[Federal Register Volume 71, Number 194 (Friday, October 6, 2006)]
[Rules and Regulations]
[Pages 59262-59299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8492]



[[Page 59261]]

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Part III





Federal Housing Finance Board





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12 CFR Part 951



 Affordable Housing Program Amendments; Final Rule

  Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Rules 
and Regulations  

[[Page 59262]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 951

[No. 2006-17]
RIN 3069-AB26


Affordable Housing Program Amendments

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its Affordable Housing Program regulation to remove prescriptive 
requirements, clarify certain operational requirements, provide 
additional discretionary authority in certain areas, remove certain 
authorities, and otherwise streamline and reorganize the regulation.

DATES: The final rule is effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Associate Director, 
Office of Supervision, [email protected] or 202-408-2537; Sylvia C. 
Martinez, Senior Advisor, Office of Supervision, [email protected] or 
202-408-2825; Melissa L. Allen, Program Analyst, Office of Supervision, 
[email protected] or 202-408-2524; or Sharon B. Like, Senior Attorney 
Advisor, Office of General Counsel, [email protected] or 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 facilitating Bank 
support of their members' efforts to meet the housing needs of their 
communities. The strength of the AHP 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 $2.5 
billion in AHP subsidies to assist nearly 472,000 housing units. 
Seventy percent of the units receiving AHP subsidies were for very low-
income households. AHP subsidies have proven effective 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 in 
conjunction with Low-Income Housing Tax Credits (LIHTC or tax credits), 
which are important funding sources for rental housing for very-low 
income households.
    The AHP also serves as an important resource for low- or moderate-
income homeowners and first-time homebuyers. From 1990 through 2005, 
the program assisted in the financing of over 126,000 owner-occupied 
units under the Banks' competitive application programs, and over 
47,000 units under their homeownership set-aside programs. Some of the 
units address specific housing needs, such as expanding homeownership 
opportunities for underserved households.

II. Proposed Rule

    The Finance Board's regulation implementing the AHP provisions of 
the Bank Act is codified at 12 CFR part 951. The regulation generally 
has reflected a prescriptive approach, which was appropriate for rules 
implementing a newly created program. As the program has matured, the 
Finance Board periodically has revised the AHP regulation, to provide 
greater authority to the Banks in managing their individual programs 
and codify lessons learned through oversight of the Banks' operation of 
their programs. The Finance Board believes, based in part on its review 
of the AHP on a System-wide level, 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 it can revise the regulation to provide for additional 
enhancement of the program.\1\ Accordingly, on December 28, 2005, the 
Finance Board published proposed amendments to the AHP in the Federal 
Register for a 120-day comment period, which closed on April 27, 2006. 
See 70 FR 76938 (Dec. 28, 2005). The Finance Board received a total of 
59 comment letters on the proposed rule, representing 61 commenters.\2\ 
Commenters included: All 12 Banks; 4 Bank Affordable Housing Advisory 
Councils; 3 Bank members; 13 trade associations; 9 not-for-profit 
housing developers; 5 housing advocacy and assistance organizations; 3 
State housing finance agencies; 3 for-profit housing developers; 3 
community development financial institutions; 3 individuals; 2 
wholesale financial intermediary and assistance organizations; and 1 
secondary market entity for home purchase and rehabilitation mortgages. 
The Finance Board has considered all of the comments it received on the 
proposed rule, and has determined to adopt a final rule amending the 
AHP, with a number of revisions to the proposed rule, as further 
discussed below. Comments received that were relevant to the issues 
raised in the proposed rule are discussed below. Comments that raised 
issues beyond the scope of the proposed rule are not addressed in this 
final rule, but may be considered by the Finance Board at a future 
date.
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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.
    \2\ Letters from 2 of the Banks also incorporate the comments of 
those Banks' respective Affordable Housing Advisory Councils.
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III. Analysis of the Final Rule

    As discussed in the SUPPLEMENTARY INFORMATION section of the 
proposed rule, the amendments to the AHP regulation are intended to 
address the following principal changes.
    1. The final rule incorporates additional definitions into the 
regulation at Sec.  951.1. These definitions establish the precise 
meaning of key terms that are used in the regulation.
    2. The final rule reorganizes the regulatory text so that 
operational provisions relating to the competitive application program 
and the homeownership set-aside program, respectively, are fully 
contained within separate sections of the regulation. Section 951.5 
addresses the competitive application program, while Sec.  951.6 
addresses the homeownership set-aside program. The reorganization is 
intended to make it easier for program sponsors and other interested 
parties to understand the individual operation of the competitive 
application and homeownership set-aside programs.
    3. The final rule authorizes the Banks, in their discretion, to 
provide AHP direct subsidies under the competitive application program 
for eligible projects and households involving both the lending of the 
subsidy and subsequent re-lending of subsidy principal and interest 
repayments by a revolving loan fund. This change is intended to expand 
the eligible means of supporting affordable housing through the 
program.
    4. The final rule specifies the conditions under which a Bank, in 
its discretion, may provide AHP subsidy under the competitive 
application program to loan pools. This change is intended to provide 
additional clarity for Banks that may wish to use such

[[Page 59263]]

funding vehicles to support affordable housing through the program.
    5. The final rule eliminates the existing discretionary authority 
for a Bank to prohibit applications for AHP subsidy for projects 
located outside a Bank's district. This change is in response to the 
expansion of interstate banking, which has resulted in many Bank 
members operating in markets outside a Bank's district boundaries. 
However, in response to comments received, the final rule retains the 
current discretionary scoring preference for in-district projects under 
the First District Priority, and continues to allow a Bank to adopt 
such a scoring preference under its Second District Priority.
    6. In response to comments received, the final rule retains the 
Banks' current authority to draw on AHP funds from the subsequent year 
to fund the current year's AHP, but limits the amount that may be drawn 
to an amount up to the greater of $2 million or 20 percent of the 
Bank's annual required AHP contribution for the current year, which the 
Bank would deduct from the annual required AHP contribution for the 
subsequent year. This change responds to the fact that Banks have, at 
times, found this authority to be useful for addressing housing needs 
in their districts.
    7. The final rule removes provisions in the regulation that would 
increase annually the maximum allowable dollar amount of a Bank's 
allocation to its homeownership set-aside program, and maximum 
allowable dollar amount drawn on the subsequent year's allocation under 
a Bank's homeownership set-aside and competitive application program, 
based on the annual inflation rate. This change addresses the potential 
for inflation to increase the allocation of AHP contributions to the 
homeownership set-aside program relative to the competitive application 
program.
    8. The final rule replaces certain prescriptive monitoring 
requirements in the current regulation, which detail specific 
monitoring and control processes with which a Bank must comply, with 
broadly stated monitoring objectives to be accomplished through the 
Bank's adoption and implementation of written monitoring policies for 
its competitive application and homeownership set-aside programs.
    These principal changes relative to the current rule, and other 
provisions of the final rule, including significant changes from the 
proposed rule, are discussed in greater detail below.

A. Definitions: Sec.  951.1

    Consistent with the proposed rule, the final rule revises certain 
of the existing AHP definitions and defines a number of other terms 
that are used throughout the regulation. See 12 CFR 951.1. New 
definitions are discussed below in the context of specific regulatory 
requirements. The more substantive changes are described below.
    Affordable. Consistent with the proposed rule, the final rule 
revises the existing definition of ``affordable'' by adding a 
reference, consistent with the AHP statutory term, to ``rent charged to 
a household,'' which is 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 
change clarifies the existing regulatory language, which 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. One commenter supported the proposed revision, noting that the 
change acknowledges an important distinction between unit rent and the 
household's rent payment.
    The final rule also adds a new paragraph (2) to address rents 
charged for 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, as well as rents under other 
assistance programs that are charged in the same way as under the 
Section 8 program. This provision is intended to clarify that rents 
charged to a household under such programs will be deemed to be 
``affordable'' for AHP purposes, even if the rent increases after 
initial occupancy, if the rent complied with the AHP definition of 
``affordable'' upon initial household occupancy and thereafter the 
household continues to be assisted through the program. This provision 
is applicable for purposes of the annual adjustment of targeting 
commitments after initial occupancy under Sec.  951.7(a)(5) of the 
final rule (which is re-designated from current Sec. Sec.  951.10(d) 
and 951.11(b)).
    The proposed rule would have applied this paragraph (2) only to the 
Section 8 program. Several commenters supported the change, with 1 
commenter adding that the United States Department of Agriculture 
(USDA) Rural Rental Assistance Program, at 7 CFR part 3560, charges 
rents in the same way as Section 8, and recommending that rents under 
that program be included in the AHP provision. The Finance Board 
believes that the commenter's suggestion has merit, and that the 
provision should include not only rents under the USDA program, but 
rents under any other assistance program that are charged in the same 
way as under the Section 8 program. Accordingly, the final rule adopts 
the proposed language as expanded to include rents under other 
assistance programs that are charged in the same way as under the 
Section 8 program.
    AHP project. Consistent with the proposed rule, the final rule adds 
a new definition--``AHP project''--that applies 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 applies to both single-family 
and multifamily projects. Consistent with the proposed rule, the final 
rule also makes conforming changes to the definitions of ``owner-
occupied project'' and ``rental project.'' Several commenters supported 
the proposed changes.
    Low- or moderate-income household and very low-income household. 
Consistent with the proposed rule, the final rule amends the household-
size adjustment provisions in paragraph (3) of the existing definition 
of ``low- or moderate-income household'' (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. 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 change in the final rule is intended to 
bring the AHP into conformance with other federal programs that adjust 
for household size. Several commenters supported the proposed change, 
stating that it would ensure consistency when the AHP is used with 
other federal programs.
    As discussed below, the final rule, consistent with the proposed 
rule, also relocates certain provisions of the existing definitions 
relating to when a

[[Page 59264]]

household's income must be determined, to Sec. Sec.  951.5(c)(1)(i) and 
(ii) and 951.6(c)(2)(i) for the competitive application program and the 
homeownership set-aside program, respectively.
    Median income for the area. Consistent with the proposed rule, the 
final rule removes the language ``for purposes of that entity's housing 
programs'' in the existing definition of ``median income for the 
area,'' which will enable the Finance Board to approve, upon a Bank's 
request, median income standards from sources, such as the U.S. Census 
Bureau, that publish median income data but do not have their own 
housing programs. The existing definition lists a number of median 
income standards that a Bank may adopt for purposes of determining 
household income eligibility. See 12 CFR 951.1. The regulation also 
provides that a Bank may request Finance Board approval for use 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. One commenter supported the change, citing 
the additional flexibility it would provide.
    Owner-occupied project and rental project. The final rule adopts 
the proposed amendments to the existing definitions of ``owner-occupied 
project'' and ``rental project'' 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 is relocated to the provisions 
addressing the eligibility requirements for the use of AHP subsidy, at 
Sec.  951.5(c)(1)(i) and (ii). No commenters addressed these technical 
changes.
    The proposed rule also would have added 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. In all cases, these types of housing 
have been eligible under the AHP since its inception, and the proposed 
rule sought to clarify this fact in the proposed language. However, 
some commenters misunderstood the proposed changes as indicating that 
these types of housing currently are not eligible for AHP funding. 
Based on the comments, the Finance Board has determined that the 
eligibility of manufactured housing should be further clarified as 
eligible for all AHP funding, including owner-occupied and rental 
projects under the competitive application program and owner-occupied 
units under the homeownership set-aside programs. Accordingly, the 
final rule adds the term ``manufactured housing'' not only to the 
definition of ``owner-occupied project'' but also to the definition of 
``rental project'' and to the provision on eligible uses of AHP direct 
subsidy under the homeownership set-aside program (Sec.  951.6(c)(4)). 
However, as noted by 1 commenter, whether manufactured housing is 
treated as an owner-occupied unit or a rental project depends on the 
actual use of the AHP subsidy.\3\
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    \3\ See, e.g., Finance Board Regulatory Interpretation 2000-RI-
04 (May 26, 2000) (available in the FOIA Reading Room on the Finance 
Board Web site at http://www.fhfb.gov/
Default.aspx?Page=59&ListYear=2000&ListCategory=8#8\200
0).
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    Several commenters suggested that the Finance Board restrict the 
types of manufactured housing that would be eligible housing under the 
AHP, for example, by requiring that the housing be on a permanent 
foundation. The Finance Board recognizes the benefits of placing a 
manufactured home on a permanent foundation. However, the Finance Board 
is not adopting such a requirement, because the various types of 
manufactured housing provide different and significant sources of 
affordable housing stock, including temporary shelters during an 
emergency following a natural disaster.
    Retention period. The final rule revises the proposed definition of 
``retention period'' to provide that, in the case of rehabilitated 
units that currently are occupied by the owner and do not involve a 
closing, the retention period shall commence on the date established by 
the Bank in its AHP Implementation Plan.
    The proposed rule would have provided that the retention period 
commenced on the date of completion of the rehabilitation. One 
commenter supported the proposal, while a number of commenters opposed 
it, pointing out that it can be difficult to determine with specificity 
the date that rehabilitation of an already owner-occupied unit is 
complete. The comments indicated that Banks have adopted different 
dates for the commencement of the retention period, based on local 
rehabilitation and real estate practices, and suggested that the Banks 
be given the discretion to establish the date. The Finance Board finds 
merit in the commenters' suggestions and, consequently, has revised the 
language in the final rule to require a Bank to specify in its AHP 
Implementation Plan the date that the retention period commences for 
rehabilitated units that are currently occupied by the owner and do not 
involve a closing.
    Sponsor. Consistent with the proposed rule, the final rule amends 
the existing definition of ``sponsor'' by requiring a Bank to define in 
its AHP Implementation Plan the terms ``ownership interest'' and 
``integrally involved,'' which are part of the definition of 
``sponsor.'' 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 the Bank to address concerns that 
some rental project sponsors may manipulate ownership interests in 
order to receive points as not-for-profit sponsors under the 
competitive application program's scoring system. Several commenters 
agreed that the proposal would address concerns about sponsors that are 
only nominally or initially involved in a project. Commenters concurred 
with the Finance Board that the proposal would allow the Banks to 
address projects that attempt to ``game'' the scoring system by using 
minimally involved not-for-profit sponsors to get points under the 
scoring criterion for sponsorship by a not-for-profit or government 
entity.
    Consistent with the proposed rule, the final rule also expands the 
definition of ``sponsor'' to include revolving loan funds or entities 
that operate loan pools. Those terms are used for purposes of 
implementing amendments to the competitive application program rules 
that address revolving loan funds and loan pools, respectively.
    Subsidy. The final rule adopts the proposed revisions to the 
existing definition of ``subsidy.'' Specifically, the provisions 
specifying the dates as of which the amount of the subsidy is to be 
determined are deleted, and the substance of those provisions is 
incorporated into Sec.  951.5(c)(12), which sets forth the eligibility 
requirements relating to the competitive application program. In 
addition, the term ``homeownership set-aside funds'' is removed from 
the definition of ``subsidy'' because homeownership set-aside funds are 
direct subsidies, which are included within the definition of 
``subsidy.'' No commenters addressed these technical changes.

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

    Required annual contribution: Sec.  951.2(a). Under the Bank Act, 
each

[[Page 59265]]

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); 12 CFR 
951.2. The pro rata allocation method has not been needed since the 
Banks' annual contributions based on the 10 percent of income formula 
have exceeded $100 million. Nonetheless, consistent with the proposed 
rule, Sec.  951.2(a)(2) of the final rule revises the existing 
provision to clarify that if the pro rata allocation method is used in 
any future year, the required annual contribution for any Bank shall 
not exceed its net earnings for the previous year. This primarily is 
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. Several 
commenters supported the change.
    Net earnings of a Bank: Sec.  951.1. Consistent with the proposed 
rule, Sec.  951.1 of the final rule revises the existing definition of 
``net earnings of a Bank'' to clarify existing practice with respect to 
how a Bank's earnings are defined for purposes of calculating its 
required AHP contribution. See 12 CFR 951.1. Each Bank must present its 
financial statements 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), requires the Banks to classify 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 on the 
statement of income. 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 (the Resolution Funding Corporation 
obligations) 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 are treated as interest expense in 
the calculation of GAAP net income. One commenter supported the change.
    Allocation of contributions: Sec.  951.2(b). Consistent with the 
proposed rule, the final rule relocates the allocation of contributions 
provisions for the competitive application program and homeownership 
set-aside program in existing Sec.  951.3(a) to Sec.  951.2(b), as they 
relate to the requirements for AHP contributions, which are set forth 
in Sec.  951.2. No comments addressed this technical change.
    AHP subsidies are disbursed through a Bank's competitive 
application program and its homeownership set-aside program. Under the 
existing regulation, 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 allot (or 
accelerate) additional amounts from the subsequent year's AHP 
contribution, up to the greater of $3 million or 25 percent of the 
Bank's annual required AHP contribution for the following year, to the 
current year's homeownership set-aside program.
    In addition to those amounts, under the current regulation, 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 homeownership 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 homeownership set-aside program exceeds the amount of available 
AHP subsidy for a particular year, a Bank may allot an additional 
amount from the subsequent year's AHP contribution, up to the greater 
of $1.5 million or 10 percent of the Bank's annual required AHP 
contribution for the subsequent year, to the current year's first-time 
homebuyer set-aside program. Under the competitive application program, 
a Bank currently may allot up to the greater of $3 million or 25 
percent of its annual required AHP contribution for the subsequent 
year, to the current year's competitive application program. 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), (a)(2).
    Removal of CPI adjustment provisions. Consistent with the proposed 
rule, the final rule removes the existing provision authorizing an 
annual CPI adjustment of the caps on the dollar amounts, including 
amounts allotted from the subsequent year, that may be allocated to the 
homeownership set-aside programs, principally because it has the 
potential over time to increase disproportionately the amounts 
allocated to the homeownership set-aside programs versus the 
competitive application program. See 12 CFR 951.3(a)(1)(iii). In 
addition, the provision authorizing a CPI adjustment of any amount 
allotted from the subsequent year under the competitive application 
program, as provided under existing Sec.  951.3(a)(2), is eliminated. 
Several commenters supported the changes, with 1 commenter stating that 
the changes are needed to ensure some parity between the homeownership 
set-aside and competitive application programs.
    Consolidation of separate homeownership set-aside program 
authorities: Sec.  951.2(b)(2). Consistent with the proposed rule, 
Sec.  951.2(b)(2) of the final rule retains 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 eliminates the first-time 
homebuyer set-aside program authority as a separate and distinct 
authority. See 12 CFR 951.3(a)(1). The final rule replaces the existing 
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 reflects a comparable commitment to first-time 
homebuyers. 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 allocating funds 
under the separate homeownership set-aside authority that specifically 
targets first-time homebuyers. Therefore, the Finance Board believes 
the change will simplify the regulation without causing a material 
change in the allocation of homeownership set-aside funds to first-time 
homebuyers.
    A number of commenters supported the change. One commenter 
requested clarification on whether one-third of any amount allocated 
and not actually disbursed by a Bank for its homeownership set-aside 
programs in a given year must be targeted to first-time homebuyers. 
Consistent with current practice, the ``allocation'' language in the 
rule makes clear that the one-third

