and use of the AHP subsidy. If 
a project does not do so within such period, the Bank must cancel its 
approval of the application. See 12 CFR 951.8(c)(1). The rigidity of 
this requirement sometimes has impaired the ability of the Banks to 
determine whether the delays are significant enough to affect a 
particular project's ability to draw down and use the subsidy. While 
the Banks have extended the time period for certain projects in an 
effort to take into account such delays, the requirement that a fixed 
time period be stated in the AHP Implementation Plan limits a Bank's 
ability to manage this process. Accordingly, the proposed rule would 
give the Banks greater capacity to manage this process by requiring 
them to adopt policies and procedures that address how they will make 
such determinations.
    Compliance upon disbursement: Proposed Sec.  951.5(g)(3). Section 
951.5(g)(3) of the proposed rule would require a Bank to establish 
policies and procedures for determining, prior to initial disbursement 
of AHP subsidy, and prior to subsequent disbursement if the need for 
AHP subsidy has changed, whether the project continues to meet the 
applicable eligibility requirements and all obligations committed to in 
the approved AHP application. The Bank's requirements must be included 
in its AHP Implementation Plan. Under the current AHP regulation, a 
Bank is required to verify compliance with eligibility requirements and 
application commitments prior to each disbursement of AHP subsidy. See 
12 CFR 951.8(c)(2). The requirement to repeatedly verify project 
compliance during every stage of the disbursement process may be more 
than is necessary to ensure compliance with the rules, and effectively 
precludes a Bank from using its best judgment to determine whether the 
circumstances of a particular AHP project warrant repeated verification 
of compliance with the rules. The proposed amendment would give the 
Banks greater latitude in determining when it is appropriate to verify 
compliance prior to disbursing AHP funds.
    Bank board of directors duties and delegation: Proposed Sec.  
951.5(h). The proposed rule would set forth the Bank board of 
directors' various duties regarding establishment and implementation of 
the competitive application program requirements in one section, 
proposed Sec.  951.5(h), and would reiterate that the Bank's board 
cannot delegate these responsibilities to Bank officers or other Bank 
employees.

F. Homeownership Set-Aside Program: Proposed Sec.  951.6

    The proposed rule would reorganize the existing regulation, 
generally by combining various homeownership set-aside program 
provisions into one section, to be located at proposed Sec.  951.6.
    Eligible applicants: Proposed Sec.  951.6(b). The existing AHP 
regulations permit a Bank to accept applications for homeownership set-
aside program subsidies from an institution that is not a member of the 
Bank, but which has pending an application for membership. See 12 CFR 
951.6(a). The proposed rule would eliminate this provision and would 
require an applicant to be a member of the Bank at the time that it 
submits an AHP application. The rationale for this revision was 
discussed in connection with a similar amendment that is proposed for 
the competitive application program.
    Timing of household income-eligibility determination: Proposed 
Sec.  951.6(c)(2)(i). Section 951.6(c)(2)(i) of the proposed rule would 
clarify that a household's income eligibility is to be determined at 
the time that it is enrolled in the set-aside program. This change is 
intended to address confusion with respect to the income eligibility, 
for example, of a household that is enrolled in a matched savings 
account program, an Individual Development Account program, a Welfare-
to-Work program, or any other similar empowerment program designed to 
assist low-income households accumulate assets. The existing regulation 
has been interpreted by some Banks as requiring that the household's 
income qualification for purposes of the AHP be determined at the time 
that the household is qualified for a loan. See 12 CFR 951.1 and 
951.5(a)(2)(i). The proposal would permit income eligibility to be 
determined at the time that the household is accepted by the member and 
the Bank to enroll in the AHP set-aside program, even though at that 
time the household may not qualify for a mortgage. This clarification 
is consistent with existing Finance Board policy and reflects the 
Finance Board's understanding that the purpose of these programs is to 
prepare households for homeownership. Activities designed to qualify 
low- or moderate-income households for mortgages should be encouraged. 
Such programs, however, require careful administration by a Bank and 
the participating member and should be subject to reasonable Bank 
policies and procedures on the timely use of AHP subsidy. Moreover, it 
is the Finance Board's expectation that Bank policies will preclude use 
of the program by individuals whose low- or moderate-income eligibility 
is a temporary condition, such as students, who would ordinarily have a 
reasonable prospect for a substantial increase in income upon entering 
the workforce.
    Counseling: Proposed Sec.  951.6(c)(2)(ii). Under the existing 
regulation, all households receiving AHP funds under a Bank's 
homeownership set-aside program must complete a homeowner or homebuyer 
counseling program. See 12 CFR 951.5(a)(2)(ii). The Finance Board is 
proposing to make this an option rather than a requirement, for 
obtaining subsidies under the homeownership set-aside program. As a 
practical matter, not all households will necessarily require such 
counseling. Moreover, there are some areas of the country in which such 
counseling may not be readily available, and the quality of the 
counseling can also vary. Accordingly, Sec.  951.6(c)(2)(ii) of the 
proposed rule would allow each Bank to determine whether to include 
counseling as an eligibility requirement in its AHP Implementation 
Plan. These

[[Page 76946]]

revisions are consistent with the proposed change that would allow a 
Bank to adopt such a counseling requirement under its competitive 
application program, which is located at proposed Sec.  
951.5(c)(15)(ii). Notwithstanding the change, the Finance Board 
encourages the Banks to consider requiring homeowner and homebuyer 
counseling when they believe it to be appropriate. Proposed Sec.  
951.6(c)(8) would retain the current provision that allows 
homeownership set-aside funds to be used to pay for the costs of 
obtaining such counseling for those homebuyers that actually purchase 
an AHP-assisted unit. See 12 CFR 951.5(a)(7).
    Member financial incentives: Proposed Sec.  951.6(c)(6). The 
proposed rule would revise the existing regulation by requiring a Bank 
to establish incentives for members to provide financial or other 
assistance in connection with providing the homeownership set-aside 
subsidy. Under existing Sec.  951.5(a)(6), a member that provides 
mortgage financing to a participating household under the set-aside 
program must also provide financial or other incentives in connection 
with the mortgage financing. See 12 CFR 951.5(a)(6). Some Banks have 
observed that this requirement may place small members, such as those 
located in rural areas, at a disadvantage and may encourage them to 
pass the AHP subsidy to a larger institution, which may or may not be a 
member of that Bank. The existing requirement may thus place a greater 
obligation to provide subsidized financing on a member than on a 
nonmember mortgage provider and may result in a disincentive for member 
financing. The Finance Board specifically requests comment on: (1) 
Whether it should require all originators of AHP-assisted mortgage 
loans to provide financial or other incentives in connection with the 
mortgage financing, irrespective of whether the originator is a member 
or nonmember; (2) whether the current financial incentive requirement 
should remain as a mandatory requirement or be made a matter of 
discretion for the Bank, as a preferential selection criterion for its 
homeownership set-aside program(s); and (3) whether additional 
incentives should be required, such as a matching funds requirement, 
member-provided financing, or preference to a member working in 
partnership with a nonprofit sponsor assisting first-time homebuyers to 
qualify for a mortgage.
    Financing costs: Proposed Sec.  951.6(c)(7). Section 951.5(a)(6) of 
the current regulations requires that the rate of interest, points, 
fees, and other charges imposed by the member not exceed a reasonable 
market rate. See 12 CFR 951.5(a)(6). As currently worded, the 
requirement applies only to situations in which the member provides the 
financing, but not if a third party does so. The Finance Board is 
concerned that the existing language has the potential to create 
opportunities for using AHP funds in conjunction with the origination 
of loans with interest rates, points, fees, and other charges that 
exceed a reasonable market rate, if the loans are originated by a 
nonmember. In order to avoid that possibility, Sec.  951.6(c)(7) of the 
proposed rule would revise the regulation to state that such charges 
that are ``used directly or indirectly in conjunction with the AHP 
direct subsidy'' must not exceed a reasonable market rate. That 
revision is consistent with the statutory requirement that Finance 
Board regulations must ``ensure that subsidies provided by Banks to 
member institutions * * * are passed on to the ultimate borrower.'' See 
12 U.S.C. 1430(j)(9)(E).
    Progress towards use of AHP subsidy: Proposed Sec.  951.6(c)(9). 
For reasons similar to those discussed above under the competitive 
application program, proposed Sec.  951.6(c)(9) would revise the 
existing regulation by requiring that progress be made towards draw-
down and use of the AHP direct subsidies by eligible households 
pursuant to policies and procedures adopted by the Bank. See 12 CFR 
951.5(a)(8).
    Cash backs: Proposed Sec.  951.6(c)(10). The Finance Board's 
Horizontal Review identified problems in the operations of the 
homeownership set-aside programs at some of the Banks. Although those 
problems were limited to a few situations, the proposed rule seeks to 
address them by clearly identifying ineligible uses of AHP set-aside 
funds. Therefore, Sec.  951.6(c)(10) of the proposed rule would 
expressly prohibit a member from providing cash back to a household at 
the closing on the mortgage loan and would require a member to use any 
AHP subsidy beyond what is needed for closing costs and the approved 
mortgage amount to further reduce the principal of the mortgage loan.
    Progress towards use of AHP subsidies: Proposed Sec.  951.6(e)(2). 
For reasons similar to those discussed above under the competitive 
application program, proposed Sec.  951.6(e)(2) would require a Bank to 
establish policies and procedures, such as time limits, for determining 
whether progress is being made towards drawdown and use of 
homeownership set-aside funds by eligible households, and whether to 
cancel application approvals for lack of such progress. See 12 CFR 
951.8(b)(1). The requirements must be specified in the Bank's AHP 
Implementation Plan. A Bank would be required to determine, pursuant to 
such policies and procedures, whether progress is being made by 
eligible households, and whether to cancel any application approvals 
for lack of progress.

G. Monitoring: Proposed Sec.  951.7

    The proposed rule would retain the current requirement for annual 
certifications by rental project owners to the Bank under the 
competitive application program, but would make a number of changes to 
the monitoring provisions under both the competitive application and 
homeownership set-aside programs. A number of the current monitoring 
provisions are prescriptive in nature and set deadlines by which the 
Bank and other parties must undertake certain actions. See 12 CFR 
951.10 and 951.11. The proposed rule would replace those provisions 
with more broadly stated performance objectives, which are intended to 
allow the Banks more latitude in determining the type and frequency of 
reports and certifications that are best suited for monitoring a 
particular project's compliance with the AHP rules. The proposed 
amendments would accomplish this goal by requiring the Banks to adopt 
policies and procedures for monitoring progress made towards project 
completion and compliance with other AHP requirements.
1. Monitoring Requirements for the Competitive Application Program: 
Proposed Sec.  951.7(a)
    Initial monitoring policies and procedures: Proposed Sec.  
951.7(a)(1). For both owner-occupied and rental projects under the 
competitive application program, the proposed rule would require each 
Bank to adopt written policies and procedures for monitoring AHP 
projects prior to, and within a reasonable period of time after, 
project completion. Specifically, a Bank's monitoring polices and 
procedures must enable it to determine: Whether the construction or 
rehabilitation is progressing satisfactorily; whether a completed 
project is progressing satisfactorily toward occupancy by eligible 
households; and whether a project is meeting the commitments made in 
the approved AHP application and is otherwise in compliance with 
applicable AHP requirements within a reasonable time after the project 
has been completed. The proposed rule would remove the existing 
requirement