[[Page 59266]]

requirement applies to the amount allocated and not to the amount 
actually disbursed.
    Several commenters suggested that the one-third allocation include 
households displaced by natural disasters, rather than be limited to 
first-time homebuyers. The Banks may use their remaining allocation of 
homeownership set-aside funding to assist households displaced by 
natural disasters. In addition, a Bank may request a waiver from the 
Finance Board to use its first-time homebuyer allocation for other 
purposes.
    Additional funding authority: Sec.  951.2(b)(3). Section 
951.2(b)(3) of the final rule revises the proposal by providing that a 
Bank may draw on AHP funds from the subsequent year to fund the current 
year's AHP, up to an amount equal to the greater of $2 million or 20 
percent of the Bank's annual required AHP contribution for the current 
year. The Bank would deduct the amount from the annual required AHP 
contribution for the subsequent year. The proposed rule would have 
removed the 2 existing provisions authorizing such allotment for the 
competitive application and homeownership set-aside programs. See 12 
CFR 951.3(a)(1)(i) and (ii) and (a)(2). The Banks have not often used 
this authority, although 1 or 2 Banks may do so in a year. The existing 
authority may present operational difficulties because it may require 
the Banks to project future earnings in order to determine how much 
they may allot to the current year, and these projections may fall 
short. Basing the authority on the known amount of the current year's 
contribution eliminates uncertainty about the maximum permissible 
amount that the Bank may allot from the subsequent year's required AHP 
contribution to the current year's AHP funding levels.
    A number of commenters supported eliminating this authority from 
the homeownership set-aside and competitive application programs, 
citing operational difficulties. However, a Bank and its Advisory 
Council stated that the Bank has not found the authority to be 
difficult to administer. A number of other commenters favored retaining 
the authority, stating that it has been an important tool for the Banks 
to meet housing demand and to respond to the need for emergency owner-
occupied housing and rehabilitation following natural disasters. 
Commenters also noted that some Banks have used the authority to ensure 
some minimum availability of AHP funding when reduced Bank earnings 
cause a significant decrease in AHP contributions in a given year. 
Several commenters suggested that the Finance Board retain the 
authority provision but further limit the amount of AHP funds that may 
be allotted from the subsequent year.
    Based on the comments, the Finance Board recognizes that the 
authority may be helpful for Banks in responding to housing needs in 
their districts and the need for emergency housing and rehabilitation 
following natural disasters, but believes that the authority should be 
limited in scope and calculated based on the current year's required 
AHP contribution to minimize potential operational and compliance 
difficulties with the subsequent year's allocation requirement. A Bank 
could request a waiver from the Finance Board of the funding limits in 
the event that those limits are not sufficient to address specific 
housing needs in the Bank's district. Consequently, the final rule 
allows a Bank to allot AHP funds from the subsequent year to fund the 
current year's AHP, up to an amount equal to the greater of $2 million 
or 20 percent of its annual required AHP contribution for the current 
year, which the Bank would deduct from its annual required AHP 
contribution for the subsequent year.

C. AHP Implementation Plan: Sec.  951.3

    Adoption of Plan: Sec.  951.3(a). Consistent with the proposed 
rule, Sec.  951.3(a) of the final rule reorganizes and streamlines 
requirements for a Bank's AHP Implementation Plan to conform them to 
amendments to other parts of the AHP regulation. See 12 CFR 951.3(b). 
The changes 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 final rule also 
adopts the proposed requirement that the AHP Implementation Plan 
include the Banks' retention agreement requirements.
    A number of commenters supported the changes to the requirements 
for the AHP Implementation Plan, but expressed concern that they would 
require a Bank to include all of its policies and procedures in its 
Plan, which would make for a cumbersome document and complicate the 
Bank's process for amending the policies and procedures. The Finance 
Board intends that a Bank's program requirements, such as its scoring 
guidelines, but not its implementing operating procedures, be included 
in the Plan. A Bank may reference its operating procedures in the Plan 
so that AHP participants will be aware of their existence and make them 
available upon request.
    Notification of Plan amendments: Sec.  951.3(c). Section 951.3(c) 
of the final rule adopts the proposed requirement that a Bank notify 
the Finance Board within 30 days of amending its AHP Implementation 
Plan. Several commenters supported the change.
    Public access: Sec.  951.3(d). Section Sec.  951.3(d) of the final 
rule adopts the proposed requirement that a Bank make the amended AHP 
Implementation Plan publicly available through its Web site within 30 
days after adoption of the amendments. Under the current rule, the Bank 
must submit all amendments to the Finance Board and make its AHP 
Implementation Plan available to members of the public upon request. 
See 12 CFR 951.3(b)(4), (b)(5). Making the AHP Implementation Plan 
available through the Banks' Web sites 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. A 
number of commenters supported the change as increasing transparency 
and accountability and noted that most of the Banks have now placed 
their AHP Implementation Plans on their Web sites.

D. Advisory Councils: Sec.  951.4

    The final rule makes a number of revisions to the existing 
provisions addressing 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: Sec.  951.4(b). Section 951.4(b) 
of the final rule adopts the proposed requirement that each Bank adopt 
policies governing the appointment process for Advisory Council 
members. In addition, the final rule requires each Bank to appoint 
Advisory Council members to terms of 3 years, except that a Bank may 
appoint members for terms of 1 or 2 years as a transitional measure 
solely for purposes of achieving the necessary staggering of the 3-year 
terms.
    Proposed Sec.  951.4(b) would have required each Bank to appoint 
members to terms of ``up to'' 3 years. This proposal was 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, by allowing the Banks to 
appoint as a transitional measure 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 Advisory

[[Page 59267]]

Council as a whole while achieving appropriate staggering of terms. 
Under the current rule, the Banks must appoint members of the Advisory 
Council to 3-year terms. See 12 CFR 951.4(d).
    A number of commenters supported the proposal, stating that it 
would allow for better balance of expiring terms and provide greater 
continuity of the Advisory Council membership. Other commenters raised 
concerns that the proposal would allow the Banks as a routine matter to 
appoint Advisory Council members to terms of 1 year and 2 years in 
addition to 3 years, creating positions of unequal power and resulting 
in greater turnover and loss of members with AHP knowledge and 
expertise. The Finance Board's intent in proposing the change was to 
allow the Banks the flexibility to appoint members to shorter terms 
when necessary as a transitional measure to reconfigure the staggering 
of the 3-year terms on the Advisory Councils. Although the Banks 
originally set staggering of the 3-year terms beginning in January 
1998, when the current AHP regulation became effective, the Banks have 
found it necessary to reset the staggering from time to time. The 
Finance Board has acted on a number of Bank requests, through waivers 
or no-action letters, to allow the Banks to readjust staggering by 
appointing some members to terms of less than 3 years. The Finance 
Board recognizes the concerns of the commenters, but also recognizes 
the need of the Banks for flexibility to stagger the Advisory Council 
member terms. Consequently, the language is revised in the final rule 
to provide that Advisory Council terms shall be for 3 years, except 
that a Bank may appoint members for terms of 1 or 2 years as a 
transitional measure solely for purposes of achieving the necessary 
staggering of the 3-year terms.
    Election of officers: Sec.  951.4(c). Consistent with the proposed 
rule, Sec.  951.4(c) of the final rule imposes 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, election of 
such officers. See 12 CFR 951.4(e). Several commenters supported the 
change.
    Duties: Meetings with the Banks: Sec.  951.4(d)(1)(ii). Consistent 
with the proposed rule, Sec.  951.4(d)(1)(ii) of the final rule revises 
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 
subsidies between the competitive application and homeownership set-
aside programs; the AHP Implementation Plan; eligibility criteria for 
each program; scoring criteria and related definitions for the 
competitive application program; and any priority criteria for the 
homeownership set-aside program. A number of commenters supported the 
changes, stating they would strengthen communication among the Bank's 
board, the Advisory Council, and the public.
    Annual Advisory Council analysis; public access: Sec.  951.4(d)(3). 
Section 951.4(d)(3)(i) of the final rule adopts the proposed extension 
of the deadline by which the Advisory Council must submit its annual 
analysis of the Bank's low- and moderate-income housing and community 
lending activity to the Finance Board from March 1 to May 1. See 12 CFR 
951.4(f)(3). The proposed change in the due date was intended to 
respond to requests received from some of the Advisory Councils, which 
meet at least quarterly, for additional time after the end of each 
calendar year to prepare, review, and approve their report. A number of 
commenters supported the change in the due date, with 1 commenter 
stating that it would offer the Advisory Council a better opportunity 
to summarize the accomplishments of the year.
    Section 951.4(d)(3)(ii) of the final rule adopts the proposed 
requirement that each Bank publish the Advisory Council analysis on its 
publicly available Web site within 30 days of its submission to the 
Finance Board. Making the Advisory Councils' analyses available to the 
public through the Banks' Web sites is intended to promote greater 
transparency and accountability in the Banks' AHP and in the work of 
the Banks' Advisory Councils. A number of commenters supported the 
change, stating that it would increase transparency and accountability.
    No delegation: Sec.  951.4(f). Section 951.4(f) of the final rule 
prohibits a Bank's board of directors from delegating to Bank officers 
or other Bank employees its responsibility for appointing Advisory 
Council members and meeting with the Advisory Council at the quarterly 
meetings required by the Bank Act. See 12 U.S.C. 1430(j)(11). 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 in general the Bank boards 
could improve their interactions with their Advisory Councils. See 12 
U.S.C. 1430(j)(11); Horizontal Review at 23.
    Several commenters supported the proposal, stating that it would 
improve the Bank board's understanding of affordable housing issues. A 
Bank and its Advisory Council opposed the proposal, believing it would 
add to the duties and responsibilities of the Bank's board and apply to 
Advisory Council meetings beyond the quarterly meetings with the Bank's 
board that are required by the Bank Act. It was not the Finance Board's 
intent to prohibit Bank staff from meeting with the Advisory Councils 
at times other than the Bank boards' quarterly meetings with the 
Advisory Councils. Consequently, the language is revised in the final 
rule to clarify that the prohibited delegation applies only to the 
statutorily-required quarterly meetings between the Banks' boards and 
their Advisory Councils.

E. Competitive Application Program: Sec.  951.5

    Consistent with the proposed rule, the final rule consolidates 
existing regulatory provisions governing the operation of the 
competitive application program into a single section of the AHP rule--
Sec.  951.5. Under the current regulation, some of those provisions are 
located in different sections of the regulation. A number of commenters 
supported the proposed reorganization, streamlining, and consolidation 
of the regulatory provisions. Commenters stated that these technical 
revisions would be helpful for the Banks, members, and sponsors in 
understanding the specific requirements of the competitive application 
and homeownership set-aside programs. The principal revisions to the 
existing regulatory structure are described below.
    Removal of optional nonmember applicants provision: Sec.  
951.5(b)(2). Consistent with the proposed rule, Sec.  951.5(b)(2) of 
the final rule eliminates the current discretionary authority for 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). A trade association opposed the proposed change, stating 
that the AHP offers an incentive for nonmember institutions to join the 
Banks and the current regulatory provision remains an important 
membership recruitment tool for the Banks. The Finance Board notes that 
the AHP would remain a membership recruitment tool under the final rule 
as the institution can apply for AHP funds once it is a member.

[[Page 59268]]

    A Bank opposed the proposal, stating that where a member that 
intends to submit AHP applications on behalf of sponsors is merged into 
a nonmember, and the nonmember intends to apply for Bank membership, 
the proposal would prohibit the nonmember from continuing the process 
of submitting to the Bank the AHP applications for those sponsors for 
an imminent funding round. The Bank noted that this would result in the 
AHP activities of the nonmember being prohibited for as much as 180 
days. See 12 CFR 925.24(b). The Finance Board believes that such an 
event would be rare, and the Bank has alternatives to address the 
matter so that the sponsors could compete for funding at that time, 
such as by assisting the sponsors in identifying another member to 
submit the application.
    Eligibility requirements: Sec.  951.5(c). Consistent with the 
proposed rule, Sec.  951.5(c) of the final rule sets out the 
eligibility requirements that apply in connection with the receipt of 
AHP subsidies under the competitive application program.
    Timing of household income-eligibility determination: Sec.  
951.5(c)(1). Consistent with the proposed rule, the final rule 
relocates the current provisions on timing of household income 
eligibility from the definitions of ``low- or moderate-income 
household'' and ``very low-income household'' in Sec.  951.1 to Sec.  
951.5(c)(1). In addition, consistent with the proposed rule, the final 
rule incorporates 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: Sec.  951.5(c)(2). The final rule permits a Bank, 
in its discretion, to permit a project's sources of funds to include or 
exclude the estimated market value of in-kind donations and voluntary 
professional labor or services (excluding the value of sweat equity), 
provided that the project's uses of funds also include or exclude, 
respectively, the value of such estimates. The existing regulation 
requires that, for purposes of determining a project's eligibility, the 
project must 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 have maintained this requirement, but would have eliminated 
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 (excluding the value of sweat 
equity) as sources of funds. See 12 CFR 951.5(b)(2)(i)(B). By focusing 
the analysis on cash sources and uses, the sponsor can streamline the 
analysis, as non-cash contributions are exactly offset by the amount of 
non-cash expenses they cover and, therefore, cancel out of the 
comprehensive sources and uses of funds analysis. For example, a 
contribution of materials (in-kind) is a source that reduces the need 
for cash payments by exactly its value. The Finance Board stated in the 
SUPPLEMENTARY INFORMATION section of the proposed rule that experience 
since 1998 indicated that estimates of non-cash costs generally do not 
affect the amount of subsidy needed for a project, and that eliminating 
this requirement also would obviate the need for Regulatory 
Interpretation 1999-RI-03 (Jan. 26, 1999),\4\ which already had 
eliminated this requirement for self-help homeownership projects 
involving such non-cash costs.
---------------------------------------------------------------------------

    \4\ 1999-RI-03 is available in the FOIA Reading Room on the 
Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=59&ListCategory=8#8. 
---------------------------------------------------------------------------

    One commenter opposed the proposal, stating that if estimates of 
non-cash costs generally do not affect the amount of subsidy needed for 
a project, then it should not matter whether or not a project includes 
non-cash sources and uses in its development budget, and the rule 
should leave it to the Bank's discretion whether the development budget 
may include such items. This commenter stated that sponsors must make 
these estimates as line items in their budgets for funding from certain 
federal programs such as Low-Income Housing Tax Credits and Community 
Development Block Grants, and the regulation should not require them to 
do separate budgets for the AHP. The Finance Board finds the comment 
persuasive. Accordingly, the final rule provides a Bank with the 
discretion to determine whether estimates of market value of in-kind 
donations and voluntary professional labor or services (excluding the 
value of sweat equity) may be a required component in determining a 
project's source of funds along with the identical value included as a 
use of funds.
    Section 951.5(c)(2)(ii) of the final regulation also includes a 
requirement for how a self-help homeownership sponsor that provides 
permanent financing must account for the value of cash payments that it 
will receive from the purchaser of the home when determining the 
sponsor's cash sources of funds. Several commenters were concerned that 
rescinding 1999-RI-03 also would remove a provision relating to the 
determination of cash sources of funds for such sponsors. The 
Regulatory Interpretation provides that, in performing the cash sources 
and uses of funds analysis, the sponsor's cash contribution must 
include the present value, rather than the face value, of any payments 
the sponsor is to receive from the homebuyer, i.e., any cash down 
payment from the buyer plus the present value of any below-market 
purchase note the sponsor holds on the unit. If such a note carries a 
market interest rate commensurate with the credit quality of the 
borrower (market rate), the present value of the note equals the face 
value of the note. If the note carries an interest rate below the 
market rate, the present value of the note can be determined using the 
market rate to discount the cash flows.
    The commenters stated that, without the provision in 1999-RI-03, 
such sponsors would be required to include the face value of the 
mortgage payments received rather than the discounted amount, which 
would result in the development budget for these types of projects 
showing cash sources of funds in excess of cash uses, i.e., no need for 
AHP subsidy, thereby making such projects ineligible to receive AHP 
subsidy. The Finance Board concurs that the provision related to the 
use of the net present value should continue to apply to sponsor-
financed self-help housing, and the final rule codifies the 1999-RI-03 
provision in Sec.  951.5(c)(2)(ii).
    The final rule also adopts the proposal that would make the need 
for subsidy requirement independent of the project developmental and 
operational feasibility requirements. These feasibility requirements 
are separate assessments and, therefore, should not be linked to the 
need for subsidy requirement. The Finance Board stated in the 
SUPPLEMENTARY INFORMATION section of the proposed rule that this change 
also may have the effect of more competition by smaller projects and 
projects with higher production or operating costs, such as projects 
with services or more common space, and several commenters agreed that 
this could be a result of the proposed change.
    Project costs: Sec.  951.5(c)(3). Section 951.5(c)(3)(i) of the 
final rule adopts the proposed clarification that the determination of 
project costs is a separate eligibility requirement, and removes an 
existing requirement that project costs be ``customary'' and

[[Page 59269]]

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, a Bank is still required to establish 
feasibility and cost guidelines as a basis for evaluating project 
costs, but must determine whether an individual project's costs are 
reasonable by taking into account the geographic 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, which affect the project's costs. The changes are 
intended to make the eligibility review process more adaptive to 
projects such as those serving special needs populations, and other 
projects that may require special architectural features or other 
amenities appropriate to their location.
    Several commenters supported the proposal as providing additional 
flexibility for a Bank to assess project costs based on the 
characteristics of individual projects, taking into consideration 
factors that could increase costs in determining whether a project's 
costs are reasonable. Some commenters stated, however, that the 
proposed language could be read to require a Bank's feasibility 
guidelines to reflect a variety of characteristics for different 
project types. This was not the intent of the proposal. Accordingly, 
the language in the final rule is reworded to state that the Bank's 
feasibility guidelines themselves need not include characteristics for 
different project types.
    As discussed above under Need for Subsidy, the proposed rule would 
have eliminated the existing provision in Sec.  951.5(b)(2)(i)(B) that 
requires, for purposes of a Bank's sources and uses of funds analysis, 
that the Bank include as sources of funds estimates of the market value 
of in-kind donations and volunteer professional labor or services 
(excluding the value of sweat equity) committed to the project. See 12 
CFR 951.5(b)(2)(i)(B). Several commenters objected that removal of this 
provision would result in payment of a lower developer's fee where the 
fee is calculated as a percentage of the project's total development 
costs, as the total development costs amount would be lower. One 
commenter stated that this consequence would be particularly difficult 
for small, not-for-profit housing producers, especially in rural areas, 
that rely on income from the developer's fee for their continuing 
operations. Commenters stated that the Banks should be given discretion 
to include in-kind donations and volunteer professional labor or 
services as part of total development costs in the budget. The Finance 
Board believes the comments have merit. Accordingly, Sec.  
951.5(c)(3)(i)(B) of the final rule allows a Bank to include estimates 
of the market value of in-kind donations and volunteer professional 
labor or services (excluding the value of sweat equity) in total 
development costs for purposes of calculating the developer's fee. The 
Bank would continue to be required to determine, after calculating the 
fee, that it is a reasonable fee pursuant to the Bank's project cost 
guidelines, as required by Sec.  951.5(c)(3)(i)(A) of the final rule.
    Project feasibility: Sec.  951.5(c)(4). Consistent with the 
proposed rule, Sec.  951.5(c)(4) of the final rule separates the 2 
aspects of project feasibility--developmental feasibility of a project 
and, in the case of rental housing, operational feasibility of the 
project over time--and defines the terms. These 2 types of project 
feasibility are not differentiated in the existing rule. Section 
951.5(c)(4)(i) requires 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. Section 951.5(c)(4)(ii) requires 
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.
    A Bank and its Advisory Council supported the proposal, stating 
that it would allow the Banks more flexibility in addressing project 
needs based on a variety of factors that can influence development 
costs and operational budgets.
    Financing costs: Sec.  951.5(c)(5). Consistent with the proposed 
rule, the final rule makes a technical 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 
Sec.  951.5(c)(5) of the final rule. See 12 CFR 951.5(b)(2)(iii). The 
final rule also clarifies that this provision applies to loans made for 
the project in conjunction with the AHP subsidy.
    Refinancing: Sec.  951.5(c)(8). Section 951.5(c)(8) of the final 
rule adopts a proposed technical change regarding the use of AHP 
subsidies in connection with a refinancing of a project. See 12 CFR 
951.5(b)(6). The change clarifies that refinancing is permitted only if 
it generated equity proceeds and if the proceeds are used to purchase, 
construct, or rehabilitate eligible housing units. The change also 
clarifies 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. No comments addressed this 
technical change.
    Project sponsor qualifications: Sec.  951.5(c)(10). Consistent with 
the proposed rule, Sec.  951.5(c)(10)(ii) and (iii) of the final rule 
revises 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. See 12 CFR 951.5(b)(8). These issues are 
discussed separately below under the sections addressing use of the AHP 
subsidy by revolving loan funds and loan pools.
    Calculation of AHP subsidy: Sec.  951.5(c)(12). Consistent with the 
proposed rule, Sec.  951.5(c)(12) of the final rule, which relates to 
the calculation of the AHP subsidy, incorporates, without change, the 
existing provisions regarding the time at which the calculation of 
subsidy is to be made, which currently is included as part of the 
definition of ``subsidy'' in Sec.  951.1. No comments addressed this 
technical change.
    Lending and re-lending of AHP direct subsidy by revolving loan 
funds: Sec.  951.5(c)(13). General requirements: Consistent with the 
proposed rule, the final rule authorizes a Bank, in its discretion, to 
provide AHP direct subsidy under its competitive application program 
for eligible projects and households involving both the lending of the 
subsidy and subsequent lending of subsidy principal and interest 
repayments by a revolving loan fund. The final rule further provides 
that 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, would have to meet AHP eligibility requirements, as 
applicable depending on whether the subsidy is used for initial lending 
or for subsequent lending, as discussed below. The revolving loan fund 
also would have to assure that the initial loans are made to projects 
and households that meet the commitments made in the approved AHP 
application, and that they will be met for the full AHP retention 
period. In order to exercise this authority, a Bank would have to 
consult with its Advisory Council and then adopt written policies 
governing

[[Page 59270]]

the disbursement of the AHP direct subsidy through this type of entity.
    A number of commenters supported allowing the Banks to provide AHP 
direct subsidy to revolving loan funds as proposed, stating that it 
could maximize the impact of the direct subsidy because using loans 
rather than grants allows the financial benefit of the subsidy to be 
leveraged many times over. One commenter stated that it would meet a 
need for small, flexible-term loans for a broad range of purposes. 
Another commenter stated that it would benefit rural areas that are 
losing affordable housing, as revolving loan funds are better able to 
match the capital needs of smaller scale, scattered-site development 
efforts typical in rural areas.
    Other commenters opposed the proposal, stating that it would be 
unworkable because of difficulties with scoring, monitoring and 
compliance. A commenter stated that lending the AHP direct subsidy 
would erode the value of the AHP grants. Several commenters stated that 
revolving loan funds charge interest or fees that increase project 
costs, thereby effectively reducing the amount of AHP subsidy passing 
through to the project, and projects that cannot support debt service 
would not be able to benefit from revolving loan funds using direct 
subsidy as loan principal instead of grants. The Finance Board 
acknowledges these potential concerns, but notes that under the 
regulation no Bank would be obligated to accept applications from a 
revolving loan fund. The authority in the rule is permissive, not 
mandatory. The Finance Board believes that revolving loan funds can 
provide opportunities for the benefits of the AHP to reach harder-to-
serve populations, such as those in rural areas or those with special 
needs. By allowing revolving loan funds to lend and re-lend direct 
subsidy, the regulation will enable entities specializing in community 
development lending to leverage additional funds for low-income 
borrowers, or bring added value to the services provided by not-for-
profit corporations and local governments, and provide technical 
assistance that can contribute to project success and help develop 
capacity of small, not-for-profit housing producers.
    As noted previously, Sec.  951.1 of the final rule expands the 
definition of ``sponsor'' to specify revolving loan funds in the list 
of eligible sponsors. Section 951.1 of the final rule defines a 
``revolving loan fund'' as a capital fund established to make mortgage 
or other loans whereby loan principal is repaid into the fund and re-
lent to other borrowers. Commenters questioned whether members would 
qualify as revolving loan funds under the rule, noting that if members 
could not qualify, the rule would give revolving loan funds an unfair 
competitive advantage over members in access to AHP funds. Members are 
eligible to apply for AHP subsidy as revolving loan funds if they meet 
the definition of ``revolving loan fund'' and the project sponsor 
qualifications requirement in the final rule.
    The Finance Board notes that revolving loan funds currently can and 
do apply as sponsors under the competitive application program for AHP 
subsidy for funding specified projects. Under Sec.  951.5(c)(13)(i) of 
the final rule, in a Bank's discretion, a revolving loan fund would be 
able to apply for direct subsidy to lend to a specified or an 
unspecified project (or projects) meeting the requirements of the 
competitive application program and to re-lend repayments of that 
subsidy to subsequent projects that meet certain minimum eligibility 
requirements. A number of commenters stated that it was not clear how 
an application for an unspecified project could meet the eligibility 
requirements for project feasibility and project costs. To address 
these issues, Sec.  951.5(c)(13)(i) and (ii) of the final rule provides 
that an application for an unspecified project to be funded through a 
revolving loan fund must include the revolving loan fund's criteria for 
lending of the subsidy, including its project cost and project 
feasibility guidelines, which the Bank will evaluate according to the 
AHP eligibility requirements, including the Bank's project cost and 
project feasibility guidelines. See Sec.  951.5(c)(3) and (c)(4) of 
final rule. Pursuant to Sec.  951.7(a)(1) of the final rule, upon 
initial monitoring of the actual project(s) funded with the initial 
lending of subsidy, the Bank will have to determine that the actual 
project costs were reasonable in accordance with the Bank's project 
cost guidelines, and that the subsidy was needed in accordance with 
Sec.  951.5(c)(2).
    Section 951.5(c)(13)(ii) of the final rule provides that a Bank 
shall review an application from a revolving loan fund to evaluate the 
project or criteria for the initial lending of the subsidy, as 
applicable, pursuant to the Bank's scoring guidelines. Some commenters 
questioned how an application for an unspecified project(s) could be 
scored against other applications for projects. Under Sec.  
951.5(c)(13)(i), an application with nonspecific project(s) would have 
to propose how the project(s) will meet various applicable scoring 
criteria and, if approved, the revolving loan fund would have to ensure 
that the actual project or projects eventually funded with the initial 
lending of subsidy would meet those scoring criteria. If, upon initial 
monitoring of the project, the Bank found that the project did not meet 
the scoring criteria and could not be modified under Sec.  951.5(f), 
then the revolving loan fund would have to repay the AHP subsidy to the 
Bank. Many revolving loan funds operating for the purpose of financing 
housing for very low- and low- or moderate-income households either 
restrict their funding to projects with certain requirements, such as 
housing for the elderly, or have a pipeline of potential projects. 
Consequently, the Finance Board believes that an application can be 
scored based on the proposed characteristics of an unspecified project.
    An application with unspecified project(s) must still meet the 
eligibility requirement in Sec.  951.5(c)(6) that the project must be 
likely to begin drawing down some or all of the AHP subsidy or use it 
to procure other financing commitments within 12 months of the date of 
the application's approval. The Finance Board does not intend that 
approved AHP subsidy lay idle for significant periods of time.
    Section 951.5(c)(13)(iv) of the final rule also provides that 
payments of interest on the lending of the AHP direct subsidy must be 
used by the revolving loan fund in accordance with the requirements for 
subsequent lending of AHP direct subsidy in that section. Some 
commenters opposed allowing interest earned on the lending of the AHP 
subsidy to be used for general operating support of the revolving loan 
fund or the sponsor, and the Finance Board concurs. Under Sec.  
951.13(d)(3) of the current AHP regulation, a member or sponsor that 
lends AHP direct subsidy to a project must pay any repayments of 
principal and payments of interest forthwith to the Bank for use by 
other AHP-eligible projects. See 12 CFR 951.13(d)(3). Requiring a 
revolving loan fund to return interest payments to its lending fund and 
use them for AHP-eligible purposes in accordance with the subsequent 
lending provisions is consistent with this existing requirement. In 
addition, Sec.  951.9(a)(9) of the final rule revises existing Sec.  
951.13(d)(3) to provide for an exception to the requirement that 
repayments of principal and payments of interest must be paid to the 
Bank in the case of lending and re-lending of direct subsidy by a 
revolving loan fund.
    Initial lending of AHP direct subsidy: Sec.  951.5(c)(13)(iii): 
Section 951.5(c)(13)(iii)(A) of the final rule provides that, once its 
application is

[[Page 59271]]

approved, a revolving loan fund may lend direct AHP subsidy to 1 or 
more projects or households, as needed to use the full amount of 
subsidy approved, that meet the eligibility criteria of Sec.  951.5(c) 
and the commitments made in the approved AHP application. Like all 
other approved projects, the project or projects funded as part of the 
revolving loan fund's initial lending of the AHP direct subsidy are 
subject to AHP retention agreements, and to initial and long-term 
monitoring, as applicable according to whether the housing is owner-
occupied or rental. The revolving loan fund may re-lend subsidy 
principal and interest repayments received in accordance with the 
``subsequent lending'' requirements described below.
    Section 951.5(c)(13)(iii)(B) of the final rule provides that if an 
initial-lending project or owner-occupied unit is not in compliance 
with the commitments in the approved AHP application, or is sold or 
refinanced prior to the end of the applicable AHP retention period, the 
required amount of AHP subsidy must be repaid to the revolving loan 
fund in accordance with Sec. Sec.  951.8 and 951.9 of the final rule. 
The revolving loan fund must re-lend such repaid subsidy, excluding the 
amounts of AHP subsidy principal already repaid to the revolving loan 
fund, to another project or owner-occupied unit meeting the initial 
lending requirements for the remainder of the retention period. For 
example, if an initial-lending rental project is sold after 8 years and 
the buyer does not commit to maintain the AHP income-targeting and 
affordability commitments, then the revolving loan fund must re-lend 
the repaid subsidy to another eligible project meeting the initial 
lending requirements that will have a retention period of 7 years in 
order to complete the full 15-year retention period required for an 
initial-lending rental project. In this case, the amount of subsidy 
that must be used for another initial-lending project does not include 
the amounts of AHP subsidy principal already repaid to the revolving 
loan fund.
    Subsequent lending of AHP subsidy principal and interest 
repayments: Sec.  951.5(c)(13)(iv): Section 951.5(c)(13)(iv)(B) of the 
final rule provides that subsequent lending of AHP subsidy principal 
and interest repayments must be for the purchase, construction, or 
rehabilitation of owner-occupied units for households with incomes at 
or below 80 percent of the median income for the area, or of rental 
projects where at least 20 percent of the units are occupied by and 
affordable for households with incomes at or below 50 percent of the 
median income for the area, and must meet all other eligibility 
requirements in Sec.  951.5(c). Section 951.5(c)(13)(iv)(C) provides 
that a Bank may, in its discretion, require the revolving loan fund's 
subsequent lending of AHP subsidy principal and interest repayments to 
be subject to retention period, monitoring, and recapture requirements 
as defined by the Bank in its AHP Implementation Plan. A number of 
commenters expressed concerns about the revolving loan fund sponsor 
having to monitor revolved payments of AHP subsidy over the long-term 
retention period. Some commenters stated that the monitoring 
requirements would be extremely difficult or unworkable, and would be 
different than those applicable under the final rule for projects that 
do not involve revolving loan funds. Commenters recommended various 
approaches to the monitoring of the revolved subsidy, including that: 
The Bank have flexibility to determine whether to require monitoring 
over a long-term period (as proposed); the sponsor be allowed to 
commingle the AHP funds with its other funds but be required to 
separately account for the AHP funds through an annual A-133 type 
audit; the Bank be allowed to monitor the performance of the revolving 
loan fund rather than the individual households or properties; and the 
monitoring period be limited to 5 years or until the AHP direct subsidy 
is rolled over twice. The Finance Board recognizes the potential 
problems that monitoring for subsequent lending of the repaid subsidy 
could entail. As discussed above, only projects funded with the 
revolving loan fund's initial lending of subsidy would be subject to 
the monitoring requirements applicable to all projects under the 
competitive application program. The Bank, in its discretion, may 
decide what, if any, monitoring, retention, or recapture requirements 
should apply to subsequent lending of the repaid AHP subsidy.
    Section 951.5(c)(13)(iv)(A) of the final rule also provides that a 
revolving loan fund, in its discretion, may provide part or all of the 
AHP subsidy principal and interest repayments as nonrepayable grants to 
eligible projects under the ``subsequent lending'' requirements. Under 
Sec.  951.5(c)(13)(v), the revolving loan fund must return to the Bank 
any AHP subsidy that will not be used for AHP-eligible purposes.
    Several commenters wanted to ensure that the Finance Board or the 
Banks would not set the interest rate that a revolving loan fund could 
charge for lending the AHP direct subsidy. The final rule does not set 
the interest rates that a revolving loan fund can charge; however, a 
revolving loan fund's interest rates must be reasonable and comply with 
the financing costs requirement of Sec.  951.5(c)(5).
    Revolving loan fund sponsor qualifications: Sec.  951.5(c)(10(ii): 
Consistent with the proposed rule, Sec.  951.5(c)(10)(ii) of the final 
rule provides that, pursuant to written policies adopted by a Bank's 
board, a revolving loan fund sponsor that intends to use the AHP 
subsidy in accordance with this section must: (i) Provide audited 
financial statements that its operations are consistent with sound 
business practices; and (ii) demonstrate the ability to re-lend AHP 
subsidy repayments on a timely basis and track the use of the AHP 
subsidy. Several commenters recommended that the regulation give 
priority to community development financial institutions as qualified 
revolving loan fund sponsors, because of their experience and controls 
and reporting systems for the lending of funds. Another commenter 
suggested that a revolving loan fund sponsor should have to have a 
minimum of 2 years' experience successfully operating a revolving loan 
fund in order to be considered an eligible sponsor. The Finance Board 
does not believe it is appropriate to give preference in the regulation 
to any particular type of sponsor or indicator of experience. The AHP 
is a competitive application process and, during the application review 
process, a Bank must evaluate a sponsor's experience in determining 
whether the sponsor has the qualifications to be eligible to 
participate in the competitive application process. Those sponsors that 
can demonstrate such qualifications will be eligible to participate in 
the competitive application process.
    Other issues: Several commenters also recommended that the Banks be 
allowed to fund revolving loan funds as a separate set-aside, rather 
than under the competitive application program, and that the Banks be 
allowed to establish the governing policies for their revolving loan 
fund programs. The Finance Board does not believe that it is 
appropriate to set aside AHP funds for specific types of sponsors. The 
AHP is primarily a competitive program that awards funds based on the 
merits of the application, regardless of sponsorship.
    Under the final rule, AHP funds disbursed through a revolving loan 
fund may not be used for purposes, such as to pay for operating costs, 
that are unrelated to the purchase, construction, or rehabilitation of 
housing. Several commenters stated that AHP subsidy