[[Page 76947]]

that the Banks must monitor project habitability, and also would remove 
the definition of ``habitable'' from the existing definitions. See 12 
CFR 951.1 and 951.10(a)(2)(ii)(B)(2) and (c). Proposed Sec.  
951.7(a)(1)(ii) would require a Bank's monitoring policies and 
procedures to include provisions requiring Bank review of back-up 
documentation regarding household incomes and rents that are maintained 
by the project sponsor or owner, and would allow a Bank to include 
requirements for maintenance and Bank review of other project 
documentation, at the Bank's discretion.
    Long-term monitoring policies and procedures: Proposed Sec.  
951.7(a)(2). The proposed rule would require a Bank to adopt written 
policies and procedures for monitoring completed rental projects, 
commencing in the second year after project completion and continuing 
for the full 15-year retention period. The monitoring polices must 
enable a Bank to determine whether household income, rents, and 
populations served comply with the respective commitments made in the 
AHP application. The proposed rule would remove the existing 
requirement that the Banks monitor project habitability for the full 
AHP retention period. See 12 CFR 951.11(a)(3). The policies also must 
take into account various risk factors and could allow the Bank to use 
a reasonable risk-based sampling plan.
    Proposed Sec.  951.7(a)(2)(iii) would require that monitoring 
policies include provisions addressing: Bank review of annual 
certifications by project owners that household incomes and rents 
comply with commitments made in the AHP application and other AHP 
requirements; Bank review of back-up project documentation regarding 
household incomes and rents, as maintained by the project owner; and 
maintenance and Bank review of such other project documentation that 
the Bank deems necessary.
    The current regulation requires the Banks to select from 1of 3 
approved methods for long-term monitoring of rental projects: (1) 
Monitoring by a federal, state, or local government entity in 
connection with a project that also is receiving tax credits or funds 
from that entity, subject to certain other limits stated in the rule; 
(2) monitoring of such projects by a contractor; or (3) monitoring by 
the Bank, its members, and project owners. See 12 CFR 951.11(a). The 
existing regulation contains prescriptive procedural requirements for 
projects monitored by the Banks, their members, and project owners 
under the third option. It details specific monitoring and 
certification duties for the parties and includes deadlines for 
submission of specific monitoring reports. These deadlines may not 
comport with construction and development schedules and can result in 
regulatory noncompliance for reasons that do not reflect the actual 
performance of a project. The existing regulation requires a Bank to 
review project documentation and verify compliance with rent, income, 
and project habitability requirements according to a schedule based on 
the amount of AHP subsidy received by a project, such that projects 
receiving greater amounts of subsidy have more stringent and frequent 
monitoring requirements. See 12 CFR 951.11(a)(3)(iii).
    Such prescriptive monitoring requirements do not necessarily 
promote accurate assessments of program effectiveness or take into 
account the true risks to the Bank's AHP. The existing monitoring 
requirements also may fail to capture adequately the operational risk, 
financial performance risk, location risk, or other relevant 
performance factors affecting the Bank's AHP project portfolio. 
Moreover, the prescriptive nature of the regulations implies that the 
particular approach to monitoring that is embodied in the regulation is 
the optimal approach for such matters, irrespective of the risk 
characteristics that may be associated with a particular AHP project or 
the compliance record of the participating member, sponsor, or owner.
    Proposed Sec.  951.7(a)(2) would require a Bank to develop written 
policies and procedures for long-term monitoring of rental projects, 
taking into account various risk factors. Those policies and procedures 
would be subject to Finance Board examination annually. A Bank's 
policies and procedures would be required to take into account certain 
risk factors, such as the amount of AHP subsidy in the project, the 
type, size, and location of the project, sponsor experience, and any 
monitoring provided by a federal, state, or local entity, as discussed 
further in the following section.
    Reliance on other monitoring: Proposed Sec.  951.7(a)(2)(ii)(B). 
Section 951.7(a)(2)(ii)(B) of the proposed rule would expand the 
ability of the Banks to rely on the monitoring of AHP-assisted rental 
projects by other governmental agencies that are providing tax credits 
or other funds to the projects. In the case of AHP projects that also 
receive tax credits or other governmental funds, the existing 
regulation permits a Bank to rely on the monitoring conducted by the 
federal, state, or local government entity providing the tax credits or 
funds, or by certain third parties, provided that the income targeting, 
rents, and retention period requirements monitored by such entities for 
their own programs are the same as, or more restrictive than, those 
committed to in the approved AHP application. See 12 CFR 951.11(a)(1).
    The LIHTC, which often is used by projects that receive some form 
of AHP subsidy, has two elective eligibility standards related to the 
units in the project and the income of the households occupying the 
units: (1) that 20 percent of the units must be occupied by households 
with incomes at or below 50 percent of the area median income; or (2) 
that 40 percent of the units must be occupied by households with 
incomes at or below 60 percent of the area median income. See 26 U.S.C. 
42(g)(1). The Bank Act imposes similar limits on the use of AHP 
subsidies for rental housing, i.e., eligible rental projects must have 
at least 20 percent of the units occupied by households with incomes at 
or below 50 percent of the area median income. See 12 U.S.C. 
1430(j)(2)(B). Because this AHP standard is identical to the first tax 
credit standard, the Finance Board has deemed it to be substantively 
equivalent to the income eligibility standard required for an LIHTC 
project. For AHP-assisted tax credit projects that employ the first 
standard, the current AHP regulation permits a Bank to accept the 
project monitoring that is conducted by, or on behalf of, the 
government agencies that have provided the tax credits.
    With respect to AHP-assisted tax credit projects that employ the 
second standard, under which 40 percent of the units must be occupied 
by households with incomes at or below 60 percent of the area median 
income, the current AHP regulation allows a Bank to rely on monitoring 
conducted by or on behalf of other governmental agencies only if those 
entities also monitor the project for compliance with the AHP standard. 
Because this tax credit standard differs from the AHP standard, a Bank 
may be required to negotiate agreements with various state agencies or 
contractors to conduct their monitoring of the project in accordance 
with the AHP standard, which is common to both programs. Such 
additional monitoring entails additional costs to the Bank, which a 
number of the Banks have contended is not an effective means of 
monitoring the project, as it is largely duplicative of existing 
monitoring conducted by other parties. A number of AHP users also have 
contended that this level of

[[Page 76948]]

monitoring is superfluous and adds unnecessary burdens to the project.
    After reviewing several studies on the performance of the LIHTC, 
the Finance Board has concluded that the overwhelming majority of these 
tax credit projects--irrespective of their income eligibility 
standard--meet the AHP income eligibility standard in a substantially 
equivalent manner. A 1997 General Accounting Office study found that 75 
percent of households in tax credit projects had incomes under 50 
percent of the area median income, which would be well within the AHP 
requirement that 20 percent of units be occupied by households with 
incomes at or below 50 percent of the area median income. Other 
subsequent studies, such as those prepared by Abt Associates for HUD, 
and one by Ernst and Young, have come to similar conclusions regarding 
the targeting of tax credit projects to very low-income households. 
Moreover, the Finance Board notes that the length of the retention 
periods for AHP rental projects and tax credit projects is the same, 
and that noncompliance with the income-eligibility requirements by tax 
credit projects is relatively rare, as it would lead to adverse tax 
consequences for investors in such projects. The Finance Board also 
notes that the affordability standard for tax credit projects, i.e., 
the rent requirement, is substantially equivalent to the AHP rent 
requirement that the rents charged may not exceed 30 percent of the 
targeted household income. See 12 U.S.C. 1430(j)(13)(D) and 26 U.S.C. 
42(g)(2). Accordingly, the Finance Board is proposing to amend the AHP 
regulation to allow a Bank to rely on the monitoring by the state-
designated housing credit agency administering the tax credits of the 
income targeting, rent, and retention period requirements applicable 
under the LIHTC, provided that the compliance profiles of the AHP and 
the LIHTC continue to be substantively equivalent.
    In addition, for AHP projects that receive funds from federal, 
state, or local government entities, the proposed rule would allow a 
Bank to rely on the monitoring by such entities of the income 
targeting, rent, and retention period requirements applicable under 
their programs, provided that: The income targeting, rent, and 
retention period requirements for those programs are substantively 
equivalent to those of the AHP; the entity has demonstrated and 
continues to demonstrate its ability to monitor the project; the entity 
agrees to provide reports to the Bank on the project's incomes and 
rents for the full 15-year AHP retention period; and the Bank reviews 
the reports from the monitoring entity to confirm that they comply with 
the Bank's monitoring policies and procedures.
2. Monitoring Requirements for the Homeownership Set-Aside Program: 
Proposed Sec.  951.7(b)
    The proposed rule would retain the member certification 
requirements from the existing regulation and would require a Bank to 
adopt and implement its own written monitoring policies and procedures 
for determining compliance with the requirements of its homeownership 
set-aside programs. See 12 CFR 951.8(b)(2). The Banks would be allowed 
to use a reasonable sampling plan to select the households to be 
monitored and to review the back-up and any other documentation 
received by the Bank. The proposed rule also would provide that the 
Bank's monitoring policies and procedures must include requirements for 
the Bank to review back-up documentation regarding household incomes 
maintained by the member, and may include requirements for maintenance 
and Bank review of other documentation, in the Bank's discretion.

H. Remedial Actions for Noncompliance: Proposed Sec.  951.8

    Proposed Sec.  951.8 would reorganize and streamline the language 
in the existing regulations regarding remedial actions for 
noncompliance with the AHP regulations in order to eliminate redundancy 
and provide greater clarity. See 12 CFR 951.12.
    Repayment of AHP subsidy by project sponsor or owner: Proposed 
Sec.  951.8(b)(2). Proposed Sec.  951.8(b)(2) would add a provision 
allowing a Bank to determine whether a project sponsor or owner must 
repay AHP subsidies directly to the Bank or to the member, which would 
then repay the Bank, in the event that the project fails to comply with 
any of the AHP requirements. Under the existing regulation, project 
sponsors or owners are required to repay AHP subsidies to the member, 
which in turn is required to repay the subsidies to the Bank. See 12 
CFR 951.12(b). The proposed change would give the Banks greater 
flexibility in managing how AHP subsidies are required to be repaid in 
the event of a failure to comply with the rules.
    Finance Board approval of settlements: Proposed Sec.  951.8(d)(2). 
The proposed rule also would revise provisions of the existing 
regulation that allow a Bank to obtain approval from the Board of 
Directors of the Finance Board to settle a disputed claim regarding an 
AHP subsidy. See 12 CFR 951.12(c)(2)(ii). As revised, the rule would 
allow the Bank to obtain the approval from ``the Finance Board,'' which 
would allow Finance Board staff to approve the Bank's proposed 
settlements relating to the AHP subsidy.
    Bank reimbursement of AHP fund: Proposed Sec.  951.8(e)(1). The 
proposed rule would add a provision requiring a Bank to reimburse its 
AHP fund in the amount of any AHP subsidies (plus interest, if 
appropriate) misused as a result of the Bank's actions or omissions, 
even without a Finance Board order to do so. See 12 CFR 951.12(c)(3). 
Where noncompliance with AHP requirements is the result of a Bank's 
actions or omissions, the Bank should reimburse its AHP fund without 
the Finance Board having to order it to do so.
    Parties to enforcement proceedings. The proposed rule would remove 
an existing regulatory provision, located at 12 CFR 951.12(d), that 
allows a Bank to enter into a written agreement with a member, project 
sponsor, or project owner under which it consents to be a party to a 
Finance Board enforcement action regarding the repayment of AHP 
subsidies that it has received or to suspension or debarment, provided 
that it has agreed to be bound by the Finance Board's final 
determination in the enforcement proceeding. This provision would be 
removed because regulatory authorization is not necessary for a Bank to 
enter into such an agreement.
    Re-use of repaid AHP direct subsidies in same project: Proposed 
Sec.  951.8(f)(2). The proposed rule would clarify that a Bank must 
consult with its Advisory Council in determining whether to allow the 
re-use of AHP direct subsidies in the same project, as is authorized 
under this section. See 12 CFR 951.12(e)(2). That provision also would 
clarify that a Bank's board of directors cannot delegate to Bank 
officers or other Bank employees the responsibility to adopt any Bank 
policies on re-use of repaid AHP direct subsidies in the same project 
under this section.

I. Agreements: Proposed Sec.  951.9

    The existing regulations require each Bank to have in place with 
each member that receives AHP subsidies a written agreement that 
includes certain provisions set out in the regulation. See 12 CFR 
951.13. The proposed rule, at Sec.  951.9, would revise the provisions 
of the existing regulation in order to eliminate redundancy and provide 
greater clarity.
    Notification of member: Proposed Sec.  951.9(a)(1). The proposed 
rule, at Sec.  951.9(a)(1), would add a provision requiring the AHP 
agreements to

[[Page 76949]]

acknowledge that the member has been notified of the AHP requirements 
and all Bank policies relevant to the member's approved AHP 
application.
    Monitoring agreements: Proposed Sec.  951.9(a)(5). Proposed Sec.  
951.9(a)(5) would revise the provisions relating to monitoring in order 
to conform them to the changes proposed elsewhere to the substantive 
monitoring requirements. See 12 CFR 951.13(b)(4). Under the proposed 
change, the Banks' agreements with their members would have to set 
forth the members' specific monitoring responsibilities, as required 
under the Banks' monitoring policies and procedures. In addition, these 
agreements would have to require the member to have in place its own 
agreement with each project sponsor and project owner setting forth the 
specific monitoring responsibilities of those sponsors and owners, as 
required under the Banks' monitoring policies and procedures.
    Refinancing of owner-occupied units: Proposed Sec.  
951.9(a)(7)(ii)(A). Proposed Sec.  951.9(a)(7)(ii)(A) would revise 
existing Sec.  951.13(c)(4)(i)(B) by providing that, in the case of a 
refinancing prior to the end of the 5-year retention period of a 
permanent mortgage loan that was funded by an AHP subsidized advance, 
the household would not have to repay the AHP subsidy it already used 
in the unit. See 12 CFR 951.13(c)(4)(i)(B). The existing regulation 
requires the household to repay the full amount of the AHP subsidy 
received (i.e., the value of the interest rate subsidy for the time the 
household has been paying on the mortgage loan) from any net gain 
realized upon the refinancing, unless the unit continues to be subject 
to a retention agreement. The proposed change would be consistent with 
the existing regulatory provision providing that a household subsidized 
with AHP direct subsidy that refinances an owner-occupied unit must 
repay only the amount of AHP subsidy that has not been used (i.e., the 
subsidy required to be repaid is reduced for every year the household 
owned the unit). See 12 CFR 951.13(d)(1)(iii). In addition, the 
proposed change would help remove a possible deterrent to refinancing 
by households that seek to make their units more affordable or obtain 
equity for purposes of their economic betterment.
    Relocation of households in rental projects: Proposed Sec.  
951.9(a)(8)(iii)(B). Proposed Sec.  951.9(a)(8)(iii)(B) would revise 
the existing regulation by providing that, in the case of a sale or 
refinancing of an AHP-assisted rental project prior to the end of the 
retention period, the AHP subsidy would not have to be repaid to the 
Bank if the households are relocated to another property that is made 
subject to a deed restriction or other legally enforceable retention 
agreement or mechanism incorporating the income-eligibility and 
affordability restrictions committed to in the approved AHP application 
for the remainder of the retention period. See 12 CFR 951.13(c)(5)(iii) 
and 951.13(d)(2)(iii). The proposed change would allow Banks to deal 
with situations where approved rental projects are forced to relocate 
for reasons such as the exercise of eminent domain or a need for 
additional units or services, and the project sponsors will be 
transferring the same residents to a new building. Currently, the AHP 
regulation treats these situations as a sale that requires the 
repayment of the entire amount of AHP subsidy, thereby releasing the 
project from its AHP commitments and making the AHP subsidy available 
for other AHP-eligible projects, unless the property continues to be 
subject to a deed restriction or other legally enforceable retention 
agreement or mechanism incorporating the income-eligibility and 
affordability restrictions committed to in the AHP application for the 
remainder of the retention period. Allowing project sponsors to 
transfer the AHP subsidies, along with the corresponding income-
eligibility and affordability commitments, to a new building would 
result in the retention of the affordable units for the duration of the 
original retention period and ensure that existing tenants are not 
adversely affected.
    Agreements between Banks and project sponsors or owners: Proposed 
Sec.  951.9(b). As discussed above, proposed Sec.  951.8(b)(2) would 
allow a Bank to determine whether to require a project sponsor or owner 
to repay AHP subsidies directly to the Bank in the event of 
noncompliance, in contrast to the existing regulation which requires 
project sponsors or owners to repay AHP subsidies to the member, which 
in turn repays the subsidies to the Bank. Under proposed Sec.  
951.9(b), if a Bank intends to require project sponsors or owners to 
repay AHP subsidies directly to the Bank, the Bank first must have in 
place an agreement with each project sponsor or project owner under 
which the party agrees to repay the AHP subsidies directly to the Bank.
    Application to existing projects: Proposed Sec.  951.9(c). The 
proposed rule would streamline the language in existing Sec.  951.16, 
which addresses the application of the regulation to existing AHP 
projects, and relocate the provision to proposed Sec.  951.9(c). See 12 
CFR 951.16.

J. Conflicts of Interest: Proposed Sec.  951.10

    The proposed rule would relocate the provisions governing the 
adoption of conflict of interest policies from existing Sec.  951.3(c) 
to proposed Sec.  951.10. See 12 CFR 951.3(c). The proposed rule also 
would add new provisions that would prohibit Bank directors or 
employees or Advisory Council members, and their family members, from 
engaging in the conflicts of interest prohibited by the conflict of 
interest policies. Proposed Sec.  951.10(c) would prohibit a Bank's 
board of directors from delegating to any Bank officers or other Bank 
employees its responsibility to adopt the conflict of interest 
policies.

K. Temporary Suspension of AHP Contributions: Proposed Sec.  951.11

    Proposed Sec.  951.11 would remove various procedural requirements 
in existing Sec.  951.14, leaving these decisions to the discretion of 
the Finance Board in the event an application is received from a Bank 
for a temporary suspension of its required annual AHP contribution. See 
12 CFR 951.14. In addition, certain of the information required to be 
provided by the Banks is readily obtainable by the Finance Board 
without the necessity of a regulatory requirement.

L. Affordable Housing Reserve Fund: Proposed Sec.  951.12

    Proposed Sec.  951.12 would remove the requirements in existing 
Sec.  951.15 that a Bank report by January 15th of each year the amount 
of any unused and uncommitted AHP funds from the prior year that will 
be deposited in an Affordable Housing Reserve Fund (Reserve Fund), and 
that the Finance Board notify the Banks of the total amount of funds, 
if any, available in the Reserve Fund. See 12 CFR 951.15. The amount of 
any unused and uncommitted AHP funds is readily obtainable by the 
Finance Board without imposing such a regulatory mandate. Moreover, the 
Finance Board has never had to establish a Reserve Fund and does not 
expect to in the future, given the high demand for AHP funds that has 
always exceeded the amount of AHP funds available.

III. Paperwork Reduction Act

    The information collection contained in the current AHP regulation, 
entitled ``Affordable Housing Program (AHP),'' has been assigned 
control number 3069-0006 by the Office of Management and Budget (OMB). 
The OMB control number is due to expire on July 31, 2007. This proposed 
rule, if adopted as a final rule, will not substantively or

[[Page 76950]]

materially modify the approved information collection. Consequently, 
the Finance Board has not submitted any information to OMB for review 
under the Paperwork Reduction Act of 1995 (PRA).\3\
---------------------------------------------------------------------------

    \3\ See 44 U.S.C. 3501 et seq. This proposed rule does not 
incorporate the proposed changes to AHP data reporting discussed in 
detail in the PRA notice published in April 2005. See 70 FR 21411 
(Apr. 26, 2005).
---------------------------------------------------------------------------

IV. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 951

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

    For the reasons stated in the preamble, the Finance Board proposes 
to revise 12 CFR, chapter IX, part 951, to read as follows:

PART 951--AFFORDABLE HOUSING PROGRAM

Sec.
951.1 Definitions.
951.2 Required annual AHP contributions; allocation of 
contributions.
951.3 AHP implementation plan.
951.4 Advisory Councils.
951.5 Competitive application program.
951.6 Homeownership set-aside programs.
951.7 Monitoring.
951.8 Remedial actions for noncompliance.
951.9 Agreements.
951.10 Conflicts of interest.
951.11 Temporary suspension of AHP contributions.
951.12 Affordable Housing Reserve Fund.

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


Sec.  951.1  Definitions.

    As used in this part:
    Affordable means that:
    (1) The rent charged to a household for a unit that is to be 
reserved for occupancy by a household with an income at or below 80 
percent of the median income for the area, does not exceed 30 percent 
of the income of a household of the maximum income and size expected, 
under the commitment made in the AHP application, to occupy the unit 
(assuming occupancy of 1.5 persons per bedroom or 1.0 persons per unit 
without a separate bedroom); or
    (2) The rent charged to a household, for rental units subsidized 
with Section 8 assistance under 42 U.S.C. 1437f, if the rent complied 
with this Sec.  951.1 at the time of the household's initial occupancy 
and continues to comply with the Section 8 agreement for that 
household.
    AHP project means a single-family or multifamily housing project 
for owner-occupied or rental housing that has been awarded or has 
received AHP subsidy under the competitive application program.
    Competitive application program means a program established by a 
Bank under which the Bank awards and disburses AHP subsidy through a 
competitive application scoring process pursuant to the requirements of 
Sec.  951.5.
    Cost of funds means, for purposes of a subsidized advance, the 
estimated cost of issuing Bank System consolidated obligations with 
maturities comparable to that of the subsidized advance.
    Direct subsidy means an AHP subsidy in the form of a direct cash 
payment.
    Eligible household means a household that meets the income limits 
and other requirements specified by a Bank for its competitive 
application program and homeownership set-aside programs, provided 
that:
    (1) In the case of owner-occupied housing, the household's income 
may not exceed 80 percent of the median income for the area; and
    (2) In the case of rental housing, the household's income in at 
least 20 percent of the units may not exceed 50 percent of the median 
income for the area.
    Eligible project means a project eligible to receive AHP subsidy 
pursuant to the requirements of this part.
    Family member means any individual related to a person by blood, 
marriage, or adoption.
    Funding period means a time period, as determined by a Bank, during 
which the Bank accepts AHP applications for subsidy.
    Homeownership set aside program means a program established by a 
Bank under which the Bank disburses AHP direct subsidy pursuant to the 
requirements of Sec.  951.6.
    Household means one or more persons living in a dwelling unit.
    Loan pool means a group of mortgage or other loans meeting the 
requirements of this part that are purchased, held in trust, and 
pledged as security for a financial instrument.
    Low- or moderate-income household means a household that has an 
income of 80 percent or less of the median income for the area, with 
the income limit adjusted for household size in accordance with the 
methodology of the applicable median income standard, unless such 
median income standard has no household size adjustment methodology.
    Low- or moderate-income neighborhood means any neighborhood in 
which 51 percent or more of the households have incomes at or below 80 
percent of the median income for the area.
    Median income for the area means one or more of the following 
median income standards as determined by a Bank, after consultation 
with its Advisory Council, in its AHP implementation plan:
    (1) The median income for the area, as published annually by HUD;
    (2) The median income for the area obtained from the Federal 
Financial Institutions Examination Council;
    (3) The applicable median family income, as determined under 26 
U.S.C. 143(f) (Mortgage Revenue Bonds) and published by a state agency 
or instrumentality;
    (4) The median income for the area, as published by the United 
States Department of Agriculture; or
    (5) The median income for an applicable definable geographic area, 
as published by a federal, state, or local government entity, and 
approved by the Finance Board, at the request of a Bank, for use under 
the AHP.
    Multifamily building means a structure with five or more dwelling 
units.
    Net earnings of a Bank means the net earnings of a Bank for a 
calendar year after deducting the Bank's annual contribution to the 
Resolution Funding Corporation required under section 21B of the Act 
(12 U.S.C. 1441b), and before declaring or paying any dividend under 
section 16 of the Act (12 U.S.C. 1436). For purposes of this part, 
``dividend'' includes any dividends on capital stock subject to a 
redemption request even if under GAAP, those dividends are treated as 
an ``interest expense.''
    Owner-occupied project means, for purposes of the competitive 
application program, one or more owner-occupied units in a single-
family or multifamily building, including condominiums, cooperative 
housing, and manufactured housing.
    Owner-occupied unit means a dwelling unit occupied by the owner of 
the unit. Housing with two to four dwelling units consisting of one 
owner-occupied unit and one or more rental units is considered a single 
owner-occupied unit.

[[Page 76951]]

    Program means the Affordable Housing Program established pursuant 
to this part.
    Rental project means, for purposes of the competitive application 
program, one or more dwelling units for occupancy by tenants or 
households that are not owner-occupants, including overnight and 
emergency shelters, transitional housing for homeless households, 
mutual housing, and single-room occupancy housing.
    Retention period means the following period of time during which 
AHP-assisted owner-occupied units or rental projects must meet the 
applicable income targeting and rent commitments in the approved AHP 
application for subsidy:
    (1) Five years from closing for an AHP-assisted owner-occupied 
unit, or in the case of rehabilitation of a unit currently occupied by 
the owner where there is no closing, 5 years from the date of 
completion of the rehabilitation; and
    (2) Fifteen years from the date of project completion for a rental 
project.
    Revolving loan fund means a capital fund established to make 
mortgage or other loans meeting the requirements of this part whereby 
loan principal is re-paid into the fund and re-lent to other borrowers.
    Single-family building means a structure with one to four dwelling 
units.
    Sponsor means a not-for-profit or for-profit organization or public 
entity that:
    (1) Has an ownership interest (including any partnership interest), 
as defined by the Bank in its AHP implementation plan, in a rental 
project;
    (2) Is integrally involved, as defined by the Bank in its AHP 
implementation plan, in an owner-occupied project, such as by 
exercising control over the planning, development, or management of the 
project, or by qualifying borrowers and providing or arranging 
financing for the owners of the units;
    (3) Establishes a loan pool; or
    (4) Is a revolving loan fund.
    Subsidized advance means an advance to a member at an interest rate 
reduced below the Bank's cost of funds, by use of a subsidy.
    Subsidy means:
    (1) A direct subsidy, provided that if a direct subsidy is used to 
write down the interest rate on a loan extended by a member, sponsor, 
or other party to a project, the subsidy must equal the net present 
value of the interest foregone from making the loan below the lender's 
market interest rate; or
    (2) The net present value of the interest revenue foregone from 
making a subsidized advance at a rate below the Bank's cost of funds.
    Very low-income household means a household that has an income at 
or below 50 percent of the median income for the area, with the income 
limit adjusted for household size in accordance with the methodology of 
the applicable median income standard, unless such median income 
standard has no household size adjustment methodology.
    Visitable means, in either owner-occupied or rental housing, at 
least one entrance is at-grade (no steps) and approached by an 
accessible route such as a sidewalk, and the entrance door and all 
interior passage doors are at least 2 feet, 10 inches wide, offering 32 
inches of clear passage space.