[[Page 59272]]

should be able to be used for operating costs, citing the more 
intensive servicing needed for higher-risk, low-income loans. A 
commenter proposed that revolving loan funds be able to use interest 
earned on lending the AHP direct subsidy and on short-term investment 
of the AHP subsidy for servicing and related functions and investments. 
The Finance Board believes that use of AHP subsidy for operating costs 
and investment of the subsidy would not be consistent with the 
requirement in the Bank Act that AHP subsidy only be used for the 
financing of purchase, construction, or rehabilitation of affordable 
housing and, as discussed above, that interest earned on the lending of 
the subsidy should also be used for AHP-eligible purposes. See 12 
U.S.C. 1430(j)(2).
    Some commenters also stated that revolving loan funds should be 
allowed to lend AHP subsidy to fund predevelopment costs for rental 
housing, or short-term construction loans. The Finance Board notes that 
lending for short-term construction loans is an eligible use of AHP 
subsidy, provided that the resulting housing complies with the AHP 
retention requirements. The Finance Board has determined that 
predevelopment costs are not an eligible use of AHP subsidy if no 
eligible housing is produced as a result. Under the AHP, a project that 
meets the eligibility requirements, including developmental and 
operational feasibility requirements, may include previously incurred 
predevelopment costs in its uses of funds.
    Three years after promulgation of the new revolving loan fund 
authority, the Finance Board intends to conduct a program review of the 
use of the authority to determine how the program is working and to 
address any issues that have arisen.
    Use of AHP subsidy in loan pools: Sec.  951.5(c)(14). General 
requirements: Consistent with the proposed rule, Sec.  951.5(c)(14) of 
the final rule specifies the conditions under which a Bank, in its 
discretion, may provide AHP subsidies under its competitive application 
program for the origination of first mortgage loans or rehabilitation 
loans with subsidized interest rates to AHP-eligible households through 
a purchase commitment by an entity that will purchase and pool the 
loans. The final rule also allows a loan pool sponsor to use repaid AHP 
subsidy resulting from prepayments of a loan in the pool for the 
origination of another AHP-assisted loan as substitution for the 
prepaid loan in the pool, rather than requiring the return of the AHP 
subsidy to the Bank, as is required under the current regulation. 
Because of this new reuse authority, the Finance Board has determined 
that each Bank should have the discretion to determine whether to fund 
AHP applications for loan pools under its competitive application 
program. The Bank would determine whether there is a market need for 
such funding in its district as part of its determination whether to 
permit funding of applications for loan pool sponsors. In order to make 
available the loan pool authority under its competitive application 
program, a Bank would have to consult with its Advisory Council and 
then adopt written policies governing the disbursement of the AHP 
subsidy through this type of funding arrangement.
    A number of commenters generally supported the use of AHP subsidy 
by loan pool sponsors, stating that greater use of secondary market 
operations could help sponsors provide homeownership to more low-or 
moderate-income households in their communities. Commenters also 
supported the discretionary nature of the proposal. Other commenters 
opposed the proposal, citing a number of reasons, including that loan 
pools may not be addressing a specific market need. The Finance Board 
notes that loan pool entities are already eligible sponsors for AHP-
assisted projects provided that the loan originations through the 
purchase commitments meet the requirements of the current AHP 
regulation. However, prepayments of loans prior to the end of the 
retention period required that AHP subsidy be returned to the Bank in 
accordance with the retention agreements. One Bank stated that it has 
received applications for AHP subsidy from a loan pool sponsor in its 
district, but was unsure how loan pool operations could meet the AHP 
requirements, especially when loans in the pool prepaid. The Finance 
Board believes that loan pools can facilitate the origination of AHP-
subsidized home purchase mortgage loans, owner-occupied rehabilitation 
loans, and rental property loans for eligible households. Consequently, 
consistent with the proposed rule, the final rule specifies the 
criteria that the Finance Board has determined meet the requirements of 
the AHP, especially in the areas of retention, eligible uses, need for 
subsidy, pass through of the subsidy to the ultimate borrower, and 
substitution of prepaid loans.
    Loan pool sponsor qualifications: Sec.  951.5(c)(10)(iii): As noted 
previously, Sec.  951.1 of the final rule specifically includes in the 
definition of ``sponsor'' entities that operate loan pools in the list 
of eligible sponsors. Consistent with the proposed rule, Sec.  951.1 of 
the final rule defines a ``loan pool'' as a group of AHP-eligible loans 
that are purchased, pooled, and held in trust. Consistent with the 
proposed rule, and in light of the new authority to reuse repaid 
subsidy for new AHP-assisted loans to substitute in the loan pools, 
Sec.  951.5(c)(10)(iii) of the final rule provides that, pursuant to 
written policies adopted by a Bank's board, a project sponsor that 
operates a loan pool must: (i) Provide evidence of sound asset/
liability management practices; (ii) provide audited financial 
statements that its operations are consistent with sound business 
practices; and (iii) demonstrate the ability to track the use of the 
AHP subsidy. Several commenters recommended that only loan pool 
sponsors that have previously received AHP funds should be considered 
eligible sponsors. For the same reasons discussed above under Revolving 
Loan Funds, the Finance Board does not believe it is appropriate to 
give preference in the regulation to particular types of sponsors or 
indicators of experience. However, a Bank may take into consideration a 
sponsor's experience in determining its qualifications and the 
eligibility of the project to participate in the AHP competitive 
application process.
    Commenters also questioned whether members could qualify as loan 
pool sponsors under the rule, noting that if members could not qualify, 
the proposed rule could give secondary market entities an unfair 
competitive advantage over members that are engaged in originating 
loans for their portfolios or for sale. The Finance Board believes that 
members, like any other entity, should be eligible to apply for AHP 
subsidy as loan pool sponsors if they meet the definition of ``loan 
pool'' sponsor and the project sponsor qualifications requirement in 
the final rule.
    Eligibility requirements; forward commitment: Sec.  
951.5(c)(14)(i), (ii)(A): The final rule adopts a number of proposed 
provisions intended to ensure that AHP subsidies disbursed through a 
loan pool sponsor actually benefit AHP-eligible households. 
Specifically, Sec.  951.5(c)(14)(i) provides that the loan pool's use 
of the AHP subsidy must meet the requirements of Sec.  951.5(c)(14), 
and shall not be used for the purpose of providing liquidity to the 
originator or holder of the purchased loans, or paying the loan pool's 
operating or secondary market transaction costs. The loan pool sponsor 
must purchase the loans pursuant to a forward commitment that

[[Page 59273]]

conforms to the approved AHP application. Subsequent purchases of loans 
to substitute for repaid loans in the pool also must be made pursuant 
to the terms of the approved AHP application. The use of a forward 
commitment ensures that the loan originators will originate the end 
loans in accordance with the requirements of the sponsor's approved AHP 
application and the requirements of the AHP, such that each end loan 
will have the prescribed interest rate and term and be subject to a 
retention agreement and that each household will meet the income-
eligibility commitments in the approved AHP application.
    The Finance Board requested comment in the proposed rule on whether 
it is preferable to establish by regulation a time limit, to be 
specified in the forward commitment, within which a project sponsor 
would have to expend the full amount of the AHP subsidy and, if so, the 
duration of that time limit, or whether to allow a Bank to establish 
the time limit as part of its AHP Implementation Plan, as proposed. 
Several commenters stated that the Bank should have the discretion to 
establish the time limit, noting that different time limits may be 
appropriate depending on the type, complexity, and specific funding 
needs of the loan pool, as well as legal and regulatory factors that 
may affect the pool. The Finance Board recognizes the need for some 
flexibility in this regard. The time limit should reflect the loan pool 
sponsor's market volume, considering the size and capacity of the 
network of originators that the loan pool sponsor uses to produce the 
AHP-assisted loans. However, the Finance Board believes that the time 
period should be no longer than 1 year because the use of the subsidy 
is interest-rate sensitive. Accordingly, the final rule allows a Bank 
to determine the time limit, to be specified in the forward commitment, 
for use of the AHP subsidy, provided that such limit may not exceed 1 
year from the date of approval of the AHP application.
    Section 951.5(c)(14)(ii)(B) of the final rule provides that, as an 
alternative to using a forward commitment, a loan pool sponsor may 
purchase an initial round of loans that were not originated pursuant to 
an AHP-specific forward commitment, provided that the entities from 
which the loans were purchased are required to use the proceeds from 
these purchases within the time limits specified in the Bank's AHP 
Implementation Plan, which shall not exceed 1 year from the date of 
approval of the AHP application. The proceeds must be used by such 
entities for loans with terms in the approved AHP application and 
subject to AHP retention agreements.
    Retention agreements and other requirements: Sec.  
951.5(c)(14)(iii): Section 951.5(c)(14)(iii) of the final rule requires 
that each AHP-assisted owner-occupied unit and rental property 
receiving AHP direct subsidy or a subsidized advance shall be subject 
to the requirements for monitoring and remedial action for 
noncompliance in the final rule, as well as the requirement for an AHP 
5-year or 15-year retention agreement, respectively. The proposed rule 
inadvertently omitted the requirement for such a retention agreement in 
the case of loans financed with the proceeds of a subsidized advance. 
Consistent with the proposed rule, Sec.  951.9(a)(7)(ii)(A) of the 
final rule eliminates current Sec.  951.13(c)(4)(i)(B), such that 
households receiving permanent mortgage loans through the use of a 
subsidized advance would not have to repay any AHP subsidy in the case 
of a refinancing of the owner-occupied unit prior to the end of the 
retention period. However, the final rule continues to require such 
households to have retention agreements in place, because the retention 
agreement contains the requirements for notice to the Bank of any sale 
or refinancing of the unit. Several commenters favored not requiring a 
retention agreement for owner-occupied units assisted with subsidized 
advances, and recommended that a retention agreement also not be 
required where owner-occupied units are assisted with direct subsidies. 
The Finance Board believes that households funded with AHP-assisted 
mortgage loans and rehabilitation loans whose origination was funded by 
a loan pool sponsor should be subject to the same requirements as 
households receiving AHP-assisted loans or direct subsidies from other 
sponsors.
    Use of AHP subsidy as interest-rate buy down: Sec.  
951.5(c)(14)(iv): Section 951.5(c)(14)(iv) of the final rule provides 
that where AHP direct subsidy is being used to buy down the interest 
rate of a loan or loans from a member or other lender, the loan pool 
sponsor must use the full amount of the AHP direct subsidy to buy down 
the interest rate at the time of closing on such loan or loans to 
achieve the permanent below-market interest rate on the loan as 
specified in the approved AHP application.
    Other issues: A number of commenters recommended that the Banks be 
allowed to fund loan pools as a separate set-aside, rather than under 
the competitive application program, and that the Banks be allowed to 
establish the governing policies for their loan pool programs. As 
discussed above under Revolving Loan Funds, the Finance Board does not 
believe that it is appropriate to set aside AHP funds for specific 
types of sponsors such as loan pool sponsors. The AHP is primarily a 
competitive program that funds projects based on their individual 
merits, regardless of sponsorship.
    The Finance Board requested comment in the proposed rule on 
whether, in addition to loans for AHP-assisted owner-occupied units, 
rental housing loans should 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. Several commenters 
stated generally that rental housing loans should be eligible under the 
loan pool authority, with 1 commenter stating that this would help 
maximize the Bank's ability to meet housing needs in its district. The 
Finance Board recognizes that there may not be a sizable market at the 
current time for purchase and pooling of rental housing loans. 
Nevertheless, the Finance Board does not want to foreclose the 
potential use of AHP subsidy for this purpose should such opportunities 
arise. Accordingly, the final rule allows rental housing loans to be 
eligible under the AHP loan pool authority.
    Out-of-district projects eligibility requirement: Sec.  
951.5(c)(15). Consistent with the proposed rule, Sec.  951.5(c)(15) of 
the final rule removes the existing provision that allows a Bank, in 
its discretion, to require as an eligibility requirement that a project 
receiving AHP subsidy must be located in the Bank's district. See 12 
CFR 951.5(b)(10)(i)(B). In addition, proposed Sec.  951.5(c)(17) would 
have prohibited a Bank from establishing an eligibility requirement 
that a project receiving AHP subsidy must be located in the Bank's 
district. This provision is unnecessary and is omitted from the final 
rule, as a Bank in any case may not adopt additional eligibility 
requirements not specifically authorized under the AHP regulation. See 
the further discussion of the out-of-district projects issue below, 
under AHP Projects Outside the District.
    Removal of discretionary minimum Bank credit product usage 
requirement. Consistent with the proposed rule, the final rule removes 
the existing provision that authorizes a Bank, in its discretion, 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). A number of commenters opposed elimination of this

[[Page 59274]]

discretionary authority, stating that members who use a Bank's credit 
products contribute to the Bank's earnings, thereby generating more 
funds for the AHP, and a credit product usage requirement can be an 
incentive to encourage borrowing by members. The Finance Board believes 
that AHP funding should be provided, without restriction, to projects 
that score highest under a Bank's competitive application scoring 
criteria without regard to a member's Bank credit product usage. 
Accordingly, the final rule eliminates the authority.
    Discretionary homebuyer or homeowner counseling requirement: Sec.  
951.5(c)(15)(ii). Section 951.5(c)(15)(ii) of the final rule adopts the 
proposed provision authorizing a Bank, in its discretion, to require 
homebuyer or homeowner counseling as an eligibility requirement for 
owner-occupied projects under the competitive application program. 
Under such a requirement, a Bank could limit AHP subsidies to owner-
occupied projects that provide this resource for low- or moderate-
income households. Such counseling, particularly for first-time 
homebuyers, 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); 
see also discussion of counseling below under Homeownership Set-Aside 
Program.
    A number of commenters supported allowing the Banks to require 
homeownership counseling as an eligibility requirement for 
homeownership projects under the competitive application program, with 
some commenters stating that the Finance Board should go further by 
making homeownership counseling mandatory under the competitive 
application program. However, several commenters pointed out that there 
are situations, such as rehabilitation of currently owner-occupied 
units or homeownership for households that are not first-time 
homebuyers, such as disaster victims, in which it is unnecessary or 
impractical to require counseling. It is for this reason that the 
Finance Board also proposed to make the currently mandatory counseling 
requirement under the homeownership set-aside program discretionary for 
households that are not first-time homebuyers (see Sec.  
951.6(c)(2)(iii)). The Finance Board does not believe that it is 
appropriate to mandate counseling for all projects under the 
competitive application program, nor was such a proposal noticed for 
comment in the proposed rule. Nevertheless, the Banks, in their 
discretion, may require homebuyer or homeownership counseling, such as 
counseling for first-time homebuyers.
    Several commenters also suggested that the Finance Board set 
minimum standards for homeownership counseling. The Finance Board 
believes that the Banks have better knowledge of what counseling is 
available in their districts and, under the final rule, the Banks have 
the discretion to set minimum counseling requirements. The Finance 
Board does not believe that it is appropriate to set national 
requirements in the rule that may create challenges in delivery for 
some local jurisdictions.
    Several commenters also recommended that the Finance Board permit 
the use of AHP funds for counseling even when the counseled household 
does not purchase an AHP-assisted unit. The Finance Board believes that 
allowing this would not be consistent with the statutory requirement 
that AHP funds be used for the purchase, construction, or 
rehabilitation of eligible housing. See 12 U.S.C. 1430(j)(2).
    Prohibited use of AHP subsidy: prepayment fees: Sec.  
951.5(c)(16)(i). Section 951.5(c)(16)(i) of the final rule revises the 
current provision by allowing 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: (i) The project is in financial 
distress that cannot be remedied through a project modification 
pursuant to Sec.  951.5(f); (ii) the prepayment of the subsidized 
advance is necessary to retain the project's affordability and income 
targeting commitments; (iii) subsequent to such prepayment, the project 
will continue to comply with the terms of the approved AHP application 
and the requirements of the AHP regulation for the duration of the 
original retention period; (iv) any unused AHP subsidy is returned to 
the Bank and made available for other AHP projects; and (v) the amount 
of AHP subsidy used for the prepayment fee may not exceed the amount of 
the member's prepayment fee to the Bank. The existing provision does 
not include the restrictions in (i), (ii), and (v) above. See 12 CFR 
951.5(b)(4)(i). The proposed rule would have prohibited AHP subsidy 
from being used for prepayment fees under all circumstances.
    One commenter supported elimination of the authority, stating that 
AHP subsidy should be used only for purchase, construction, or 
rehabilitation of housing, as required by the Bank Act. A number of 
other commenters opposed elimination of the authority, citing potential 
adverse consequences for ongoing project retention and affordability. A 
Bank stated that when a project is in financial distress and cannot 
maintain the AHP debt service, sale of the project or injection of 
additional equity or grant funds and subsequent repayment of the 
outstanding AHP subsidized advance may be its only recourse, with 
prepayment of the AHP subsidy allowing the project to be feasible 
provided it agrees to continue to meet the AHP requirements. The Bank 
asserted that such use of the AHP subsidy constitutes use of the 
subsidy for purchase, construction, or rehabilitation, as required by 
the Bank Act. Other commenters stated that the proposal appears to 
place members using AHP subsidized advances at a disadvantage over 
members using direct subsidies, by placing a greater burden on members 
that would likely pass some or all of the burden on to homeowners, 
project owners, and sponsors, thereby having a potentially chilling 
effect on member participation in the AHP. A Bank stated that the 
proposal would limit members' use of AHP subsidized advances because of 
the increased exposure to prepayment fees, and noted that subsidized 
advances provide long-term benefits to members and projects. The 
commenters also stated that prepayment fees are a customary part of 
financing costs for the purchase, construction, or rehabilitation of 
housing and, therefore, should be allowed as an eligible use of AHP 
subsidy.
    Based on the comments, the Finance Board believes that in the 
limited circumstances where a project is in financial distress that 
cannot be remedied through a project modification pursuant to Sec.  
951.5(f), and prepayment of the AHP subsidized advance is necessary to 
retain the project's affordability and income targeting commitments, 
the AHP subsidy should be able to be used to pay the prepayment fee. 
Subsequent to prepayment, the project would have to continue to comply 
with the terms of the approved AHP application and the requirements of 
the AHP regulation for the duration of the original retention period, 
and any unused AHP subsidy would have to be returned to the Bank and 
made available for other AHP projects. In addition, the amount of AHP 
subsidy used for the prepayment fee may not exceed the amount of the