Sec.  951.2  Required annual AHP contributions; allocation of 
contributions.

    (a) Annual AHP contributions. Each Bank shall contribute annually 
to its Program the greater of:
    (1) 10 percent of the Bank's net earnings for the previous year; or
    (2) That Bank's pro rata share of an aggregate of $100 million to 
be contributed in total by the Banks, such proration being made on the 
basis of the net earnings of the Banks for the previous year, except 
that the required annual AHP contribution for a Bank shall not exceed 
its net earnings in the previous year.
    (b) Allocation of contributions. Each Bank, after consultation with 
its Advisory Council and pursuant to written policies adopted by the 
Bank's board of directors, shall allocate its annual required AHP 
contribution as follows:
    (1) Competitive application program. Each Bank shall allocate 
annually that portion of its annual required AHP contribution that is 
not set aside to fund homeownership set-aside programs under paragraph 
(b)(2) of this section, to provide funds to members through a 
competitive application program, pursuant to the requirements of this 
part.
    (2) Homeownership set-aside programs. (i) Allocation amount; first-
time homebuyers. A Bank, at its discretion, may set aside annually, in 
the aggregate, up to the greater of $4.5 million or 35 percent of the 
Bank's annual required AHP contribution to provide funds to members 
participating in homeownership set-aside programs established by the 
Bank, provided that at least one-third of the Bank's aggregate annual 
set-aside allocation to such programs shall be to assist first-time 
homebuyers, pursuant to the requirements of this part. A Bank may 
establish one or more homeownership set-aside programs pursuant to 
written policies adopted by the Bank's board of directors.
    (ii) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility for 
adopting its homeownership set-aside program policies.


Sec.  951.3  AHP implementation plan.

    (a) Adoption; no delegation. Each Bank, after consultation with its 
Advisory Council, shall adopt a written AHP implementation plan, and 
shall not amend the plan without first consulting its Advisory Council. 
The Bank's board of directors shall not delegate to Bank officers or 
other Bank employees the responsibility to consult with the Advisory 
Council prior to adopting or amending the AHP implementation plan. The 
AHP implementation plan shall set forth, at a minimum:
    (1) The applicable median income standard or standards adopted by 
the Bank consistent with the definition of median income for the area 
in Sec.  951.1;
    (2) The Bank's requirements for its competitive application program 
established pursuant to Sec.  951.5, including the schedule for AHP 
funding periods, definition of sponsor, project cost, and feasibility 
guidelines, any additional optional District eligibility requirements, 
scoring guidelines, and related definitions, requirements for timely 
use of AHP subsidies, and requirements for determining compliance upon 
disbursement of AHP subsidies;
    (3) The Bank's requirements for any homeownership set-aside 
programs established by the Bank pursuant to Sec.  951.6, including 
eligibility requirements and priority criteria and related definitions, 
AHP funding requirements, and requirements for timely use of the AHP 
subsidy;
    (4) The Bank's requirements for funding revolving loan funds, if 
adopted by the Bank pursuant to Sec.  951.5(c)(13);
    (5) The Bank's requirements for funding loan pools, if adopted by 
the Bank pursuant to Sec.  951.5(c)(14);
    (6) The Bank's requirements for monitoring under its competitive 
application program and any Bank homeownership set-aside programs, 
adopted pursuant to Sec.  951.7;
    (7) The Bank's requirements, including time limits, for re-use of 
repaid AHP direct subsidy, if adopted by the Bank pursuant to Sec.  
951.8(f)(2); and
    (8) Retention agreement requirements for projects and households 
under the competitive application program and any Bank homeownership 
set-aside

[[Page 76952]]

programs, pursuant to Sec.  951.9(a)(7) and (a)(8).
    (b) Advisory Council review. Prior to the adoption or amendment of 
a Bank's AHP implementation plan, the Bank shall provide its Advisory 
Council an opportunity to review the document, and the Advisory Council 
shall provide its recommendations to the Bank's board of directors.
    (c) Notification of plan amendments to the Finance Board. A Bank 
shall notify the Finance Board of any amendments made to its AHP 
implementation plan within 30 days after the date of their adoption by 
the Bank's board of directors.
    (d) Public access. A Bank shall publish its current AHP 
implementation plan on a publicly available website, and shall publish 
any amendments to the plan on the website within 30 days after the date 
of their adoption by the Bank's board of directors.


Sec.  951.4  Advisory Councils.

    (a) Appointment. (1) Each Bank's board of directors shall appoint 
an Advisory Council of from 7 to 15 persons who reside in the Bank's 
District and are drawn from community and not-for-profit organizations 
that are actively involved in providing or promoting low- and moderate-
income housing, and community and not-for-profit organizations that are 
actively involved in providing or promoting community lending, in the 
District.
    (2) Each Bank shall solicit nominations for membership on the 
Advisory Council from community and not-for-profit organizations 
pursuant to a nomination process that is as broad and as participatory 
as possible, allowing sufficient time for responses.
    (3) The Bank's board of directors shall appoint Advisory Council 
members from a diverse range of organizations so that representatives 
of no one group shall constitute an undue proportion of the membership 
of the Advisory Council, giving consideration to the size of the Bank's 
District and the diversity of low- and moderate-income housing and 
community lending needs and activities within the District.
    (b) Terms of Advisory Council members. Pursuant to policies adopted 
by the Bank's board of directors, Advisory Council members shall be 
appointed by the Bank's board of directors to serve for terms of up to 
3 years, and such terms shall be staggered to provide continuity in 
experience and service to the Advisory Council. No Advisory Council 
member may be appointed to serve for more than three full consecutive 
terms. An Advisory Council member appointed to fill a vacancy shall be 
appointed for the unexpired term of his or her predecessor in office.
    (c) Election of officers. Each Advisory Council shall elect from 
among its members a chairperson, a vice chairperson, and any other 
officers the Advisory Council deems appropriate.
    (d) Duties. (1) Meetings with the Banks. (i) The Advisory Council 
shall meet with representatives of the Bank's board of directors at 
least quarterly to provide advice on ways in which the Bank can better 
carry out its housing finance and community lending mission, including, 
but not limited to, advice on the low- and moderate-income housing and 
community lending programs and needs in the Bank's District, and on the 
use of AHP subsidies, Bank advances, and other Bank credit products for 
these purposes.
    (ii) The Advisory Council's advice shall include recommendations 
on:
    (A) The amount of AHP subsidies to be allocated to the Bank's 
competitive application program and any Bank homeownership set-aside 
programs;
    (B) The AHP implementation plan and any subsequent amendments 
thereto;
    (C) The scoring criteria, related definitions, and any additional 
optional District eligibility requirements for the competitive 
application program; and
    (D) The eligibility requirements and any priority criteria for any 
Bank homeownership set-aside programs.
    (2) Summary of AHP applications. The Bank shall comply with 
requests from the Advisory Council for summary information regarding 
AHP applications from prior funding periods.
    (3) Annual analysis; public access. (i) Each Advisory Council shall 
submit to the Finance Board annually by May 1 its analysis of the low- 
and moderate-income housing and community lending activity of the Bank 
by which it is appointed.
    (ii) Within 30 days after the date the Advisory Council's annual 
analysis is submitted to the Finance Board, the Bank shall publish the 
analysis on a publicly available website.
    (e) Expenses. The Bank shall pay Advisory Council members' travel 
expenses, including transportation and subsistence, for each day 
devoted to attending meetings with representatives of the board of 
directors of the Bank and meetings requested by the Finance Board.
    (f) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to appoint 
persons as members of the Advisory Council or to meet with the Advisory 
Council at least quarterly.


Sec.  951.5  Competitive application program.

    (a) Establishment of program. A Bank shall establish a competitive 
application program pursuant to the requirements of this part.
    (b) Funding periods and application process. (1) Funding periods. A 
Bank may accept applications for AHP subsidy under its competitive 
application program during a specified number of funding periods each 
year, as determined by the Bank.
    (2) Eligible applicants. A Bank shall accept applications for AHP 
subsidy under its competitive application program only from 
institutions that are members of the Bank at the time the application 
is submitted to the Bank.
    (3) Submission of applications. A Bank shall require applications 
for AHP subsidy to contain information sufficient for the Bank to:
    (i) Determine that the proposed AHP project meets the eligibility 
requirements of paragraph (c) of this section; and
    (ii) Evaluate the application pursuant to the scoring guidelines 
adopted by the Bank pursuant to paragraph (d) of this section.
    (4) Review of applications submitted. A Bank shall review the 
applications for AHP subsidy to determine that the proposed AHP project 
meets the eligibility requirements of paragraph (c) of this section, 
and shall evaluate the applications pursuant to the Bank's scoring 
guidelines adopted pursuant to paragraph (d) of this section.
    (c) Minimum eligibility requirements. Projects receiving AHP 
subsidies pursuant to a Bank's competitive application program must 
meet the following eligibility requirements:
    (1) Owner-occupied or rental housing. The AHP subsidy shall be used 
exclusively for:
    (i) Owner-occupied housing. The purchase, construction, or 
rehabilitation of an owner-occupied project by or for very low-income 
or low- or moderate-income households. A household must have an income 
meeting the income targeting commitments in the approved AHP 
application at the time it is qualified by the project sponsor for 
participation in the project; or
    (ii) Rental housing. The purchase, construction, or rehabilitation 
of a rental project, where at least 20 percent of the units in the 
project are occupied by and affordable for very low-income households. 
A household must have an income meeting the income targeting 
commitments in the approved AHP application upon initial occupancy of

[[Page 76953]]