[[Page 59275]]

member's prepayment fee to the Bank. Accordingly, the final rule allows 
AHP subsidy to be used for prepayment fees under these limited 
circumstances.
    Changes to the scoring system: Sec.  951.5(d). Section 951.5(d)(1) 
and (2) of the final rule retains the current provisions that require 
each Bank to adopt written scoring guidelines for its competitive 
application program, and to allocate 100 points among 9 scoring 
criteria. See 12 CFR 951.6(b)(4). The proposal would not have made any 
substantive changes to those criteria, except for those relating to 
disaster areas and out-of-district projects, but proposed a number of 
technical revisions to the current rules and codification of certain 
staff interpretations.
    Variable-point scoring: Sec.  951.5(d)(3)(ii): Section 
951.5(d)(3)(ii) of the final rule adopts the proposal to retain the 
provisions relating to fixed-point and variable-point scoring criteria, 
but makes technical changes to the latter, the effect of which is 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). Several commenters 
supported the proposal, with 1 commenter stating that the flexibility 
ensures that a Bank can meet effectively the housing needs in its 
district.
    Removal of optional income-targeting scoring provision for projects 
receiving government funds or tax credits: Sec.  951.5(d)(5)(iii)(A): 
Consistent with the proposed rule, Sec.  951.5(d)(5)(iii)(A) of the 
final rule removes a provision of the existing regulation that allows a 
Bank, in its discretion, to score rental projects according to the 
targeting commitments made by the project to a government 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 is no 
longer necessary because of the changes to the rule, located at Sec.  
951.7(a)(2) and (a)(3), discussed further below, that allow a Bank, in 
its discretion, to rely for AHP long-term monitoring purposes on 
monitoring by government or tax credit monitoring entities, and the new 
risk-based monitoring authority that will enable a Bank to adopt risk-
based monitoring requirements for such projects even if the projects' 
targeting commitments differ from those of the government or tax credit 
allocating entity. This does not preclude a project from using the 
targeting commitments of another housing program when applying for AHP 
subsidy, even when the project intends to exceed such targeting 
commitments in practice. No comments addressed elimination of this 
scoring provision.
    Owner-occupied project income-targeting scoring: Sec.  
951.5(d)(5)(iii)(B): Section 951.5(d)(5)(iii)(B) of the final rule 
adopts the proposed language clarifying regulatory practice relating to 
the scoring criterion for income targeting in owner-occupied projects. 
The provision clarifies 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. One commenter supported the change.
    Disaster areas and displaced households scoring criterion: Sec.  
951.5(d)(5)(vi)(E). Section 951.5(d)(5)(vi)(E) of the final rule adopts 
the proposed language permitting a Bank to award scoring points for 
applications that would finance housing located in a federally declared 
disaster area, as well as for applications that would finance 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. The current regulatory 
provision on disaster area scoring permits the Banks to award scoring 
points only to the financing of housing located in federally declared 
disaster areas. See 12 CFR 951.6(b)(4)(iv)(F)(5). Because disasters may 
displace families from their homes, as in the case of Hurricane Katrina 
in 2005, the Finance Board believes that this scoring criterion should 
be expanded to address such situations. A number of commenters 
supported the change, stating that it would be consistent with other 
federal initiatives. One Bank recommended that the Finance Board 
eliminate income-eligibility requirements for displaced households, or 
codify in the regulation its No-Action Letter 2005-NAL-01 (Sept. 9, 
2005),\5\ which temporarily suspended income-eligibility requirements 
for existing AHP rental projects that provide vacant units for 
households displaced by Hurricane Katrina. However, the AHP income-
eligibility limits are required by the Bank Act, and suspension of 
these limits only should be done on a case-by-case basis in 
extraordinary circumstances.
---------------------------------------------------------------------------

    \5\ 2005-NAL-01 is available in the FOIA Reading Room on the 
Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=59&ListYear=2005&ListCategory=7#72005.
---------------------------------------------------------------------------

    AHP projects outside the district: Sec. Sec.  951.5(d)(5)(vi)(L), 
951.5(d)(5)(vii). Consistent with the proposed rule, the final rule 
rescinds the Bank's existing discretionary authority to prohibit 
applications to fund projects located outside a Bank's district. 
However, in contrast to the proposed rule, the final rule retains, at 
Sec.  951.5(d)(5)(vi)(L), the Bank's current discretionary authority to 
give a scoring preference under the First District Priority to 
applications to fund projects located in the Bank's district. In 
addition, under Sec.  951.5(d)(5)(vii) of the final rule, a Bank 
continues to have the discretion to adopt a Second District Priority 
for in-district projects.
    Under the current regulation, a Bank, in its discretion, may deny 
consideration of applications to the AHP competitive application 
program from members proposing to fund projects located outside a 
Bank's district. See 12 CFR 951.5(b)(10)(i)(B). Another provision of 
the current regulation permits a Bank to give scoring point preference 
to applications proposing to finance housing located within the Bank's 
district. See 12 CFR 951.6(b)(4)(iv)(F)(12). The proposed rule would 
have eliminated both provisions. In addition, proposed Sec.  
951.5(d)(5)(vii) would have prohibited 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).
    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). 
The existing discretionary authority to prohibit applications for out-
of-district projects was adopted at a time when all Bank members 
generally conducted 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 are located outside the Bank's 
district boundaries. This restriction also could disadvantage 
communities served by financial institutions that move their 
headquarters to a state located in a different Bank district. The 
Finance Board believes that a Bank should not prohibit applications for 
AHP projects simply because the projects are located outside the Bank's 
district, so long as

[[Page 59276]]

they are in communities in which a member does business.
    In addition, the existing authority in the current AHP regulation 
has not been extensively invoked by the Banks. In 2004, only 1 Bank 
prohibited the use of AHP funds for out-of-district projects, and only 
2 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. Of over 10,000 AHP projects 
funded since the beginning of the program in 1990, approximately 300 
projects, or 3.0 percent, have been located outside a Bank's district.
    A number of commenters supported elimination of the 2 provisions, 
stating that the proposal recognized the changing nature of member 
operations resulting from interstate mergers and acquisitions, and 
would allow members to obtain the benefits of the AHP for their entire 
market areas. Some commenters pointed out that the proposal would 
enable developers and communities to continue established relationships 
with financial institutions even when mergers and acquisitions result 
in a change in the Bank district of which the institution is a member. 
Other commenters opposed elimination of the 2 provisions, citing a 
number of reasons, including increased monitoring costs, less 
familiarity with out-of-district projects and their market areas, and 
the concern that large, multiregional members would have access to more 
projects outside of the district that could compete for funds more 
effectively than projects in the district, putting local, state-
chartered members at a disadvantage. Several Banks stated that their 
Advisory Councils and members preferred to keep the district's 
resources within the district where they can help meet local needs, 
especially when other resources for affordable housing may be less 
available to local projects.
    The remaining commenters on the proposal stated that they would not 
object to requiring the Banks to permit applications for out-of-
district projects, provided the regulation retained the current 
discretionary scoring preference for in-district projects under the 
First District Priority. These commenters stated that this 
discretionary scoring priority preserves a geographic balance by 
spreading projects across and among the different Bank districts, and 
eliminating the priority may eventually divert projects from districts 
with fewer or smaller members to districts with large, multibillion 
dollar members. A trade association representing local member 
institutions encouraged the Finance Board to continue to permit the 
Banks to provide some scoring points for in-district projects for at 
least a portion of their AHP funds, to ensure that those members that 
do not operate out-of-district have access to some share of AHP funds.
    The Finance Board continues to believe that the Banks should not be 
authorized to prohibit applications for AHP funding for out-of-district 
projects, because the AHP should be available to all members and each 
Bank has members with branches located outside the district boundaries. 
However, the Finance Board is persuaded by the comments that there is 
merit in retaining the current discretionary authority for the Banks to 
give scoring preference to in-district projects. Consequently, the 
final rule eliminates the existing discretionary authority to prohibit 
out-of-district projects, but retains the existing discretionary 
scoring criterion for in-district projects under the First District 
Priority. The final rule also retains the existing language in the 
Second District Priority, thereby allowing a Bank, in its discretion, 
to adopt a scoring preference for in-district projects under that 
scoring category. However, the Finance Board intends that a Bank should 
not use the scoring criteria as a way to exclude out-of-district 
projects from the competitive application program.
    Modifications of approved AHP applications: Sec.  951.5(f). Section 
951.5(f) of the final rule adopts the proposed codification of 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). One commenter supported the 
proposed language.
    Progress towards use of AHP subsidies: Sec.  951.5(g)(2). Section 
951.5(g)(2) of the final rule requires each Bank to establish and 
implement policies, including time limits, for determining whether 
progress is being made towards draw-down and use of AHP subsidies by 
approved projects, and whether to cancel an AHP 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 requirements, community challenges, or other 
events. These delays may affect the ability of a project to progress 
towards its scheduled draw-down and use of the AHP subsidy. The current 
regulation requires a Bank to specify a time period in its AHP 
Implementation Plan for the draw-down 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 current cancellation 
requirement limits a Bank's ability to manage this process.
    The final rule gives the Banks greater capacity to manage this 
process by requiring them to adopt policies that address how they will 
make such determinations. Several commenters supported the change as 
providing increased flexibility.
    Compliance upon disbursement: Sec.  951.5(g)(3). Section 
951.5(g)(3) of the final rule adopts the proposed requirement that a 
Bank establish and implement policies for determining, prior to initial 
disbursement of AHP subsidy, and prior to each subsequent disbursement 
if the need for AHP subsidy has changed, that the project meets the 
applicable eligibility requirements and all obligations committed to in 
the approved AHP application. The final rule also states that if a Bank 
cancels any AHP application approvals due to failure to meet the 
eligibility requirements, the Bank shall make the AHP subsidies 
available for other AHP-eligible projects. The Bank's requirements must 
be included in its AHP Implementation Plan.
    Under the current regulation, a Bank must 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 
change gives the Banks greater latitude in determining when it is 
appropriate to verify compliance prior to disbursing AHP funds. Several 
commenters supported the change as providing additional Bank discretion 
to establish appropriate compliance procedures.
    Bank board of directors duties and delegation: Sec.  951.5(h). The 
final rule consolidates provisions of the current and proposed rules 
addressing the Bank

[[Page 59277]]

board of directors'' various duties regarding establishment and 
implementation of the competitive application program requirements in 
one section, Sec.  951.5(h). Specifically, Sec.  951.5(h)(1) states 
that a Bank's board, after consultation with its Advisory Council, 
shall be responsible for adoption of the AHP Implementation Plan, and 
for approving or disapproving the applications for AHP subsidy. Section 
951.5(h)(2) reiterates that the Bank's board may not delegate these 
responsibilities to Bank officers or other Bank employees. No comments 
addressed these changes.

F. Homeownership Set-Aside Program: Sec.  951.6

    The final rule adopts the proposed reorganization of the existing 
regulation, generally by combining various homeownership set-aside 
program provisions into one section, located at Sec.  951.6. A number 
of commenters supported these technical changes, stating that they 
would be helpful for the Banks, members, and sponsors in understanding 
the different requirements of the competitive application and 
homeownership set-aside programs.
    Removal of optional nonmember applicants provision: Sec.  951.6(b). 
Consistent with the proposed rule, Sec.  951.6(b) of the final rule 
eliminates the existing provision permitting a Bank, in its discretion, 
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). Thus, an 
applicant would have to be a member of the Bank at the time that it 
submits an AHP application. The rationale for this revision was 
discussed above in connection with a similar amendment for the 
competitive application program.
    Timing of household income-eligibility determination; reservation 
of set-aside funds; qualification of students: Sec.  951.6(c)(2)(i), 
(e)(2). Timing of household enrollment: Sec.  951.6(c)(2)(i): Section 
951.6(c)(2)(i) of the final rule provides that a household's income 
eligibility is to be determined at the time the member enrolls the 
household in the Bank's homeownership set-aside program, with the time 
of enrollment by the member to be defined by the Bank in its AHP 
Implementation Plan. 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 mortgage loan. See 12 CFR 951.1 (definition of ``low- 
or moderate-income household''); 951.5(a)(2)(i). Such an interpretation 
has posed problems for certain households participating in empowerment 
programs, such as multi-year job training or savings or welfare-to-work 
programs, that are designed to assist very low- and low- or moderate-
income households accumulate assets over a number of years, including 
households that might not otherwise qualify for a mortgage loan. The 
problem has been that by the time the household completes such a 
program and can qualify for a mortgage loan, the household may no 
longer qualify as low- or moderate-income as required under the AHP 
homeownership set-aside program.
    In response to the concern that participants in empowerment 
programs be able to depend on receipt of anticipated closing cost or 
down payment assistance when they are ready to purchase a home, such as 
offered by homeownership set-aside funding, Sec.  951.6(c)(2) of the 
proposed rule would have provided that the household's income 
eligibility be determined at the time the household is enrolled by the 
member and the Bank in the homeownership set-aside program. This was 
intended to clarify that once a household is enrolled in an empowerment 
program, the household's income eligibility for the homeownership set-
aside program is assured. This clarification was intended to be 
consistent with the belief that such assurance is important to 
achieving the purpose of such programs to prepare households for 
homeownership.
    This provision in the proposed rule, however, caused some confusion 
among commenters, because the process of ``enrollment'' was not 
described in the rule. Several commenters pointed out that under some 
existing Bank homeownership set-aside programs, members and Banks 
enroll households at different times; e.g., a member may enroll a 
household for participation in the homeownership set-aside program at 
the member level, but not notify the Bank of the household's 
participation until the household has met the requirements of the 
Bank's homeownership set-aside program, such as saving for a specified 
period or receiving homeownership counseling. This process recognizes 
that any number of households enrolled by the member will not complete 
the program before completing program requirements, and minimizes the 
administrative requirements of processing them at the Bank level.
    The Finance Board wants to ensure that a Bank may allow a household 
to enroll with a member, even though the household may not meet the 
requirements of the Bank's homeownership set-aside program for a number 
of years because the household is participating in an empowerment 
program. The Finance Board believes the individual Bank should 
establish the policies for enrollment of households by members in the 
Bank's homeownership set-aside program. Accordingly, the final rule 
provides that income eligibility is to be determined as of the date the 
household is enrolled by the member in the Bank's homeownership set-
aside program, with the time of enrollment by the member defined by the 
Bank in its AHP Implementation Plan.
    Reservation of set-aside subsidies: Sec.  951.6(e)(2): In the past, 
the Finance Board generally has considered a household to be enrolled 
in the AHP homeownership set-aside program at the time the member or 
the Bank reserves the set-aside funds for the household so that the 
funds will be available when the household closes on its home purchase. 
While such a process might ensure that the set-aside funds will be 
available when all program requirements have been met for households 
participating in job-training or other empowerment programs, such a 
process could result in many years elapsing between the time of 
enrollment of the households in the homeownership set-aside program and 
the disbursement of the set-aside funds to that household. Such a delay 
is inconsistent with the intent of Sec.  951.6(e)(3), which requires 
progress to be made towards draw-down and use of the AHP direct 
subsidies by eligible households pursuant to the requirements in the 
Bank's policies.
    The homeownership set-aside program requires careful administration 
by a Bank and the participating member and should be subject to 
reasonable Bank policies on the reservation and timely use of AHP 
subsidy. In those cases in which members enroll households that may 
take a number of years to complete the program requirements, the Bank 
should not reserve funds for these households at the time of enrollment 
by the member in the homeownership set-aside program, but should 
anticipate the timing of disbursement and manage future set-aside 
allocations based on that. The Finance Board believes that, in managing 
future set-aside allocations, it would be reasonable for a Bank to 
reserve set-aside funds up to 2 years in advance of the Bank's time 
limit for the draw-down and use of the funds by the household. The Bank 
should reserve

[[Page 59278]]

such funds from the set-aside allocation of the year in which the Bank 
makes the reservation. For example, a household enrolling with a member 
at the same time it enrolls in the Family Self Sufficiency (FSS) 
Program has 5 years in which to complete the requirements of the FSS. 
In this case, a member may enroll a household in 2006, but the Bank 
should not reserve 2006 set-aside funds for the household. Rather, the 
Bank should anticipate funding that household from a future year's set-
aside allocation, with such future reservation of funds being no more 
than 2 years prior to the expected disbursement to the household. In 
this case, the Bank could reserve funds from its 2009 set-aside 
allocation for a household that has until 2011 to complete its FSS 
requirements and purchase its home. It is expected that the Bank will 
work with members that enroll such households in order to determine 
whether households are likely to meet the FSS requirements in fewer 
than 5 years and to manage the reservation of funds to accommodate such 
households. This provision will not affect the operations of the 
current homeownership set-aside programs of most of the Banks, which 
already require a household to draw down the AHP subsidy within 24 
months or less of enrollment in their homeownership set-aside programs.
    Accordingly, Sec.  951.6(e)(2) of the final rule provides that a 
Bank must establish and implement policies for reservation of set-aside 
subsidies for households enrolled in the Bank's homeownership set-aside 
program. These must provide that set-aside subsidies be reserved no 
more than 2 years in advance of the Bank's time limit in its AHP 
Implementation Plan for draw-down and use of the funds by the 
households and the reservation of subsidies be made from the set-aside 
allocation of the year in which the Bank makes the reservation.
    Qualification of students: It is the Finance Board's expectation 
that Bank policies for the homeownership set-aside program will be 
designed to assist AHP income-eligible households who, but for receipt 
of the AHP subsidy, would not be able to afford to purchase or 
rehabilitate a home. This would preclude qualification of students with 
part-time or no income while in school who ordinarily would have a 
reasonable prospect for a substantial increase in income exceeding the 
AHP income-eligibility limit upon entering the workforce full-time.
    Several commenters appeared to misunderstand the manner in which 
this principle was expressed in the SUPPLEMENTARY INFORMATION section 
of the proposed rule, believing that it was intended to address 
households already in the workforce with low- or moderate-incomes that 
a Bank would have to determine were ``temporary.'' Rather, this 
principle refers to a potential misuse of AHP funds available through 
the homeownership set-aside program, in which member institutions 
qualify students as income-eligible based on part-time or no income, 
but who have a reasonable expectation or knowledge that, upon 
graduation, the student will have income substantially above the AHP 
income limit. For example, a member should not qualify a full-time law 
school student with little or no income, knowing that the student 
already has secured a position with a law firm upon graduation that 
will pay considerably more than the AHP income limit of 80 percent of 
the area median income. This principle is not intended to apply to 
households participating in empowerment programs, such as multi-year 
job training or savings or welfare-to-work programs, that are designed 
to assist very low- and low- or moderate-income households accumulate 
assets over a number of years.
    Homebuyer or homeowner counseling: Sec.  951.6(c)(2)(ii), 
(c)(2)(iii). Section 951.6(c)(2)(ii) of the final rule retains the 
existing requirement that first-time homebuyers must complete a 
homebuyer or homeowner counseling program in order to be eligible for 
homeownership set-aside assistance, but Sec.  951.6(c)(2)(iii) revises 
the existing requirement by authorizing a Bank to decide, in its 
discretion, whether to require households that are not first-time 
homebuyers to complete a homebuyer or homeowner counseling program in 
order to be eligible for homeownership set-aside assistance.
    Under the existing regulation, all households receiving AHP 
homeownership set-aside funds must complete a homeowner or homebuyer 
counseling program. See 12 CFR 951.5(a)(2)(ii). At its inception, the 
homeownership set-aside program was a home-purchase program for first-
time homebuyers only. As a result, the Finance Board required each 
assisted household to obtain homebuyer counseling in order to obtain 
AHP assistance. The Finance Board later amended the homeownership set-
aside authority to permit the Banks to use homeownership set-aside 
funds to finance housing other than for first-time homebuyers, such as 
rehabilitation of already owner-occupied units or homeownership for 
disaster victims, and required that each assisted household obtain 
homebuyer or homeowner counseling. As a practical matter, not all 
households will require such counseling. Moreover, there are some areas 
of the country in which counseling may not be readily available, and 
the quality of the counseling also may vary. Accordingly, the proposed 
rule would have made counseling for all households receiving set-aside 
funds under the homeownership set-aside program an optional requirement 
for the Bank.
    A number of commenters concurred with the Finance Board that it is 
unnecessary or impractical to require counseling for households that 
are not first-time homebuyers. Other commenters generally opposed the 
proposal, emphasizing that homeownership counseling is critical to a 
household's short-term and long-term success in avoiding foreclosure. 
While the Finance Board continues to believe that it is not appropriate 
to mandate homebuyer or homeowner counseling for all households under 
the homeownership set-aside program, the Finance Board concurs with 
commenters that counseling is important for first-time homebuyers. 
Accordingly, Sec.  951.6(c)(2)(ii) of the final rule retains the 
existing requirement that first-time homebuyers must complete a 
homebuyer or homeowner counseling program in order to be eligible for 
homeownership set-aside assistance, but Sec.  951.6(c)(2)(iii) allows a 
Bank to determine, in its discretion, whether to require households 
that are not first-time homebuyers to complete a homebuyer or homeowner 
counseling program in order to be eligible for homeownership set-aside 
assistance.
    Financial or other concessions: Sec.  951.6(c)(6). Bank 
discretionary authority: Section 951.6(c)(6) of the final rule provides 
that a Bank may, in its discretion, require members and other lenders 
to provide financial or other concessions, as defined by the Bank in 
its AHP Implementation Plan, to households in connection with providing 
the AHP direct subsidy or financing to the household.
    Under existing Sec.  951.5(a)(6), a member that provides mortgage 
financing to a participating household under the homeownership set-
aside program also must provide financial or other incentives to that 
household in connection with the mortgage financing. See 12 CFR 
951.5(a)(6). The existing requirement may place small members, such as 
those located in rural areas, at a disadvantage compared with larger 
members, which may have more financial and market resources, and may 
place a number of members at a disadvantage compared with nonmember 
lenders, which do not have

[[Page 59279]]

to provide any financial or other concessions to the borrowing 
household. The Finance Board requested comment in the proposed rule on 
whether the authority to require member financial or other concessions 
to households should be mandatory or discretionary for the Banks. Most 
commenters addressing this issue preferred that the Banks have 
discretionary authority, stating that a mandatory requirement could 
place smaller, community, and rural members at a disadvantage vis-
[agrave]-vis larger members with the resources to provide concessions 
and with nonmembers that do not have to provide concessions to the 
household. The Finance Board agrees that a mandatory requirement could 
disadvantage smaller, community, and rural members, and that each Bank 
is in the best position to determine whether such a requirement is 
appropriate for the members in its district. Accordingly, in contrast 
to the proposed rule, the final rule makes the authority to require 
member financial or other concessions discretionary for the Banks.
    Bank establishment of concessions: The current regulation does not 
prescribe or define the types of financial or other concessions the 
member must provide, leaving it to the member's discretion to determine 
what kind of concessions meet the requirement. Under the proposed rule, 
each Bank, rather than the member, would establish the specific types 
of financial incentives or other assistance that the member would have 
to provide in order to meet the requirement for providing financial or 
other concessions to the households. The Finance Board requested 
comment in the proposed rule on whether the regulation itself should 
specify particular financial or other concessions that a member must 
provide to households, such as matching funds or member-provided 
financing. Several commenters generally supported having the Bank 
establish the specific types of eligible financial or other concessions 
that the member must provide to the homebuyers. Accordingly, consistent 
with the proposed rule, the final rule provides for the Bank to 
establish the specific types of financial or other concessions that 
members must provide to households.
    Some commenters also stated that the wording of the proposal could 
be interpreted to mean that the Banks must provide financial 
concessions to the members to participate in the homeownership set-
aside program. As discussed above, this was not the intent of the 
proposed language. The language is reworded in the final rule to 
clarify that the concessions are to be provided by the members to the 
households, not by the Bank to the members.
    In reviewing the comments, the Finance Board concluded that the 
word ``incentives'' used in the proposed rule in connection with the 
member requirements created confusion, because these are not intended 
to encourage households to use the homeownership set-aside program. 
Access to AHP down payment and closing cost assistance is the incentive 
for household participation in the program. The term ``concessions'' 
more accurately describes the types of reduced costs or fee waivers 
provided by the member in order to meet the requirements of this 
provision. Accordingly, the final rule uses the word ``concessions'' 
rather than the word ``incentives.''
    The proposed rule also would have removed the existing requirement 
that a member provide financial or other concessions if it is providing 
mortgage financing to a participating household. This proposal was 
intended to level the playing field among members offering 
homeownership set-aside assistance, and to help avoid situations in 
which the member might require the household to obtain a mortgage loan 
from another lender in order to avoid having to provide financial or 
other concessions to the household. The proposal also was intended to 
provide the homebuyers additional opportunities to benefit from 
financial concessions, whether or not they are getting their mortgage 
loans from the member. As discussed above, commenters generally 
supported allowing Bank discretion in the establishment of member 
financial or other concessions. The Finance Board believes that the 
Banks are in the best position to determine whether the existing 
requirement would be appropriate in their respective districts. 
Accordingly, consistent with the proposed rule, the final rule does not 
require a member providing mortgage financing to a participating 
household to also provide financial or other concessions to the 
household in connection with the mortgage financing.
    Bank discretionary authority to require concessions from 
nonmembers: The Finance Board also requested comment in the proposed 
rule on whether the regulation should require all originators of 
mortgage loans to households receiving homeownership set-aside funding 
to provide financial or other concessions in connection with their 
mortgage financing, irrespective of whether the originator is a member 
or nonmember. The proposed rule would have applied this requirement 
only to members. Several commenters stated generally that requiring 
nonmembers, as well as members, to provide financial or other 
concessions would level the playing field. Other commenters objected to 
putting members in the position of having to monitor nonmembers and 
their concessions for adherence to Bank guidelines, which they stated 
could discourage members from participating in the AHP, and raises 
issues regarding how to enforce such requirements again nonmembers. The 
Finance Board believes that households would benefit from additional 
opportunities to receive financial or other concessions from nonmember 
lenders, and that the Banks are in the best position to determine 
whether such a requirement would be appropriate in their respective 
districts. Accordingly, the final rule provides the Banks with 
discretionary authority to require lenders other than members to 
provide financial or other concessions in conjunction with their 
lending to households receiving AHP assistance under the homeownership 
set-aside program.
    Bank discretionary authority to establish member preferences. In 
addition, the Finance Board requested comment in the proposed rule on 
whether the Banks should have to establish preferences for member 
priority access to homeownership set-aside funds, such as a preference 
for a member working in partnership with a not-for-profit sponsor 
assisting first-time homebuyers to qualify for a mortgage loan. One 
commenter supported requiring the Banks to give priority to members 
that provide financial assistance to not-for-profit sponsors for 
program development, especially for homeownership counseling assisting 
first-time homebuyers, stating that not-for-profit participation in 
homeownership programs is key to households' long-term success in 
keeping their homes. Another commenter supported a preference for 
members working with not-for-profit sponsors that have a long-term 
commitment to the creation of affordable housing. The Finance Board 
believes that the Banks are in the best position to determine whether 
such preferences for members would be appropriate in their respective 
districts. Accordingly, the final rule does not require the Banks to 
establish particular preferences for members.
    Financing costs: Sec.  951.6(c)(7). Consistent with the proposed 
rule, Sec.  951.6(c)(7) of the final rule provides that the rate of 
interest, points, fees, and any other charges for all loans made in 
conjunction with the AHP direct

[[Page 59280]]

subsidy shall not exceed a reasonable market rate of interest, points, 
fees and other charges for loans of similar maturity, terms, and risk.
    Under the existing regulation, the requirement applies only to 
situations in which the member provides the financing, but not if a 
third party does so. See 12 CFR 951.5(a)(6). 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 have revised 
the regulation to state that 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 under this program are passed 
on to the ultimate borrower.'' See 12 U.S.C. 1430(j)(9)(E).
    The majority of commenters on this issue supported extending 
application of the provision to nonmembers, stating that this would 
help guard against the imposition of excessive financing costs on low- 
or moderate-income households by a third-party lender. A Bank and its 
Advisory Council opposed the proposal on the basis that it would 
require members to regulate other lenders even though the members are 
not making the loans. The Finance Board believes that any member that 
receives AHP subsidy and passes it through to another lender has a 
responsibility to assure that the lender is not imposing excessive 
financing costs on the household receiving the AHP subsidy. Under Sec.  
951.8(b)(1) of the final rule, the member would be liable to the Bank 
for repayment of the amount of any excessive financing costs imposed by 
the lender if imposition of these costs resulted from the member's 
actions or omissions.
    Cash back to household: Sec.  951.6(c)(9). Section 951.6(c)(9) of 
the final rule provides that a member may provide cash back to a 
household at closing on the mortgage loan in an amount not exceeding 
$250, as determined by the Bank in its AHP Implementation Plan, and a 
member must use any AHP subsidy exceeding such amount that is beyond 
what is needed at closing for closing costs and the approved mortgage 
amount as a credit to reduce the principal of the mortgage loan or as a 
credit toward the household's monthly payments on the mortgage loan.
    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 sought to address them by clearly identifying ineligible 
uses of AHP set-aside funds. A number of commenters supported the 
proposal, but pointed out that implementing the prohibition on cash 
backs to households could pose an unnecessary administrative burden if 
the terms of the loan and the loan documents would need to be changed 
at closing. These commenters recommended that the final rule allow a de 
minimis amount of cash back at closing to the household. The Finance 
Board believes that the comments have merit, and accordingly, the final 
rules provides for a de minimis amount of cash back of up to $250 per 
household, as determined by the Bank in its AHP Implementation Plan.
    Some commenters were concerned that the proposal would prevent the 
use of any of the AHP subsidy to reimburse the household for closing 
costs paid outside of closing or for rehabilitation work that is part 
of the closing. The Finance Board has always allowed AHP subsidy to be 
used to reimburse households that have paid some out-of-pocket closing 
costs prior to the actual closing, and the final rule does not prevent 
that. However, the Finance Board does not believe that AHP subsidy 
should reimburse a household for any down payment, or earnest money or 
deposit applied to the down payment, especially where the Bank awards 
AHP subsidy based on a match of the household's own down payment 
savings. The prohibition on cash back to the household does not apply 
to cash that is being placed in escrow or paid to a third party for 
purposes of planned rehabilitation of the property after closing, for 
example, as would be reflected on a HUD-1A closing statement. However, 
a Bank could not provide AHP subsidy directly to the household for 
improvements that are not part of the home purchase.
    Some commenters also were concerned that requiring excess AHP 
subsidy to be used to reduce the loan principal would result in an 
administrative burden at closing because loan documents including the 
note and lender's check, and other required consumer disclosures, would 
have been prepared prior to closing. In requiring that any amount of 
AHP subsidy in excess of what is needed at closing be applied as a 
credit to reduce the principal of the mortgage loan, the Finance Board 
does not intend that the lender have to recalculate the mortgage amount 
and terms and generate new consumer disclosures at closing. Rather, the 
additional AHP subsidy may be applied as a credit to the outstanding 
principal following execution of the note and thereby increase the 
household's equity in the home. In this way, the additional AHP subsidy 
would decrease the amount of principal outstanding on the original note 
without affecting the monthly payments and, thereby, not creating an 
administrative burden at closing. This does not preclude the permanent 
lender from applying the additional AHP subsidy as additional down 
payment and revising the loan terms and consumer disclosures 
accordingly, either prior to or at closing. The final rule also 
provides that, in the alternative, the excess AHP subsidy may be 
applied as a credit toward the household's monthly payments on the 
mortgage loan.
    Procedure for funding: Sec.  951.6(e). Reservation of homeownership 
set-aside subsidies: Sec.  951.6(e)(2). As discussed above under 
Reservation of Set-Aside Subsidies, Sec.  951.6(e)(2) of the final rule 
addresses requirements for Bank reservation of homeownership set-aside 
subsidies for households enrolled in the Bank's homeownership set-aside 
program.
    Progress towards use of AHP direct subsidy: Sec.  951.6(e)(3): For 
reasons similar to those discussed above under the competitive 
application program, Sec.  951.6(e)(3) of the final rule, consistent 
with the proposed rule, requires a Bank to establish and implement 
policies, including time limits, for determining whether progress is 
being made towards draw-down and use of homeownership set-aside funds 
by eligible households, and whether to cancel AHP application approvals 
for lack of such progress. See 12 CFR 951.8(b)(1). The Bank's 
requirements adopted pursuant to this paragraph (e)(3) shall be 
included in its AHP Implementation Plan. One Bank expressed concern 
that this proposal could require the Bank to track homebuyers' progress 
toward closing on a home between the time of the household's enrollment 
and the end of the time period for draw-down and use of the subsidy, 
and that doing so would create unnecessary administrative costs of 
reporting each homebuyer's status. The Finance Board's intent in 
proposing the change was not to require tracking of a household's 
progress in meeting the requirements of the homeownership set-aside 
program during the period prior to the end of the Bank's time limit 
specified in its AHP Implementation Plan, but to allow the Banks 
greater flexibility for dealing with a household

[[Page 59281]]

that has not used the assistance by the end of the time period, rather 
than having to cancel the commitment of homeownership set-aside funds 
to the household at that time. Another Bank stated that, in the case of 
a homeownership set-aside program in which the Bank reserves a portion 
of homeownership set-aside funds for use by an individual member, the 
provision should apply to the member's progress in drawing down its 
homeownership set-aside allocation. The Finance Board believes that a 
Bank's method for members' access to the homeownership set-aside funds, 
either through lump-sum allocation or first-come, first-serve according 
to its qualified household customers, is irrelevant to the underlying 
purpose of this provision, which is the household's draw-down and use 
of the subsidy.