the rental unit, or for projects involving the purchase or 
rehabilitation of rental housing that already is occupied, at the time 
the application for AHP subsidy is submitted to the Bank for approval.
    (2) Need for subsidy. The project's estimated cash uses of funds 
shall equal its estimated cash sources of funds as reflected in the 
project's development budget. A project's cash sources of funds shall 
include estimates of funds the project sponsor intends to obtain from 
other sources but which have not yet been committed to the project.
    (3) Project costs. (i) In general. Project costs, as reflected in 
the project's development budget, must be reasonable, in accordance 
with the Bank's project cost guidelines, taking into consideration the 
geographic location of the project, development conditions, and other 
non-financial household or project characteristics.
    (ii) Cost of property and services provided by a member. The 
purchase price of property or services, as reflected in the project's 
development budget, sold to the project by a member providing AHP 
subsidy to the project, or, in the case of property, upon which such 
member holds a mortgage or lien, may not exceed the market value of 
such property or services as of the date the purchase price was agreed 
upon. In the case of real estate owned property sold to a project by a 
member providing AHP subsidy to the project, or property sold to the 
project upon which the member holds a mortgage or lien, the market 
value of such property is deemed to be the ``as-is'' or ``as-
rehabilitated'' value of the property, whichever is appropriate. That 
value shall be reflected in an independent appraisal of the property 
performed by a state certified or licensed appraiser, as defined in 12 
CFR 564.2(j) and (k), within 6 months prior to the date the Bank 
disburses AHP subsidy to the project.
    (4) Project feasibility. (i) Developmental feasibility. The project 
must be likely to be completed and occupied, based on relevant factors 
contained in the Bank's project feasibility guidelines, including, but 
not limited to, the development budget, market analysis, and project 
sponsor's experience in providing the requested assistance to 
households.
    (ii) Operational feasibility of rental projects. A rental project 
must be able to operate in a financially sound manner, in accordance 
with the Bank's project feasibility guidelines, as projected in the 
project's operating pro forma or similar statement of operational 
feasibility.
    (5) Financing costs. The rate of interest, points, fees, and any 
other charges for all loans financing the project shall not exceed a 
reasonable market rate of interest, points, fees, and other charges for 
loans of similar maturity, terms, and risk.
    (6) Timing of AHP subsidy use. The AHP subsidy must be likely to be 
drawn down by the project or used by the project to procure other 
financing commitments within 12 months of the date of approval of the 
application for AHP subsidy funding the project.
    (7) Counseling costs. AHP subsidies may be used to pay for 
counseling costs only where:
    (i) Such costs are incurred in connection with counseling of 
homebuyers who actually purchase an AHP-assisted unit; and
    (ii) The cost of the counseling has not been covered by another 
funding source, including the member.
    (8) Refinancing. The project may use AHP subsidies to refinance an 
existing single-family or multifamily mortgage loan, provided that the 
refinancing produces equity proceeds and such equity proceeds up to the 
amount of the AHP subsidy in the project shall be used only for the 
purchase, construction, or rehabilitation of housing units meeting the 
eligibility requirements of this paragraph (c).
    (9) Retention. The AHP-assisted projects are, or are committed to 
be, subject to retention agreements as follows:
    (i) Owner-occupied projects. Each AHP-assisted unit in an owner-
occupied project is, or is committed to be, subject to a 5-year 
retention agreement described in Sec.  951.9(a)(7).
    (ii) Rental projects. AHP-assisted rental projects are, or are 
committed to be, subject to a 15-year retention agreement described in 
Sec.  951.9(a)(8).
    (10) Project sponsor qualifications. (i) In general. A project's 
sponsor must be qualified and able to perform its responsibilities as 
committed to in the application for AHP subsidy funding the project.
    (ii) Revolving loan fund. Pursuant to written policies adopted by a 
Bank's board of directors, a project sponsor that is a revolving loan 
fund shall:
    (A) Provide evidence of sound business practices and fiscal 
sustainability;
    (B) Provide audited statements or equivalent evidence that its 
operations are consistent with acceptable business practices; and
    (C) Demonstrate the ability to revolve subsidy repayments on a 
timely basis and track the use of the AHP subsidy.
    (iii) Loan pool. Pursuant to written policies adopted by a Bank's 
board of directors, a project sponsor that establishes a loan pool 
shall:
    (A) Provide evidence of sound asset/liability management practices 
and fiscal sustainability;
    (B) Provide audited statements or equivalent evidence that its 
operations are consistent with acceptable business practices; and
    (C) Demonstrate the ability to track the use of the AHP subsidy.
    (11) Fair housing. The project, as proposed, must comply with 
applicable federal and state laws on fair housing and housing 
accessibility, including, but not limited to, the Fair Housing Act, the 
Rehabilitation Act of 1973, the Americans with Disabilities Act of 
1990, and the Architectural Barriers Act of 1969, and must demonstrate 
how the project will be affirmatively marketed.
    (12) Calculation of AHP subsidy. (i) Where an AHP direct subsidy is 
provided to a project to write down the interest rate on a loan 
extended by a member, sponsor, or other party to a project, the net 
present value of the interest foregone from making the loan below the 
lender's market interest rate shall be calculated as of the date the 
application for AHP subsidy is submitted to the Bank, and subject to 
adjustment under paragraph (g)(4) of this section.
    (ii) Where an AHP subsidized advance is provided to a project, the 
net present value of the interest revenue foregone from making a 
subsidized advance at a rate below the Bank's cost of funds shall be 
determined as of the earlier of the date of disbursement of the 
subsidized advance or the date prior to disbursement on which the Bank 
first manages the funding to support the subsidized advance through its 
asset/liability management system, or otherwise.
    (13) Use of AHP subsidy by revolving loan funds. Pursuant to 
written policies adopted by a Bank's board of directors after 
consultation with its Advisory Council, a Bank, in its discretion, may 
provide AHP subsidies to members for lending by revolving loan funds to 
eligible projects and households under a Bank's competitive application 
program, provided the following requirements are met:
    (i) Initial use of subsidy. (A) The revolving loan fund's initial 
lending of the AHP subsidy shall meet all applicable eligibility 
requirements under this paragraph (c).
    (B) The revolving loan fund's initial lending of the AHP subsidy 
shall be to projects and households meeting the commitments in the 
approved

[[Page 76954]]

application for AHP subsidy, and the income eligibility and 
affordability commitments in such application shall be met for the full 
AHP retention period.
    (ii) Revolving uses of repaid subsidy. (A) The revolving loan 
fund's subsequent lending of repaid AHP subsidy shall meet all 
applicable eligibility requirements under this paragraph (c).
    (B) The revolving loan fund's subsequent lending of repaid AHP 
subsidy shall be for low- or moderate-income households in the case of 
owner-occupied projects, or for rental projects where at least 20 
percent of the units are occupied by and affordable for very low-income 
households, subject to retention period, monitoring and recapture 
requirements that the Bank shall adopt.
    (iii) The revolving loan fund shall return to the Bank any repaid 
AHP subsidy that will not be used according to the requirements in this 
paragraph (c)(13).
    (14) Use of AHP subsidy in loan pools. Pursuant to written policies 
adopted by a Bank's board of directors after consultation with its 
Advisory Council, a Bank, at its discretion, may provide AHP subsidies 
to members for projects involving the purchase of eligible AHP-assisted 
loans to AHP-eligible households for inclusion in a loan pool under a 
Bank's competitive application program, provided the following 
requirements are met:
    (i) Eligibility requirements. The loan pool's use of the AHP 
subsidies shall meet all applicable eligibility requirements under this 
paragraph (c)(14), and shall not be for the sole purpose of providing 
liquidity to the originator or holder of the loans. The loan pool 
sponsor must provide to the Bank proposed loan acceptance standards for 
the pool, the number of eligible households and income levels of loans 
served in a given time period, and the sponsor must make available to 
the Bank for its review and approval the underwriting characteristics 
of loans that the loan pool will purchase.
    (ii) Forward commitment. (A) The loan pool sponsor shall purchase 
the loans pursuant to a forward commitment that identifies the loans to 
be originated with principal or interest rate reductions as specified 
in the approved AHP applications to the targeted low- or moderate-
income households. Both initial purchases of loans for the AHP loan 
pool and subsequent purchases of loans to substitute for repaid loans 
in the pool shall be made pursuant to the terms of such forward 
commitment and subject to time limits on the use of the AHP subsidy as 
specified by the Bank in its AHP implementation plan under Sec.  
951.3(a)(2) and the Bank's agreement with the loan pool sponsor.
    (B) In the alternative, the loan pool shall purchase an initial 
round of loans that are not purchased pursuant to a forward commitment, 
provided that the originator or holder of the loans is required to use 
the proceeds from the initial loan purchases within time limits on use 
of the AHP subsidy as specified by the Bank in its AHP implementation 
plan under Sec.  951.3(a)(2) and the Bank's agreement with the loan 
pool sponsor. The proceeds shall assist households that are income-
eligible under the approved AHP applications for subsidy during 
subsequent rounds of lending, and such assistance shall be provided in 
the form of a principal reduction or a below-market AHP-subsidized 
interest rate as specified in the approved AHP application.
    (iii) Each AHP-assisted owner-occupied unit receiving AHP direct 
subsidy shall be subject to an AHP 5-year retention agreement as 
required under paragraph (c)(9)(i) of this section.
    (iv) Where AHP direct subsidy is being used in connection with the 
purchase of a loan or loans from a member or other party, the loan pool 
sponsor shall use the AHP direct subsidy for a standard upfront buy-
down of the interest rate on such loan or loans, or a reduction in the 
principal of the loans.
    (15) Optional District eligibility requirements. A Bank may require 
a project receiving AHP subsidies to meet one or more of the following 
additional eligibility requirements adopted by the Bank's board of 
directors after consultation with its Advisory Council:
    (i) AHP subsidy limits. A requirement that the amount of AHP 
subsidy requested for the project does not exceed limits established by 
the Bank as to the maximum amount of AHP subsidy available per member 
each year, or per member, per project, or per project unit in a single 
funding period.
    (ii) Counseling. A requirement that a household must complete a 
homebuyer or homeowner counseling program provided by, or based on one 
provided by, an organization recognized as experienced in homebuyer or 
homeowner counseling, respectively.
    (16) Prohibited uses of AHP subsidies. The project shall not use 
AHP subsidies to pay for:
    (i) Prepayment fees. Prepayment fees imposed by a Bank on a member 
for a subsidized advance that is prepaid.
    (ii) Cancellation fees. Cancellation fees and penalties imposed by 
a Bank on a member for a subsidized advance commitment that is 
canceled.
    (iii) Processing fees. Processing fees charged by members for 
providing direct subsidies to a project.
    (17) Prohibited eligibility requirement for in-District projects. A 
Bank shall not establish a requirement that a project be located in the 
Bank's District.
    (d) Scoring of applications. (1) In general. A Bank shall adopt 
written scoring guidelines setting forth the Bank's AHP competitive 
application program scoring criteria and related definitions and point 
allocations, and implementing other applicable requirements pursuant to 
this paragraph (d). A Bank shall not adopt additional scoring criteria 
or point allocations, except as specifically authorized under this 
paragraph (d).
    (2) Point allocations. (i) A Bank shall allocate 100 points among 
the 9 scoring criteria identified in paragraph (d)(5) of this section.
    (ii) The scoring criterion for targeting identified in paragraph 
(d)(5)(iii) of this section shall be allocated at least 20 points.
    (iii) The remaining scoring criteria shall be allocated at least 
five points each.
    (3) Fixed point and variable point scoring criteria. A Bank shall 
designate each scoring criterion as either a fixed-point or a variable-
point criterion, defined as follows:
    (i) Fixed-point scoring criteria are those which cannot be 
satisfied in varying degrees and are either satisfied or not, with the 
total number of points allocated to the criterion awarded by the Bank 
to an application meeting the criterion.
    (ii) Variable-point criteria are those where there are varying 
degrees to which an application can satisfy the criteria, with the 
number of points that may be awarded to an application for meeting the 
criterion varying, depending on the extent to which the application 
satisfies the criterion, based on a fixed scale or on a scale relative 
to the other applications being scored. A Bank shall designate the 
targeting and subsidy-per-unit scoring criteria identified in 
paragraphs (d)(5)(iii) and (d)(5)(viii), respectively, of this section, 
as variable-point criteria.
    (4) Satisfaction of scoring criteria. A Bank shall award scoring 
points to applications for proposed projects based on satisfaction of 
the scoring criteria adopted by the Bank pursuant to paragraph (d)(5) 
of this section.
    (5) Scoring criteria. An application for a proposed project may 
receive scoring points based on satisfaction of the following nine 
scoring criteria:

[[Page 76955]]

    (i) Use of donated or conveyed government-owned or other 
properties. The financing of housing using a significant proportion of:
    (A) Land or units donated or conveyed by the federal government or 
any agency or instrumentality thereof; or
    (B) Land or units donated or conveyed by any other party for an 
amount significantly below the fair market value of the property, as 
defined by the Bank in its AHP implementation plan.
    (ii) Sponsorship by a not-for-profit organization or government 
entity. Project sponsorship by a not-for-profit organization, a state 
or political subdivision of a state, a state housing agency, a local 
housing authority, a Native American Tribe, an Alaskan Native Village, 
or the government entity for Native Hawaiian Home Lands.
    (iii) Targeting. The extent to which a project provides housing for 
very low- and low- or moderate-income households, as follows:
    (A) Rental projects. An application for a rental project shall be 
awarded the maximum number of points available under this scoring 
criterion if 60 percent or more of the units in the project are 
reserved for occupancy by households with incomes at or below 50 
percent of the median income for the area. Applications for projects 
with less than 60 percent of the units reserved for occupancy by 
households with incomes at or below 50 percent of the median income for 
the area shall be awarded points on a declining scale based on the 
percentage of units in a project that are reserved for households with 
incomes at or below 50 percent of the median income for the area, and 
on the percentage of the remaining units reserved for households with 
incomes at or below 80 percent of the median income for the area.
    (B) Owner-occupied projects. Applications for owner-occupied 
projects shall be awarded points based on a declining scale to be 
determined by the Bank in its AHP implementation plan, taking into 
consideration percentages of units and targeted income levels.
    (C) Separate scoring. For purposes of this scoring criterion, 
applications for owner-occupied projects and rental projects may be 
scored separately.
    (iv) Housing for homeless households. The financing of rental 
housing, excluding overnight shelters, reserving at least 20 percent of 
the units for homeless households, the creation of transitional housing 
for homeless households permitting a minimum of 6 months occupancy, or 
the creation of permanent owner-occupied housing reserving at least 20 
percent of the units for homeless households, with the term ``homeless 
households'' as defined by the Bank in its AHP implementation plan.
    (v) Promotion of empowerment. The provision of housing in 
combination with a program offering employment; education; training; 
homebuyer, homeownership, or tenant counseling; daycare services; 
resident involvement in decision making affecting the creation or 
operation of the project; or other services that assist residents to 
move toward better economic opportunities, such as welfare to work 
initiatives.
    (vi) First District priority. The satisfaction of one of the 
following criteria, or one of a number of the following criteria, as 
recommended by the Bank's Advisory Council and adopted by the Bank's 
board of directors and set forth in the Bank's AHP implementation plan, 
as long as the total points available for meeting the criterion or 
criteria adopted under this category do not exceed the total points 
allocated to this category:
    (A) Special needs. The financing of housing in which at least 20 
percent of the units are reserved for occupancy by households with 
special needs, such as the elderly, mentally or physically disabled 
persons, persons recovering from physical abuse or alcohol or drug 
abuse, or persons with AIDS; or the financing of housing that is 
visitable by persons with physical disabilities who are not occupants 
of such housing.
    (B) Community development. The financing of housing meeting housing 
needs documented as part of a community revitalization or economic 
development strategy approved by a unit of a state or local government.
    (C) First-time homebuyers. The financing of housing for first-time 
homebuyers.
    (D) Member financial participation. Member financial participation 
(excluding the pass-through of AHP subsidy) in the project, such as 
providing market rate or concessionary financing, fee waivers, or 
donations.
    (E) Disaster areas and displaced households. The financing of 
housing located in federally declared disaster areas, or for households 
displaced from federally declared disaster areas due to a disaster.
    (F) Rural. The financing of housing located in rural areas.
    (G) Urban. The financing of urban in-fill or urban rehabilitation 
housing.
    (H) Economic diversity. The financing of housing that is part of a 
strategy to end isolation of very low-income households by providing 
economic diversity through mixed-income housing in low- or moderate-
income neighborhoods, or providing very low- or low- or moderate-income 
households with housing opportunities in neighborhoods or cities where 
the median income equals or exceeds the median income for the larger 
surrounding area, such as the city, county, or Primary Metropolitan 
Statistical Area, in which the neighborhood or city is located.
    (I) Fair housing remedy. The financing of housing as part of a 
remedy undertaken by a jurisdiction adjudicated by a federal, state, or 
local court to be in violation of title VI of the Civil Rights Act of 
1964 (42 U.S.C. 2000d et seq.), the Fair Housing Act (42 U.S.C. 3601 et 
seq.), or any other federal, state, or local fair housing law, or as 
part of a settlement of such claims.
    (J) Community involvement. Demonstrated support for the project by 
local government, other than as a project sponsor, in the form of 
property tax deferment or abatement, zoning changes or variances, 
infrastructure improvements, fee waivers, or other similar forms of 
non-cash assistance, or demonstrated support for the project by 
community organizations or individuals, other than as project sponsors, 
through the commitment by such entities or individuals of donated goods 
and services, or volunteer labor.
    (K) Lender consortia. The involvement of financing by a consortium 
of at least two financial institutions.
    (vii) Second District priority: defined housing need in the 
District. The satisfaction of a housing need in the Bank's District, as 
defined and recommended by the Bank's Advisory Council and adopted by 
the Bank's board of directors. The Bank may, but is not required to, 
use one of the criteria listed in paragraph (d)(5)(vi) of this section, 
provided it is different from the criterion or criteria adopted by the 
Bank under such paragraph. The Bank may not adopt as its scoring 
criterion under this paragraph (d)(5)(vii) the financing of housing 
located in the Bank's District.
    (viii) AHP subsidy per unit. (A) Amount of subsidy. The extent to 
which a project proposes to use the least amount of AHP subsidy per 
AHP-targeted unit. In the case of an application for a project financed 
by a subsidized advance, the total amount of AHP subsidy used by the 
project shall be estimated based on the Bank's cost of funds as of the 
date on which all applications are due for the funding period in which 
the application is submitted.

[[Page 76956]]

    (B) Separate scoring. For purposes of this scoring criterion, 
applications for owner-occupied projects and rental projects may be 
scored separately.
    (ix) Community stability. The promotion of community stability, 
such as by rehabilitating vacant or abandoned properties, being an 
integral part of a neighborhood stabilization plan approved by a unit 
of state or local government, and not displacing low- or moderate-
income households, or if such displacement will occur, assuring that 
such households will be assisted to minimize the impact of such 
displacement.
    (e) Approval of AHP applications. (1) A Bank shall approve 
applications for AHP subsidy in descending order starting with the 
highest scoring application until the total funding amount for the 
particular funding period, except for any amount insufficient to fund 
the next highest scoring application, has been allocated.
    (2) The Bank also shall approve at least the next four highest 
scoring applications as alternates and, within 1 year of approval, may 
fund such alternates if any previously committed AHP subsidies become 
available.
    (f) Modifications of approved AHP applications. (1) Modification 
procedure. If, prior to or after final disbursement of funds to a 
project from all funding sources, there is or will be a change in the 
project that would change the score that the project application 
received in the funding period in which it was originally scored and 
approved, had the changed facts been operative at that time, a Bank, in 
its discretion, may approve in writing a modification to the terms of 
the approved application, provided that:
    (i) The project, incorporating any such changes, would meet the 
eligibility requirements of paragraph (c) of this section;
    (ii) The application, as reflective of such changes, continues to 
score high enough to have been approved in the funding period in which 
it was originally scored and approved by the Bank; and
    (iii) There is good cause for the modification, and the analysis 
and justification for the modification are documented by the Bank in 
writing.
    (2) AHP subsidy increases; no delegation. Modifications involving 
an increase in AHP subsidy shall be approved or disapproved by a Bank's 
board of directors. The authority to approve or disapprove such 
requests shall not be delegated to Bank officers or other Bank 
employees.
    (g) Procedure for funding. (1) Disbursement of AHP subsidies to 
members. (i) A Bank may disburse AHP subsidies only to institutions 
that are members of the Bank at the time they request a draw-down of 
the subsidies.
    (ii) If an institution with an approved application for AHP subsidy 
loses its membership in a Bank, the Bank may disburse AHP subsidies to 
a member of such Bank to which the institution has transferred its 
obligations under the approved application, or the Bank may disburse 
AHP subsidies through another Bank to a member of that Bank that has 
assumed the institution's obligations under the approved AHP 
application.
    (2) Progress towards use of AHP subsidies. A Bank shall establish 
policies and procedures, such as time limits, for determining whether 
progress is being made towards draw-down and use of AHP subsidies by 
approved projects, and whether to cancel AHP application approvals for 
lack of such progress. Pursuant to such policies and procedures, a Bank 
shall determine whether progress is being made by approved projects, 
and whether to cancel any AHP application approvals. If a Bank cancels 
any AHP application approvals, it shall make the AHP subsidies 
available for other AHP-eligible projects.
    (3) Compliance upon disbursement of AHP subsidies. A Bank shall 
establish policies and procedures for determining, prior to its initial 
disbursement of AHP subsidies for an approved project, and prior to 
subsequent disbursement if the need for AHP subsidy has changed, that 
the project meets the eligibility requirements of paragraph (c) of this 
section and all obligations committed to in the approved AHP 
application.
    (4) Changes in approved AHP subsidy amount where a direct subsidy 
is used to write down prior to closing the principal amount or interest 
rate on a loan. If a member is approved to receive AHP direct subsidy 
to write down prior to closing the principal amount or the interest 
rate on a loan to a project and the amount of AHP subsidy required to 
maintain the debt service cost for the loan decreases from the amount 
of AHP subsidy initially approved by the Bank due to a decrease in 
market interest rates between the time of approval and the time the 
lender commits to the interest rate to finance the project, the Bank 
shall reduce the AHP subsidy amount accordingly. If market interest 
rates rise between the time of approval and the time the lender commits 
to the interest rate to finance the project, the Bank, in its 
discretion, may increase the AHP subsidy amount accordingly.
    (5) AHP outlay adjustment. If a Bank reduces the amount of AHP 
subsidy approved for a project, the amount of such reduction shall be 
returned to the Bank's AHP fund. If a Bank increases the amount of AHP 
subsidy approved for a project, the amount of such increase shall be 
drawn first from any currently uncommitted or repaid AHP subsidies and 
then from the Bank's required AHP contribution for the next year.
    (6) Project sponsor notification of re-use of repaid AHP direct 
subsidy. Prior to disbursement by a project sponsor of AHP direct 
subsidy repaid to and retained by such project sponsor pursuant to a 
subsidy re-use program authorized by the Bank under Sec.  951.8(f)(2), 
the project sponsor shall provide written notice to the member and the 
Bank of its intent to disburse the repaid AHP subsidy to a household 
satisfying the requirements of this part and the commitments in the 
approved AHP application.
    (h) Bank board duties and delegation. (1) Duties. A Bank's board of 
directors, after consultation with its Advisory Council, shall be 
responsible for:
    (i) The establishment of any optional District eligibility 
requirements;
    (ii) The establishment of any policies and procedures for use of 
AHP subsidies by revolving loan funds or loan pools;
    (iii) The establishment of scoring criteria and related definitions 
and point allocations; and
    (iv) Approving or disapproving the applications for AHP subsidy.
    (2) No delegation. The Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibilities set forth 
in paragraph (h)(1) of this section.


Sec.  951.6  Homeownership set-aside programs.

    (a) Establishment of program. A Bank may establish one or more 
homeownership set-aside programs pursuant to the requirements of this 
part.
    (b) Eligible applicants. A Bank shall accept applications for AHP 
direct subsidy under its homeownership set-aside programs only from 
institutions that are members of the Bank at the time the application 
is submitted to the Bank.
    (c) Minimum eligibility requirements. A Bank's homeownership set-
aside programs must meet the following eligibility requirements:
    (1) Member allocation criteria. AHP direct subsidies shall be 
provided to members pursuant to allocation criteria established by the 
Bank in its AHP implementation plan.
    (2) Eligible households. Members shall provide AHP direct subsidies 
only to households that:

[[Page 76957]]

    (i) Have incomes at or below 80 percent of the median income for 
the area at the time the household is accepted for enrollment by the 
member and the Bank in the Bank's homeownership set-aside program; and
    (ii) Meet the first-time homebuyer requirement, in the case of 
households receiving funds pursuant to the first-time homebuyer 
requirement in Sec.  951.2(b)(2), and meet such other eligibility 
criteria that may be established by the Bank in its AHP implementation 
plan, such as a matching funds requirement, counseling requirement, or 
criteria that give priority for the purchase or rehabilitation of 
housing in particular areas or as part of a disaster relief effort.
    (3) Maximum grant amount. Members shall provide AHP direct 
subsidies to households as a grant, in an amount up to a maximum of 
$15,000 per household, as established by the Bank in its AHP 
implementation plan, which limit shall apply to all households.
    (4) Eligible uses of AHP direct subsidy. Households shall use the 
AHP direct subsidies to pay for down payment, closing cost, counseling, 
or rehabilitation assistance in connection with the household's 
purchase or rehabilitation of an owner-occupied unit, including a 
condominium or cooperative housing unit, to be used as the household's 
primary residence.
    (5) Retention agreement. An owner-occupied unit purchased or 
rehabilitated using AHP direct subsidy shall be subject to a 5-year 
retention agreement described in Sec.  951.9(a)(7).
    (6) Member financial incentives. The Bank shall establish 
incentives for members to provide financial or other assistance in 
connection with providing the AHP direct subsidy.
    (7) Financing costs. The rate of interest, points, fees, and any 
other charges for loans used directly or indirectly in conjunction with 
the AHP direct subsidy shall not exceed a reasonable market rate of 
interest, points, fees, and other charges for loans of similar 
maturity, terms, and risk.
    (8) Counseling costs. The AHP direct subsidies may be used to pay 
for counseling costs only where:
    (i) Such costs are incurred in connection with counseling of 
homebuyers who actually purchase an AHP-assisted unit; and
    (ii) The cost of the counseling has not been covered by another 
funding source, including the member.
    (9) Progress towards use of AHP subsidy. Progress shall be made 
towards draw-down and use of the AHP direct subsidies by eligible 
households pursuant to the requirements in the Bank's policies and 
procedures.
    (10) No cash back to household. A member shall not provide cash 
back to a household at closing on the mortgage loan, and shall use any 
AHP subsidy beyond what is needed at closing for closing costs and the 
approved mortgage amount to further reduce the principal of the 
mortgage loan.
    (d) Approval of AHP applications. The Bank shall approve 
applications for AHP direct subsidy in accordance with the Bank's 
criteria governing the allocation of funds.
    (e) Procedure for funding. (1) Disbursement of AHP subsidies to 
members. (i) A Bank may disburse AHP direct subsidies only to 
institutions that are members of the Bank at the time they request a 
draw-down of the subsidies.
    (ii) If an institution with an approved application for AHP direct 
subsidy loses its membership in a Bank, the Bank may disburse AHP 
direct subsidies to a member of such Bank to which the institution has 
transferred its obligations under the approved AHP application, or the 
Bank may disburse AHP direct subsidies through another Bank to a member 
of that Bank that has assumed the institution's obligations under the 
approved AHP application.
    (2) Progress towards use of AHP subsidies. A Bank shall establish 
policies and procedures, such as time limits, for determining whether 
progress is being made towards draw-down and use of the AHP direct 
subsidies by eligible households, and whether to cancel AHP application 
approvals for lack of such progress. Pursuant to such policies and 
procedures, a Bank shall determine whether progress is being made 
towards such draw-down and use, and whether to cancel any AHP 
application approvals. If the Bank cancels any AHP application 
approvals, it shall make the AHP direct subsidies available for other 
applicants for AHP direct subsidies under the homeownership set-aside 
program or for other AHP-eligible projects.