G. Monitoring: Sec.  951.7

    Consistent with the proposed rule, the final rule replaces 
prescriptive monitoring provisions in the existing regulation with more 
broadly stated monitoring objectives that 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 its AHP application commitments and the AHP 
regulation. The final rule also reorganizes the proposed monitoring 
provisions to provide greater clarity.
    Monitoring Requirements for the Competitive Application Program: 
Sec.  951.7(a). Initial monitoring policies: Sec.  951.7(a)(1): 
Adoption and implementation: Sec.  951.7(a)(1)(i): Section 
951.7(a)(1)(i) of the final rule adopts the proposed requirement that a 
Bank adopt and implement written policies for monitoring of each AHP 
owner-occupied and rental project under its competitive application 
program prior to, and within a reasonable period of time after, project 
completion. The Bank's requirements for initial monitoring shall be 
included in its AHP Implementation Plan. Specifically, a Bank's 
monitoring policies must enable it to determine, at a minimum, whether: 
the project is making satisfactory progress toward completion; the 
completed project is making satisfactory progress towards occupancy by 
eligible households; and the completed project meets the commitments 
made in the approved AHP application and is otherwise in compliance 
with applicable AHP requirements within a reasonable period of time 
after project completion. Consistent with the proposed rule, the final 
rule removes the existing requirement that the Banks must monitor 
project habitability, and also removes the definition of ``habitable'' 
from the existing definitions. See 12 CFR 951.1; 
951.10(a)(2)(ii)(B)(2), (c)(2).
    A number of commenters supported the monitoring proposal, citing 
its increased flexibility and the likelihood that it would result in 
streamlined procedures. Several commenters specifically supported 
removing the existing requirement to monitor ``project habitability.'' 
Some commenters recommended that the regulation define ``reasonable 
period of time'' in order to avoid differing interpretations. The 
Finance Board believes that such determinations are best made by the 
Banks based on the types of projects to be monitored. Some commenters 
also requested that the Finance Board review and approve the Banks' 
policies for initial monitoring. The Finance Board intends to review 
the Banks' initial monitoring policies as a part of its examination 
program.
    Back-up and other project documentation; sampling plan: Sec.  
951.7(a)(1)(ii), (a)(1)(iii): Section 951.7(a)(1)(ii) of the final rule 
adopts the proposed requirement that a Bank's monitoring policies 
include requirements for Bank review of back-up project documentation 
regarding household incomes and rents maintained by the project sponsor 
or owner, and requirements for maintenance and Bank review of other 
project documentation in the Bank's discretion. Several commenters 
supported the proposal, provided the regulation allows the Banks to use 
project sampling for initial monitoring, rather than having to conduct 
initial monitoring of each project. Section 951.7(a)(1)(iii) of the 
final rule prohibits a Bank from using a sampling plan to select the 
projects to be monitored, but allows a Bank to use a reasonable risk-
based sampling plan to review the back-up project documentation. 
Section 951.7(a)(1)(iii) reflects the importance of determining that 
all completed projects are starting out on a solid basis and in 
compliance with the commitments made in their approved AHP applications 
and the AHP regulation.
    Reliance on long-term tax credit monitoring for rental projects: 
Sec.  951.7(a)(2): Consistent with the proposed rule, Sec.  951.7(a)(2) 
of the final rule provides that for completed AHP rental projects that 
have been allocated tax credits, a Bank may, in its discretion, for 
purposes of long-term AHP monitoring, rely on the monitoring by the 
state-designated housing credit agency administering the tax credits of 
the income targeting and rent requirements applicable under the LIHTC 
program. The Bank would not need to obtain and review reports from such 
agency or otherwise monitor the projects' long-term AHP compliance.
    Under the existing regulation, in the case of AHP rental projects 
that receive tax credits, a Bank may rely on the monitoring conducted 
by the government entity providing the tax credits, provided that: (i) 
The income targeting, rent, and retention period requirements monitored 
by such entity for its own program are the same as, or more restrictive 
than, those committed to in the approved AHP application; (ii) the 
entity agrees to provide monitoring reports to the Bank on any rent, 
income and project habitability noncompliance; and (iii) the entity 
demonstrates its ability to carry out monitoring under its own program 
and the Bank does not have information that such monitoring is not 
occurring or is inadequate. See 12 CFR 951.11(a)(1). The existing 
regulation also provides that if the income targeting, rent, and 
retention period requirements monitored by such entity for its own 
program are less restrictive than those committed to in the approved 
AHP application, a Bank may rely on the monitoring conducted by such 
entity only if the entity agrees to monitor the project for compliance 
with the AHP standards and provide monitoring reports to the Bank on 
any rent, income and project habitability noncompliance. See 12 CFR 
951.11(a)(2).
    The LIHTC, which often is used by projects that receive some form 
of AHP subsidy, has 2 elective eligibility standards related to the 
units in the project and the income of the households occupying the 
units: (1) 20 percent of the units must be occupied by households with 
incomes at or below 50 percent of the area median income; or (2) 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 income-eligibility standard is identical to the first tax credit 
income-eligibility standard, 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 the government 
agencies providing the tax credits for their own programs.

[[Page 59282]]

    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 the government entity administering the tax credits only 
if the entity also monitors the project for compliance with the AHP 
income-eligibility standard. See 12 CFR 951.11(a)(2). Because this tax 
credit income-eligibility standard differs from the AHP income-
eligibility standard, under the existing AHP regulation a Bank must 
have an agreement with the government entity to conduct its monitoring 
of the AHP project for compliance with the AHP standard. 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 monitoring is superfluous and adds 
unnecessary burdens to the project.
    As discussed in the SUPPLEMENTARY INFORMATION section of the 
proposed rule, 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 
substantively 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 reached similar conclusions regarding 
the targeting of tax credit projects to very low-income households. 
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. In addition, the length of 
the retention periods for AHP rental projects and tax credit projects 
is the same, and the affordability standard for tax credit projects, 
i.e., the rent requirement, is substantively 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)(2)(B), (j)(13)(D); 26 
U.S.C. 42(g)(2).
    All commenters on this proposal strongly supported allowing a Bank 
to rely on the long-term monitoring performed by the tax credit agency, 
usually a state housing finance agency, and thereby exclude these 
rental projects from the Bank's long-term monitoring plan. Commenters 
supported the reduction in duplicative monitoring as easing the 
administrative burdens on project owners, members, and Banks, without 
sacrificing project accountability and quality. Commenters noted that 
other funding sources often are involved in AHP projects at a much 
higher funding level, and that state agencies are more than capable of 
providing high quality monitoring. Other commenters stated that the 
proposal would make the AHP more compatible with the LIHTC program. 
Some commenters suggested that the Finance Board clarify whether each 
Bank must make a determination that the compliance profiles for income 
targeting, affordability, and retention under the LIHTC program are 
substantively equivalent to those under the AHP. Commenters interpreted 
the conditional language ``provided that the compliance profiles of the 
AHP and the LIHTC program continue to be substantively equivalent'' in 
the proposed rule as requiring the Banks to make a determination 
whether the standards are satisfied before the Bank could rely on LIHTC 
monitoring. As discussed above, in the SUPPLEMENTARY INFORMATION 
section of the proposed rule, the Finance Board has made the 
determination, based on studies of the occupancy and rents of LIHTC 
projects, that these standards currently are being met. The Banks, 
therefore, will not need to make such a determination with respect to 
AHP-assisted LIHTC projects. The final rule clarifies this point by 
eliminating the conditional language ``provided that the compliance 
profiles of the AHP and the LIHTC program continue to be substantively 
equivalent.''
    Some commenters also requested clarification whether any initial 
monitoring requirements continue to apply to AHP-assisted LIHTC 
projects. Under the final rule, all of the initial monitoring 
requirements continue to apply to AHP-assisted LIHTC projects.
    Reliance on other long-term governmental monitoring for rental 
projects: Sec.  951.7(a)(3): Section 951.7(a)(3) of the final rule 
provides that, for completed AHP rental projects that received funds 
from federal, state, or local government entities other than under the 
LIHTC, a Bank may, in its discretion, for purposes of long-term AHP 
monitoring, rely on the monitoring by such entities of the income 
targeting and rent requirements applicable under their programs, 
provided the Bank can show that: (i) The compliance profiles regarding 
income targeting, rent, and retention period requirements of the AHP 
and the other programs are substantively equivalent; (ii) the entity 
has demonstrated and continues to demonstrate its ability to monitor 
the project; (iii) 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 (iv) the Bank reviews the reports from the monitoring 
entity to confirm that they comply with the Bank's monitoring policies.
    In the case of AHP rental projects that receive governmental funds 
other than tax credits, the existing regulation applies the same 
requirements for reliance on monitoring by the government entity 
providing the funds as are applicable for AHP rental projects receiving 
tax credits under the existing regulation, as discussed above. See 12 
CFR 951.11(a)(1), (a)(2). The proposed rule would have included 
requirements similar to the existing requirements for reliance on 
monitoring by other government entities, and would have provided that 
the income targeting, rent, and retention period requirements for the 
other programs be substantively equivalent to those of the AHP. The 
final rule provides that it is the compliance profiles regarding income 
targeting, rent, and retention period requirements of the AHP and the 
other programs that must be substantively equivalent.
    A majority of commenters on the proposal supported allowing the 
Banks to rely on other non-LIHTC governmental monitoring as proposed. 
Several commenters noted, however, that without determinations by the 
Finance Board that certain programs, such as those administered by HUD, 
are substantively equivalent to the AHP, Banks would be reluctant to 
make the determinations themselves and, therefore, would not take 
advantage of this provision. At this time, the Finance Board does not 
have data available to it that would allow it to make determinations 
that the compliance profiles with respect to income targeting, rent, 
and retention period requirements of any other government housing 
programs other than the federal LIHTC program currently are 
substantively equivalent to those of the AHP. Accordingly, a Bank will 
need to make such determinations if it wishes to rely on the monitoring 
by such other government programs.

[[Page 59283]]

    Long-term monitoring policies for rental projects: Sec.  
951.7(a)(4). Adoption and implementation: Sec.  951.7(a)(4)(i): 
Consistent with the proposed rule, Sec.  951.7(a)(4)(i) of the final 
rule provides that in cases where a Bank does not rely on monitoring by 
a federal, state, or local government entity pursuant to Sec.  
951.7(a)(2) or (a)(3), a Bank must establish and implement written 
policies for risk-based monitoring of completed AHP rental projects, 
commencing in the second year after project completion and continuing 
for the full 15-year retention period. The Bank's requirements for 
long-term monitoring under this section shall be included in its AHP 
Implementation Plan. The monitoring policies must enable the Bank to 
determine, at a minimum, whether household income and rents comply with 
the respective commitments made in the approved AHP applications.
    The current regulation requires the Banks to select from 1 of 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 by the Bank, its members, and project owners; or (3) 
monitoring by a third party contractor that carries out the Bank's 
monitoring obligations under the long-term monitoring requirements of 
existing Sec.  951.11(a)(3)(iii). 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 
second and third options. It requires a Bank to review project 
documentation from various parties 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 may 
fail to capture adequately the operational risk, location risk, or 
other relevant performance factors affecting the Bank's AHP project 
portfolio. The prescriptive nature of the regulation 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 project 
owner.
    A number of commenters specifically supported the proposal's 
increased flexibility, risk-based scheme, and sampling authority. Some 
commenters stated that monitoring costs could be reduced for in-
district projects under the proposal, without increasing the Bank's 
compliance, financial, or reputation risk. A Bank and its Advisory 
Council opposed the proposal in its entirety, stating that the current 
regulatory monitoring requirements have served the intended purposes, 
and changes in those requirements are not necessary or appropriate. The 
commenters stated that monitoring objectives could vary from Bank to 
Bank, which could cause confusion among members, sponsors and project 
owners that use AHP funds in multiple districts. Several commenters 
objected to the reference in the SUPPLEMENTARY INFORMATION section of 
the proposed rule to ``outcome-based'' monitoring, stating that it may 
be inconsistent with the risk-based monitoring requirement and could 
result in numerous Finance Board examination findings. In order to 
avoid confusion in this regard, the final rule does not use this term. 
A Bank suggested that long-term monitoring not be required to commence 
until the third year after project completion. Another commenter 
suggested that the rule retain the current monitoring requirement for 
projects receiving AHP subsidy over $500,000. Under the monitoring 
provisions of the final rule, a Bank would have the discretion to 
include such requirements. Some commenters also requested that the 
Finance Board review and approve the Banks' long-term monitoring 
policies. The Finance Board intends to review the Banks' long-term 
monitoring policies as a part of its examination program.
    The final rule does not include the proposed requirement that the 
Bank monitor the populations served by the project over the long-term 
retention period. A number of commenters opposed the proposed 
requirement, pointing out that the annual project owner certification 
requirement does not include a requirement to certify compliance with 
targeted population commitments, referring only to incomes and rents of 
the project households, and targeted populations are not subject to 
long-term monitoring under the current regulation. The Finance Board 
finds merit in these comments, and also notes that inclusion of this 
requirement would complicate providing housing for households displaced 
by disasters. Accordingly, the final rule does not require that 
populations served by the projects be subject to long-term monitoring.
    Consistent with the proposed rule, the final rule also removes the 
existing requirement that the Banks monitor project habitability for 
the full AHP retention period. See 12 CFR 951.11(a)(3). Several 
commenters supported removing the requirement to monitor project 
habitability.
    Annual project owner certifications; backup and other project 
documentation: Sec.  951.7(a)(4)(ii): Section 951.7(a)(4)(ii) of the 
final rule adopts the proposed requirement that the Bank's monitoring 
policies include requirements for: (i) Bank review of annual 
certifications by project owners to the Bank that household incomes and 
rents comply with the commitments made in the approved AHP application; 
(ii) Bank review of back-up project documentation regarding household 
incomes and rents maintained by the project owner; and (iii) 
maintenance and Bank review of other project documentation in the 
Bank's discretion. Several commenters supported requiring the Banks to 
establish written requirements for back-up documentation from members 
and project owners. A Bank and one of its members opposed the annual 
project owner certification requirement, stating that obtaining the 
certifications is a labor-intensive process that has little or no 
positive influence on long-term compliance. The Finance Board believes 
that the annual project owner certification, which is retained from the 
current rule, remains an important tool under the new risk-based long-
term monitoring for ensuring that the project has regular contact with 
the Bank. See 12 CFR 951.11(a)(3)(i). The Finance Board notes that the 
rule only requires that the project owner provide such a certification 
to the Bank, and this requirement does not involve the member unless 
the Bank chooses to do so in its monitoring plan.
    Risk factors and other monitoring; risk-based sampling plan: Sec.  
951.7(a)(4)(iii): Consistent with the proposed rule, Sec.  
951.7(a)(4)(iii) of the final rule requires a Bank's written policies 
to take into account risk factors such as the amount of AHP subsidy in 
the project, type, size, and location of the project, sponsor 
experience, and any monitoring of the project provided by a federal, 
state, or local government entity. The final rule further provides that 
a Bank may use a reasonable, risk-

[[Page 59284]]

based sampling plan to select the rental projects to be monitored under 
this section, and to review the annual project owner certifications, 
back-up, and any other project documentation. The risk-based sampling 
plan and its basis shall be in writing.
    Several commenters suggested that the Finance Board provide more 
detailed guidance on the monitoring requirements, including defining 
``reasonable risk-based sampling plan.'' One Bank requested 
clarification whether the Bank must select its sample of rental 
projects from different types of rental projects, and whether the 
sample must be statistically valid. The final rule does not 
specifically require these standards, but Finance Board examiners will 
review the Bank's sampling plans to ensure that they are reasonable. 
Several commenters also stated that the Banks should be able to use a 
risk-based sampling model to select not only the rental projects, but 
also the specific units in the projects, to be sampled. The language 
under the proposed and final rules allows for such risk-based sampling 
of units as well as projects.
    Monitoring Requirements for the Homeownership Set-Aside Program: 
Sec.  951.7(b). Adoption and implementation: Sec.  951.7(b)(1): 
Consistent with the proposed rule, Sec.  951.7(b)(1) of the final rule 
requires a Bank to adopt and implement written monitoring policies for 
determining compliance with the requirements of its homeownership set-
aside programs. See 12 CFR 951.8(b)(2). The Bank's requirements for 
monitoring under its homeownership set-aside programs shall be included 
in its AHP Implementation Plan. A Bank and its Advisory Council 
supported the proposal.
    Member certifications; back-up and other documentation: Sec.  
951.7(b)(2): Section 951.7(b)(2) of the final rule retains the existing 
requirement that a Bank review 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 of 
the homeownership set-aside program. See 12 CFR 951.8(b)(2). The Bank's 
monitoring policies also must include requirements for the Bank to 
review back-up documentation regarding household incomes maintained by 
the member, and maintenance and Bank review of other documentation in 
the Bank's discretion.
    Sampling plan: Sec.  951.7(b)(3): Section 951.7(b)(3) of the final 
rule provides that 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, but not the member certifications. One Bank requested 
clarification whether the Bank's sampling plan may be risk-based, and 
whether the sample must be statistically valid. Unlike sampling under 
the competitive application program, sampling under the homeownership 
set-aside program may not be risk-based, because there is no basis on 
which to vary risk of noncompliance when grants are provided through 
members directly to households for home purchase or rehabilitation 
assistance. The final rule does not specifically require that the 
sample be statistically valid, but Finance Board examiners will review 
the Bank's sampling plans to ensure that they are reasonable.