Sec.  951.7  Monitoring.

    (a) Competitive application program. (1) Initial monitoring 
policies and procedures. (i) A Bank shall adopt and implement written 
policies and procedures for monitoring of owner-occupied and rental 
projects prior to, and within a reasonable period of time after, 
project completion to determine, at a minimum, whether:
    (A) Construction or rehabilitation of projects that are underway is 
making satisfactory progress towards completion, in compliance with the 
commitments in the approved AHP applications, Bank policies, and the 
requirements of this part.
    (B) Following completion of projects, satisfactory progress is 
being made towards occupancy of the projects by eligible households.
    (C) Within a reasonable period of time after project completion, 
the projects meet the following requirements, at a minimum:
    (1) The AHP subsidy was used for eligible purposes according to the 
commitments in the approved AHP applications;
    (2) The household incomes and rents comply with the income 
targeting and rent commitments in the approved AHP applications;
    (3) The projects' actual costs were reasonable in accordance with 
the Bank's project cost guidelines, and the AHP subsidies were 
necessary for the completion of the project as currently structured;
    (4) The AHP-assisted units are subject to retention agreements 
meeting the requirements of Sec.  951.9(a)(7) or (a)(8), as applicable; 
and
    (5) In the case of rental projects, the services and activities 
committed to in the approved AHP applications have been provided in 
connection with the projects.
    (ii) Back-up documentation. A Bank's written monitoring policies 
and procedures shall include requirements for:
    (A) Bank review of back-up project documentation regarding 
household incomes and rents maintained by the project sponsor or owner; 
and
    (B) Maintenance and Bank review of other project documentation in 
the Bank's discretion.
    (2) Long-term monitoring policies and procedures. (i) A Bank shall 
adopt and implement written policies and procedures for monitoring of 
approved rental projects commencing in the second year after project 
completion to determine, at a minimum, whether during the full 15-year 
retention period, the household incomes, rents, and populations served 
comply with the income targeting, rent, and targeted population 
commitments, respectively, in the approved AHP applications.
    (ii) Risk factors and reliance on other monitoring. (A) Risk 
factors. A Bank's monitoring policies and procedures shall take into 
account risk factors such as the amount of AHP subsidy in the project, 
type of project, size of project, location of project, sponsor 
experience, and any monitoring provided by a federal, state, or local 
entity as described in this paragraph (a)(2)(ii).

[[Page 76958]]

    (B) Reliance on other monitoring. (1) Tax credit monitoring. For 
AHP projects that are allocated Federal Low-Income Housing Tax Credits 
(tax credits), a Bank may rely on the monitoring by the state-
designated housing credit agency administering the tax credits of the 
income targeting, rent, and retention period requirements applicable 
under the Low-Income Housing Tax Credit Program, provided that the 
compliance profiles of the AHP and the Low-Income Housing Tax Credit 
program continue to be substantively equivalent.
    (2) Other governmental monitoring. For AHP projects that receive 
funds from Federal, State, or local government entities, a Bank may 
rely on the monitoring by such entities of the income targeting, rent, 
and retention period requirements applicable under their programs, 
provided that:
    (i) The income targeting, rent, and retention period requirements 
for those programs are substantively equivalent to those of the AHP;
    (ii) The entity has demonstrated and continues to demonstrate its 
ability to monitor the project;
    (3) The entity agrees to provide reports to the Bank on the 
project's incomes and rents for the full 15-year AHP retention period; 
and
    (4) The Bank reviews the reports from the monitoring entity to 
confirm that they comply with the Bank's monitoring policies and 
procedures.
    (C) Risk-based sampling plan. A Bank may use a reasonable, risk-
based sampling plan to select the rental projects to be monitored and 
to review the back-up and any other project documentation received by 
the Bank. The risk-based sampling plan and its basis shall be in 
writing.
    (iii) Annual certifications and back-up documentation. A Bank's 
written monitoring policies and procedures shall include requirements 
for:
    (A) Bank review of annual certifications by project owners to the 
Bank that household incomes and rents are in compliance with the 
commitments in the approved AHP application and the requirements of 
this part;
    (B) Bank review of back-up project documentation regarding 
household incomes and rents maintained by the project owner; and
    (C) Maintenance and Bank review of other project documentation in 
the Banks' discretion.
    (3) Annual adjustment of targeting commitments. For purposes of 
determining compliance with the targeting commitments in an approved 
AHP application for both initial and long-term monitoring purposes 
under a Bank's competitive application program, such commitments shall 
be considered to adjust annually according to the current applicable 
median income data. A rental unit may continue to count toward meeting 
the targeting commitment of an approved AHP application as long as the 
rent charged to a household remains affordable, as defined in Sec.  
951.1, for the household occupying the unit.
    (b) Homeownership set-aside programs: Monitoring policies and 
procedures. (1) A Bank shall adopt and implement written policies and 
procedures for monitoring compliance with the requirements of its 
homeownership set-aside programs, including monitoring to determine, at 
a minimum, whether:
    (i) The AHP subsidy was provided to households meeting all 
applicable eligibility requirements in Sec.  951.6(c)(2) and the Bank's 
homeownership set-aside program policies; and
    (ii) All other applicable eligibility requirements in Sec.  
951.6(c) and the Bank's homeownership set-aside program policies are 
met, including that the AHP-assisted units are subject to retention 
agreements required under Sec.  951.6(c)(5).
    (2) Sampling plan. A Bank may use a reasonable sampling plan to 
select the households to be monitored, and to review the back-up and 
any other documentation received by the Bank. The sampling plan and its 
basis shall be in writing.
    (3) Member certifications and back-up documentation. A Bank's 
written monitoring policies and procedures shall include requirements 
for:
    (i) Bank review of certifications by members to the Bank, prior to 
disbursement of the AHP subsidy, that the subsidy will be provided in 
compliance with all applicable eligibility requirements in Sec.  
951.6(c);
    (ii) Bank review of back-up documentation regarding household 
incomes maintained by the member; and
    (iii) Maintenance and Bank review of other documentation in the 
Bank's discretion.
    (c) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to adopt 
the Bank's monitoring policies and procedures under its competitive 
application program and homeownership set-aside programs.


Sec.  951.8  Remedial actions for noncompliance.

    (a) Recovery of AHP subsidies. A Bank shall recover the amount of 
any AHP subsidies (plus interest, if appropriate) that are not used in 
compliance with the terms of the approved application for AHP subsidy 
and the requirements of this part, if the misuse is the result of the 
actions or omissions of the member, the project sponsor, or the project 
owner.
    (b) Responsible party for repayment of AHP subsidies. Except as 
provided in paragraph (c) of this section:
    (1) If the member causes the AHP subsidies to be misused through 
its actions or omissions, the member shall repay the AHP subsidies to 
the Bank.
    (2) If the project sponsor or owner causes the AHP subsidies to be 
misused through its actions or omissions, the following shall apply, as 
determined by the Bank in its discretion:
    (i) The member shall recover the AHP subsidies from the project 
sponsor or owner and repay them to the Bank; or
    (ii) The project sponsor or owner shall repay the AHP subsidies 
directly to the Bank.
    (c) Recovery not required. Recovery of the AHP subsidies is not 
required if:
    (1) The member, project sponsor, or project owner cures the 
noncompliance within a reasonable period of time;
    (2) The circumstances of noncompliance are eliminated through a 
modification of the terms of the approved application for AHP subsidy 
pursuant to Sec.  951.5(f); or
    (3) The member is unable to collect the AHP subsidy after making 
reasonable efforts to collect it.
    (d) Settlements. A Bank may settle a claim for AHP subsidies that 
it has against a member, project sponsor, or project owner for less 
than the full amount due. If a Bank enters into such a settlement, the 
Finance Board may require the Bank to reimburse its AHP fund in the 
amount of any shortfall under paragraph (e)(2) of this section, unless:
    (1) The Bank has sufficient documentation showing that the sum 
agreed to be repaid under the settlement is reasonably justified, based 
on the facts and circumstances of the noncompliance (including the 
degree of culpability of the non-complying parties and the extent of 
the Bank's recovery efforts); or
    (2) The Bank obtains a determination from the Finance Board that 
the sum agreed to be repaid under the settlement is reasonably 
justified, based on the facts and circumstances of the noncompliance 
(including the degree of culpability of the non-complying parties and 
the extent of the Bank's recovery efforts).
    (e) Reimbursement of AHP fund. (1) By the Bank. A Bank shall 
reimburse its

[[Page 76959]]

AHP fund in the amount of any AHP subsidies (plus interest, if 
appropriate) misused as a result of the actions or omissions of the 
Bank.
    (2) By Finance Board order. The Finance Board may order a Bank to 
reimburse its AHP fund in an appropriate amount upon determining that:
    (i) The Bank has failed to reimburse its AHP fund as required under 
paragraph (e)(1) of this section; or
    (ii) The Bank has failed to recover AHP subsidy from a member, 
project sponsor, or project owner pursuant to the requirements of 
paragraph (a) of this section, and has not shown that such failure is 
reasonably justified, considering factors such as the extent of the 
Bank's recovery efforts.
    (f) Use of repaid AHP subsidies. (1) Use of repaid AHP subsidies in 
other AHP-eligible projects. Except as provided in paragraph (f)(2) of 
this section, amounts of AHP subsidy, including any interest, repaid to 
a Bank pursuant to this part shall be made available by the Bank for 
other AHP-eligible projects.
    (2) Re-use of repaid AHP direct subsidies in same project. (i) 
Requirements. AHP direct subsidy, including any interest, repaid to a 
member or project sponsor under a homeownership set-aside program or 
the competitive application program, respectively, may be repaid by 
such parties to the Bank for subsequent disbursement to and re-use by 
such parties, or retained by such parties for subsequent re-use, as 
authorized by the Bank, in its discretion, after consultation with its 
Advisory Council, in its AHP implementation plan, provided all of the 
following requirements are satisfied:
    (A) The member or the project sponsor originally provided the AHP 
direct subsidy as down payment, closing cost, rehabilitation, or 
interest rate buy down assistance to an eligible household to purchase 
or rehabilitate an owner-occupied unit pursuant to an approved AHP 
application.
    (B) The AHP direct subsidy, including any interest, was repaid to 
the member or project sponsor as a result of a sale by the household of 
the unit prior to the end of the retention period to a purchaser that 
is not a low- or moderate-income household.
    (C) The repaid AHP direct subsidy is made available by the member 
or project sponsor, within the period of time specified by the Bank in 
its AHP implementation plan, to another AHP-eligible household to 
purchase or rehabilitate an owner-occupied unit in the same project in 
accordance with the terms of the approved AHP application.
    (ii) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to adopt 
any Bank policies on re-use of repaid AHP direct subsidies in the same 
project pursuant to paragraph (f)(2)(i) of this section.
    (g) Suspension and debarment. (1) At a Bank's initiative. A Bank 
may suspend or debar a member, project sponsor, or project owner from 
participation in the Program if such party shows a pattern of 
noncompliance, or engages in a single instance of flagrant 
noncompliance, with the terms of an approved application for AHP 
subsidy or the requirements of this part.
    (2) At the Finance Board's initiative. The Finance Board may order 
a Bank to suspend or debar a member, project sponsor, or project owner 
from participation in the Program if such party shows a pattern of 
noncompliance, or engages in a single instance of flagrant 
noncompliance, with the terms of an approved application for AHP 
subsidy or the requirements of this part.
    (h) Transfer of Program administration. Without limitation on other 
remedies, the Finance Board, upon determining that a Bank has engaged 
in mismanagement of its Program, may designate another Bank to 
administer all or a portion of the first Bank's annual AHP 
contribution, for the benefit of the first Bank's members, under such 
terms and conditions as the Finance Board may prescribe.
    (i) Finance Board actions under this section. Except as provided in 
paragraph (d)(2) of this section, actions taken by the Finance Board 
under this section are reviewable under Sec.  907.9 of this chapter.


Sec.  951.9  Agreements.

    (a) Agreements between Banks and members. A Bank shall have in 
place with each member receiving an AHP subsidized advance or AHP 
direct subsidy, an agreement or agreements containing, at a minimum, 
the following provisions, where applicable:
    (1) Notification of Program requirements and policies. The member 
has been notified of the requirements of this part and all Bank 
policies relevant to the member's approved application for AHP subsidy.
    (2) AHP subsidy pass-through. The member shall pass on the full 
amount of the AHP subsidy to the project or household, as applicable, 
for which the subsidy was approved.
    (3) Use of AHP subsidy. (i) Use of AHP subsidy by the member. The 
member shall use the AHP subsidy in accordance with the terms of the 
member's approved application for the subsidy, and the requirements of 
this part.
    (ii) Use of AHP subsidy by the project sponsor or owner. The member 
shall have in place an agreement with each project sponsor and project 
owner, in which the project sponsor and project owner agree to use the 
AHP subsidy in accordance with the terms of the member's approved 
application for the subsidy, and the requirements of this part.
    (4) Repayment of AHP subsidies in case of noncompliance. (i) 
Noncompliance by the member. The member shall repay AHP subsidies to 
the Bank in accordance with the requirements of Sec.  951.8(b)(1).
    (ii) Noncompliance by a project sponsor or owner. (A) Agreement. 
The member shall have in place an agreement with the each project 
sponsor and project owner, in which the project sponsor and project 
owner agree to repay AHP subsidies to the member or the Bank in 
accordance with the requirements of Sec.  951.8(b)(2)(i) or (b)(2)(ii), 
respectively (as applicable).
    (B) Recovery of AHP subsidies. The member shall recover from the 
project sponsor or project owner and repay to the Bank any AHP subsidy 
in accordance with the requirements of Sec.  951.8(b)(2)(i) (if 
applicable).
    (5) Project monitoring. (i) Monitoring by the member. The member 
shall comply with the monitoring requirements applicable to such party, 
as established by the Bank in its monitoring policies and procedures 
(and set forth in the agreement) pursuant to Sec.  951.7.
    (ii) Agreement. The member shall have in place an agreement with 
each project sponsor and project owner, in which the project sponsor 
and project owner agree to comply with the monitoring requirements 
applicable to such parties, as established by the Bank in its 
monitoring policies and procedures (and set forth in the agreement) 
pursuant to Sec.  951.7.
    (6) Transfer of AHP obligations. (i) To another member. The member 
shall make best efforts to transfer its obligations under the approved 
application for AHP subsidy to another member in the event of its loss 
of membership in the Bank prior to the Bank's final disbursement of AHP 
subsidies.
    (ii) To a nonmember. If, after final disbursement of AHP subsidies 
to the member, the member undergoes an acquisition or a consolidation 
resulting in a successor organization that is not a

[[Page 76960]]

member of the Bank, the nonmember successor organization assumes the 
member's obligations under its approved application for AHP subsidy, 
and where the member received an AHP subsidized advance, the nonmember 
assumes such obligations until prepayment or orderly liquidation by the 
nonmember of the subsidized advance.
    (7) Retention agreements for owner-occupied units. The member shall 
ensure that an AHP-assisted owner-occupied unit is subject to a deed 
restriction or other legally enforceable retention agreement or 
mechanism requiring that:
    (i) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period.
    (ii) In the case of a sale or refinancing of the unit prior to the 
end of the retention period, an amount equal to a pro rata share of the 
AHP subsidy that financed the purchase, construction, or rehabilitation 
of the unit, reduced for every year the seller owned the unit, shall be 
repaid to the Bank from any net gain realized upon the sale or 
refinancing, unless:
    (A) The unit was assisted with a permanent mortgage loan funded by 
an AHP subsidized advance;
    (B) The unit is sold to a very low-, or low- or moderate-income 
household; or
    (C) Following a refinancing, the unit continues to be subject to a 
deed restriction or other legally enforceable retention agreement or 
mechanism described in this paragraph (a)(7).
    (iii) In the case of a direct subsidy, such repayment of AHP 
subsidy shall be made:
    (A) To the Bank. If the Bank has not authorized re-use of the 
repaid AHP subsidy or has authorized re-use of the repaid subsidy but 
not retention of such repaid subsidy by the member or project sponsor, 
pursuant to Sec.  951.8(f)(2), or has authorized retention and re-use 
of such repaid subsidy by the member or project sponsor, pursuant to 
such section and the repaid subsidy is not re-used in accordance with 
the requirements of the Bank and such section.
    (B) To the member or project sponsor. To the member or project 
sponsor for re-use by such member or project sponsor, if the Bank has 
authorized retention and re-use of such subsidy by the member or 
project sponsor pursuant to Sec.  951.8(f)(2).
    (iv) The obligation to repay AHP subsidy to the Bank shall 
terminate after any foreclosure.
    (8) Retention agreements for rental projects. The member shall 
ensure that an AHP-assisted rental project is subject to a deed 
restriction or other legally enforceable retention agreement or 
mechanism requiring that:
    (i) The project's rental units, or applicable portion thereof, must 
remain occupied by and affordable for households with incomes at or 
below the levels committed to be served in the approved AHP application 
for the duration of the retention period.
    (ii) The Bank or its designee is to be given notice of any sale or 
refinancing of the project occurring prior to the end of the retention 
period.
    (iii) In the case of a sale or refinancing of the project prior to 
the end of the retention period, the full amount of the AHP subsidy 
received by the owner shall be repaid to the Bank, unless:
    (A) The project continues to be subject to a deed restriction or 
other legally enforceable retention agreement or mechanism 
incorporating the income-eligibility and affordability restrictions 
committed to in the approved AHP application for the duration of the 
retention period; or
    (B) The households are relocated to another property that is made 
subject to the terms of the approved AHP application as well as a deed 
restriction or other legally enforceable retention agreement or 
mechanism incorporating the income-eligibility and affordability 
restrictions committed to in the approved AHP application, for the 
remainder of the retention period.
    (iv) The income-eligibility and affordability restrictions 
applicable to the project shall terminate after any foreclosure.
    (9) Lending of AHP direct subsidies. If a member or a project 
sponsor lends AHP direct subsidy to a project, any repayments of 
principal and payments of interest received by the member or the 
project sponsor must be paid forthwith to the Bank, unless the direct 
subsidy is being lent by a revolving loan fund pursuant to Sec.  
951.5(c)(13).
    (10) Special provisions where members obtain AHP subsidized 
advances. (i) Repayment schedule. The term of an AHP subsidized advance 
shall be no longer than the term of the member's loan to the project 
funded by the advance, and at least once in every 12-month period, the 
member shall be scheduled to make a principal repayment to the Bank 
equal to the amount scheduled to be repaid to the member on its loan to 
the project in that period.
    (ii) Prepayment fees. Upon a prepayment of an AHP subsidized 
advance, the Bank shall charge a prepayment fee only to the extent the 
Bank suffers an economic loss from the prepayment.
    (iii) Treatment of loan prepayment by project. If all or a portion 
of the loan or loans financed by an AHP subsidized advance are prepaid 
by the project to the member, the member may, at its option, either:
    (A) Repay to the Bank that portion of the advance used to make the 
loan or loans to the project, and be subject to a fee imposed by the 
Bank sufficient to compensate the Bank for any economic loss the Bank 
experiences in reinvesting the repaid amount at a rate of return below 
the cost of funds originally used by the Bank to calculate the interest 
rate subsidy incorporated in the advance.
    (B) Continue to maintain the advance outstanding, subject to the 
Bank resetting the interest rate on that portion of the advance used to 
make the loan or loans to the project to a rate equal to the cost of 
funds originally used by the Bank to calculate the interest rate 
subsidy incorporated in the advance.
    (b) Agreements between Banks and project sponsors and owners. A 
Bank shall have in place an agreement with each project sponsor and 
project owner, in which the project sponsor and project owner agree to 
repay AHP subsidies directly to the Bank in accordance with the 
requirements of Sec.  951.8(b)(2)(ii) (if applicable).
    (c) Application to existing AHP projects. The requirements of 
section 10(j) of the Act (12 U.S.C. 1430(j)) and the provisions of this 
part, as amended, are incorporated into all agreements between Banks, 
members, project sponsors, or project owners receiving AHP subsidies. 
To the extent the requirements of this part are amended from time to 
time, such agreements are deemed to incorporate the amendments to 
conform to any new requirements of this part. No amendment to this part 
shall affect the legality of actions taken prior to the effective date 
of such amendment.


Sec.  951.10  Conflicts of interest.

    (a) Bank directors and employees. (1) Each Bank's board of 
directors shall adopt a written policy providing that if a Bank 
director or employee, or such person's family member, has a financial 
interest in, or is a director, officer, or employee of an organization 
involved in a project that is the subject of a pending or approved AHP 
application, the Bank director or employee shall not participate in or 
attempt to influence decisions by the Bank regarding the evaluation, 
approval, funding, monitoring, or any remedial process for such 
project.
    (2) If a Bank director or employee, or such person's family member, 
has a financial interest in, or is a director,

[[Page 76961]]

officer, or employee of an organization involved in an AHP project such 
that he or she is subject to the requirements in paragraph (a)(1) of 
this section, such person shall not participate in or attempt to 
influence decisions by the Bank regarding the evaluation, approval, 
funding, monitoring, or any remedial process for such project.
    (b) Advisory Council members. (1) Each Bank's board of directors 
shall adopt a written policy providing that if an Advisory Council 
member, or such person's family member, has a financial interest in, or 
is a director, officer, or employee of an organization involved in a 
project that is the subject of a pending or approved AHP application, 
the Advisory Council member shall not participate in or attempt to 
influence decisions by the Bank regarding the approval for such 
project.
    (2) If an Advisory Council member, or such person's family member, 
has a financial interest in, or is a director, officer or employee of 
an organization involved in an AHP project such that he or she is 
subject to the requirements in paragraph (b)(1) of this section, such 
person shall not participate in or attempt to influence decisions by 
the Bank regarding the approval for such project.
    (c) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to adopt 
the conflict of interest policies required by this section.


Sec.  951.11  Temporary suspension of AHP contributions.

    (a) Request to Finance Board. If a Bank finds that the 
contributions required pursuant to Sec.  951.2 are contributing to the 
financial instability of the Bank, the Bank may apply in writing to the 
Finance Board for a temporary suspension of such contributions.
    (b) Board of Directors review. (1) In determining the financial 
instability of a Bank, the Board of Directors shall consider such 
factors as:
    (i) Severely depressed Bank earnings;
    (ii) A substantial decline in Bank membership capital; and
    (iii) A substantial reduction in Bank advances outstanding.
    (2) Limitations on grounds for suspension. The Board of Directors 
shall not suspend a Bank's annual AHP contributions if it determines 
that the Bank's reduction in earnings is due to:
    (i) A change in the terms of advances to members that is not 
justified by market conditions;
    (ii) Inordinate operating and administrative expenses; or
    (iii) Mismanagement.


Sec.  951.12  Affordable Housing Reserve Fund.

    (a) Deposits. If a Bank fails to use or commit the full amount it 
is required to contribute to the Program in any year pursuant to Sec.  
951.2(a), 90 percent of the unused or uncommitted amount shall be 
deposited by the Bank in an Affordable Housing Reserve Fund established 
and administered by the Finance Board. The remaining 10 percent of the 
unused and uncommitted amount retained by the Bank should be fully used 
or committed by the Bank during the following year, and any remaining 
portion shall be deposited in the Affordable Housing Reserve Fund.
    (b) Use or commitment of funds. Approval of applications for AHP 
subsidies from members sufficient to exhaust the amount a Bank is 
required to contribute pursuant to Sec.  951.2(a) shall constitute use 
or commitment of funds. Amounts remaining unused or uncommitted at 
year-end are deemed to be used or committed if, in combination with AHP 
subsidies that have been returned to the Bank or de-committed from 
canceled projects, they are insufficient to fund:
    (1) The next highest scoring AHP application in the Bank's final 
funding period of the year for its competitive application program;
    (2) Pending applications for funds under the Bank's homeownership 
set-aside programs; and
    (3) Project modifications approved by the Bank pursuant to the 
requirements of this part.
    (c) Carryover of insufficient amounts. Such insufficient amounts as 
described in paragraph (b) of this section shall be carried over for 
use or commitment in the following year in the Bank's competitive 
application program or homeownership set-aside programs.

    Dated: December 14, 2005.

    By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
[FR Doc. 05-24396 Filed 12-27-05; 8:45 am]
BILLING CODE 6725-01-P