H. Remedial Actions for Non com pli ance: Sec.  951.8

    Reorganization and streamlining. Consistent with the proposed rule, 
Sec.  951.8 of the final rule reorganizes and streamlines the language 
in the existing regulation regarding remedial actions for noncompliance 
with the commitments made in the approved AHP application and the AHP 
regulation, in order to eliminate redundancy and provide greater 
clarity. See 12 CFR 951.12. No commenters addressed these technical 
revisions.
    Repayment of AHP subsidy by project sponsor or owner: Sec.  
951.8(b)(2). Section 951.8(b)(2) of the final rule adopts the proposed 
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 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 change will give the Banks greater 
flexibility in managing how AHP subsidies are required to be repaid in 
the event of AHP noncompliance. Several commenters supported the 
change, with one commenter noting that it would allow for a more 
efficient repayment process.
    Finance Board approval of settlements: Sec.  951.8(d)(2). 
Consistent with the proposed rule, Sec.  951.8(d)(2) of the final rule 
allows a Bank to obtain approval from ``the Finance Board'' to settle a 
disputed claim regarding an AHP subsidy, which will allow Finance Board 
staff to approve the Bank's proposed settlements relating to the AHP 
subsidy. The existing regulation requires a Bank to obtain approval 
from the Board of Directors of the Finance Board for such settlements. 
See 12 CFR 951.12(c)(2)(ii). Several commenters supported the proposal, 
with 1 commenter noting that it would allow AHP claims to be settled 
more efficiently.
    Bank reimbursement of AHP fund: Sec.  951.8(e)(1). Section 
951.8(e)(1) of the final rule adopts the proposed new 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. 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 as under the existing 
regulation. See 12 CFR 951.12(c)(3).
    One commenter objected to the proposal, stating that even in the 
case of misuse of funds resulting from Bank error, the Bank should not 
have to automatically reimburse the AHP fund. Instead, the Bank's board 
should be required to make an affirmative determination whether or not 
it must reimburse its AHP fund. If Finance Board examiners objected to 
the board's decision, then the full Board of Directors of the Finance 
Board could order the reimbursement after notice and a hearing. The 
Finance Board believes that the Bank already has ample opportunity to 
negotiate the amount of reimbursement through the examination process 
and discussions with the Finance Board.
    Parties to enforcement proceedings. Consistent with the proposed 
rule, the final rule removes existing Sec.  951.12(d), which allows a 
Bank, in its discretion, to enter into a written agreement with a 
member, project sponsor, or project owner under which such member, 
sponsor or owner consents to be a party to any Finance Board 
enforcement proceeding regarding the repayment of AHP subsidies 
received by such party, or to suspension or debarment of such party, 
provided that such party has agreed to be bound by the Finance Board's 
final determination in the enforcement proceeding. See 12 CFR 
951.12(d). A Bank opposed removal of the provision, stating that 
without the provision, third parties would not willingly consent to 
enter into such an agreement. However, such agreements are voluntary 
under the existing regulation, and regulatory authorization is not 
necessary for a Bank to enter into such an agreement.
    Re-use of repaid AHP direct subsidies in same project: Sec.  
951.8(f)(2). Section

[[Page 59285]]

951.8(f)(2) of the final rule adopts the proposed language clarifying 
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 clarifies that 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 under this section. No comments 
addressed these technical revisions.

I. Agreements: Sec.  951.9

    Section 951.9 of the final rule adopts proposed revisions to the 
existing regulation, which requires 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 revisions are intended to eliminate redundancy and provide 
greater clarity. No comments addressed these specific technical 
revisions.
    Notification of member: Sec.  951.9(a)(1). Consistent with the 
proposed rule, Sec.  951.9(a)(1) of the final rule adds a provision 
requiring the AHP agreements to acknowledge that the member has been 
notified of the AHP requirements and all Bank policies relevant to the 
member's approved AHP application. Several commenters supported the 
proposal, but requested clarification that the AHP agreements may 
include references to the Bank's detailed policies and procedures, as 
they may be amended from time to time, rather than be required to 
include the actual policies and procedures themselves. Commenters 
pointed out that the Banks otherwise would have to change the AHP 
agreements every time the policies or procedures were modified. The 
proposal was not intended to require the AHP agreements to include the 
Bank's detailed policies and procedures. The rule requires only that 
the agreement include a provision stating that the member has been 
notified of the Bank's policies.
    Monitoring agreements: Sec.  951.9(a)(5). Consistent with the 
proposed rule, Sec.  951.9(a)(5) of the final rule revises the existing 
provisions relating to monitoring agreements in order to conform them 
to the changes made elsewhere to the substantive monitoring 
requirements. See 12 CFR 951.13(b)(4). The final rule also revises the 
proposal that would have required the Banks' agreements with their 
members to set forth the members' specific monitoring responsibilities, 
as required under the Banks' monitoring policies. Instead, the final 
rule allows the Banks to reference their monitoring policies in the 
monitoring agreements. A number of commenters opposed requiring 
inclusion of the Banks' specific monitoring policies and procedures in 
their monitoring agreements, as the Banks revise their monitoring 
policies and procedures with some regularity, which could require 
frequent modifications to the agreements. Commenters suggested that the 
Banks be allowed to reference the applicable monitoring policies and 
procedures, as they may be amended from time to time, in the monitoring 
agreements. The Finance Board agrees that the Banks should not have to 
modify their monitoring agreements every time they revise their 
monitoring policies or procedures. Accordingly, the final rule revises 
the proposal by removing the language ``(and set forth in the 
agreement).''
    In addition, the final rule adopts the proposed provision that the 
agreements shall require the member to have in place an 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, but with the revision that the 
Bank's monitoring policies would not have to be included in such 
agreement. One commenter stated that a member should not be required to 
maintain a separate monitoring agreement with each project sponsor and 
owner, as this would increase the cost and administrative burden of 
participating in the program. The commenter stated that it supports the 
format currently used at some Banks, where all parties execute a single 
agreement. The language in the rule is consistent with the language in 
the current regulation and, as drafted, does not prohibit all parties 
from executing one agreement.
    Refinancing of owner-occupied units: Sec.  951.9(a)(7)(ii)(A). 
Consistent with the proposed rule, Sec.  951.9(a)(7)(ii)(A) of the 
final rule revises 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 does not have to repay the AHP 
subsidy it already used in the unit. See 12 CFR 951.13(c)(4)(i)(B). The 
final rule still requires that such households have retention 
agreements in place, because of the agreements' requirements for notice 
to the Bank of any sale or refinancing of the unit.
    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 change is 
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 change should 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. No comments 
specifically addressed this change.
    Relocation of households in rental projects: Sec.  
951.9(a)(8)(iii)(B). Section 951.9(a)(8)(iii)(B) of the final rule 
revises the proposal and 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, a Bank may, in its 
discretion, determine not to require repayment of the AHP subsidy to 
the Bank if, due to the exercise of eminent domain, or for expansion of 
housing or services, 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. This new 
authority is consistent with the current regulatory provision allowing 
sale of a project to another owner without requiring repayment of the 
subsidy, where the new owner agrees to maintain the income-eligibility 
and affordability requirements for the remainder of the retention 
period. 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 approved 
AHP application for the remainder of the retention period. See 12 CFR 
951.13(c)(5)(iii), 951.13(d)(2)(iii). Allowing project

[[Page 59286]]

sponsors to transfer the AHP subsidies, along with the corresponding 
income-eligibility and affordability commitments, to another property 
will 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.
    The proposed rule would have required a Bank to allow the 
relocation of tenants without repayment of AHP subsidy where the 
retention agreement is maintained. A number of commenters recommended 
that the relocation authority be at the discretion of a Bank in order 
to prevent abuse, and that it not be a regulatory authorization for 
sponsors of rental projects to relocate at their option and in all 
circumstances. Some commenters were concerned that the proposal could 
encourage owners to relocate tenants to less desirable properties in 
order to develop the subject property for market use, or allow a 
noncompliant owner to delay or escape repayment of misused subsidy. The 
Finance Board agrees that providing the Banks with discretion on 
whether to approve a project relocation could prevent abuses of the 
type raised by the commenters, and the final rule makes the authority 
discretionary rather than mandatory. In addition, in response to the 
comments, the final rule specifically includes the exercise of eminent 
domain and expansion of housing or services as the limited 
circumstances under which the authority may be used.
    Agreements between Banks and project sponsors or owners: Sec.  
951.9(b). As discussed above, Sec.  951.8(b)(2) of the final rule 
allows 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 Sec.  951.9(b) of the 
final rule, consistent with the proposed rule, if a Bank intends to 
require project sponsors or project owners to repay AHP subsidies 
directly to the Bank, the Bank first must have in place an agreement 
with each project sponsor and project owner in which the party agrees 
to repay the AHP subsidies directly to the Bank. A Bank and its 
Advisory Council requested clarification whether a tri-party agreement 
would be permissible under this provision. The language in the rule is 
consistent with the language in the current regulation and, as drafted, 
does not prohibit all parties to execute a single agreement.
    Application to existing AHP projects and units: Sec.  951.9(c). 
Consistent with the proposed rule, Sec.  951.9(c) of the final rule 
streamlines the language in existing Sec.  951.16, which addresses the 
application of the regulation to existing AHP projects, and relocates 
the provision to this section. See 12 CFR 951.16. A Bank requested 
clarification whether this provision continues to apply to units funded 
under the homeownership set-aside program as well as to competitive 
application projects, as the heading in the proposed rule referred to 
``projects'' and not units. This provision is intended to apply to both 
projects and units under both programs. Accordingly, the language in 
the final rule clarifies this by including references to units where 
appropriate.

J. Conflicts of Interest: Sec.  951.10

    Consistent with the proposed rule, Sec.  951.10 of the final rule 
relocates the provisions governing the adoption of conflict of interest 
policies from existing Sec.  951.3(c) to this section. See 12 CFR 
951.3(c). The final rule also adds new provisions that prohibit Bank 
directors or employees, Advisory Council members, and their family 
members, from engaging in the conflicts of interest prohibited by the 
Bank's conflict of interest policies. Section 951.10(c) prohibits a 
Bank's board of directors from delegating to Bank officers or other 
Bank employees its responsibility to adopt the conflict of interest 
policies. Several commenters supported the changes.

K. Temporary Suspension of AHP Contributions: Sec.  951.11

    Section 951.11 of the final rule adopts the proposal to 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. One commenter supported the changes.

L. Affordable Housing Reserve Fund: Sec.  951.12

    Section 951.12 of the final rule adopts the proposal to 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 Finance Board has never had to establish a 
Reserve Fund and does not expect to do so in the future, given the high 
demand for AHP funds that has always exceeded the amount of AHP funds 
available. In addition, information on the amount of any unused and 
uncommitted AHP funds would be readily obtainable by the Finance Board 
without such a regulatory mandate. One commenter supported the 
proposal.

IV. Paperwork Reduction Act

    Elsewhere in this issue of the Federal Register, the Finance Board 
is publishing a notice concerning the information collection entitled 
``Affordable Housing Program (AHP)''. The Finance Board is submitting 
the information collection to the Office of Management and Budget for 
review and approval of a 3 year extension of the OMB control number, 
3069-0006, which is due to expire on July 31, 2007.

V. Regulatory Flexibility Act

    The final rule applies only to the Banks, which do not come within 
the meaning of small entities for purposes of 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 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.

0
For the reasons stated in the preamble, the Finance Board hereby 
revises 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).

[[Page 59287]]

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 or subsidized under 
another assistance program where the rents are charged in the same way 
as under the Section 8 program, if the rent complied with this Sec.  
951.1 of this part at the time of the household's initial occupancy and 
the household continues to be assisted through the Section 8 or another 
assistance program, respectively.
    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 of this part.
    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 of this part.
    Loan pool means a group of mortgage or other loans meeting the 
requirements of this part that are purchased, pooled, and held in 
trust.
    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 5 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 2 to 4 dwelling units consisting of one owner-
occupied unit and one or more rental units is considered a single 
owner-occupied unit.
    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 households that 
are not owner-occupants, including overnight and emergency shelters, 
transitional housing for homeless households, mutual housing, single-
room occupancy housing, and manufactured housing.
    Retention period means:
    (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 established 
by the Bank in its AHP Implementation Plan; 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 whereby loan principal is repaid into the fund 
and re-lent to other borrowers.
    Single-family building means a structure with 1 to 4 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) Operates 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

[[Page 59288]]

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, in 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.
    (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.
    (3) Additional funding. A Bank may allot to its current year's 
Program from its annual required AHP contribution for the subsequent 
year, an amount up to the greater of $2 million or 20 percent of its 
annual required AHP contribution for the current year.


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 AHP Implementation 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 of this part;
    (2) The Bank's requirements for its competitive application program 
established pursuant to Sec.  951.5 of this part;
    (3) The Bank's requirements for its homeownership set-aside 
programs, if adopted by the Bank pursuant to Sec.  951.6 of this part;
    (4) The Bank's requirements for funding revolving loan funds, if 
adopted by the Bank pursuant to Sec.  951.5(c)(13) of this part;
    (5) The Bank's requirements for funding loan pools, if adopted by 
the Bank pursuant to Sec.  951.5(c)(14) of this part;
    (6) The Bank's requirements for monitoring under its competitive 
application program and any Bank homeownership set-aside programs, 
pursuant to Sec.  951.7 of this part;
    (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) of this part; and
    (8) The retention agreement requirements for projects and 
households under the competitive application program and any Bank 
homeownership set-aside programs, pursuant to Sec.  951.9(a)(7) and 
(a)(8) of this part.
    (b) Advisory Council review. Prior to the 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 for its 
consideration.
    (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 its publicly available Web site, and shall 
publish any amendments to the AHP Implementation Plan on the Web site 
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 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 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 3 
years, which shall be staggered to provide continuity in experience and 
service to the Advisory Council, except that Advisory Council members 
may be appointed to serve for terms of 1 or 2

[[Page 59289]]

years solely for purposes of reconfiguring the staggering of the 3-year 
terms. No Advisory Council member may be appointed to serve for more 
than 3 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 
annually shall submit to the Finance Board 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 its publicly available Web site.
    (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 the quarterly meetings required by the Act (12 
U.S.C. 1430(j)(11)).


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. Except as provided in paragraph 
(c)(13)(i) of this section, 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. Except as provided in 
paragraph (c)(13)(ii) of this section, 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.
    (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 
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. (i) The project's estimated sources of funds 
shall equal its estimated uses of funds, as reflected in the project's 
development budget. The difference between the project's sources of 
funds and uses of funds is the project's need for AHP subsidy, which is 
the maximum amount of AHP subsidy the project may receive. A Bank, in 
its discretion, may permit a project's sources of funds to include or 
exclude the estimated market value of in-kind donations and voluntary 
professional labor or services (excluding the value of sweat equity), 
provided that the project's uses of funds also include or exclude, 
respectively, the value of such estimates.
    (ii) A project's cash sources of funds shall include any cash 
contributions by the sponsor, any cash from sources other than the 
sponsor, and estimates of funds the project sponsor intends to obtain 
from other sources but which have not yet been committed to the 
project. In the case of homeownership projects where the sponsor 
extends permanent financing to the homebuyer, the sponsor's cash 
contribution shall include the present value of any payments the 
sponsor is to receive from the buyer, which shall include any cash down 
payment from the buyer, plus the present value of any purchase note the 
sponsor holds on the unit. If the note carries a market interest rate 
commensurate with the credit quality of the buyer, the present value of 
the note equals the face value of the note. If the note carries an 
interest rate below the market rate, the present value of the note 
shall be determined using the market rate to discount the cash flows.
    (iii) A project's cash uses are the actual outlay of cash needed to 
pay for materials, labor, and acquisition or other costs of completing 
the project. Cash costs do not include in-kind donations, voluntary 
professional labor or services, or sweat equity.
    (3) Project costs. (i) In general. (A) Taking into consideration 
the geographic location of the project, development conditions, and 
other non-financial household or project

[[Page 59290]]

characteristics, a Bank shall determine that a project's costs, as 
reflected in the project's development budget, are reasonable, in 
accordance with the Bank's project cost guidelines.
    (B) For purposes of determining the reasonableness of a developer's 
fee for a project as a percentage of total development costs, a Bank 
may, in its discretion, include estimates of the market value of in-
kind donations and volunteer professional labor or services (excluding 
the value of sweat equity) committed to the project as part of the 
total development costs.
    (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.
    (5) Financing costs. The rate of interest, points, fees, and any 
other charges for all loans that are made for the project in 
conjunction with the AHP subsidy 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. Some or all of 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 multi-family 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. (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) of this part.
    (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) of this part.
    (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 revolving loan fund sponsor that intends 
to use AHP direct subsidy in accordance with Sec.  951.5(c)(13) of this 
part shall:
    (A) Provide audited financial statements that its operations are 
consistent with sound business practices; and
    (B) Demonstrate the ability to re-lend AHP 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 loan pool sponsor that intends to use AHP subsidy 
in accordance with Sec.  951.5(c)(14) of this part shall:
    (A) Provide evidence of sound asset/liability management practices;
    (B) Provide audited financial statements that its operations are 
consistent with sound 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) Lending and re-lending of AHP direct subsidy by revolving loan 
funds. Pursuant to written policies established by a Bank's board of 
directors after consultation with its Advisory Council, a Bank, in its 
discretion, may provide AHP direct subsidy under its competitive 
application program for eligible projects and households involving both 
the lending of the subsidy and subsequent lending of subsidy principal 
and interest repayments by a revolving loan fund, provided the 
following requirements are met:
    (i) Submission of application. (A) An application for AHP subsidy 
under this paragraph (c)(13) shall include the revolving loan fund's 
criteria for the initial lending of the subsidy, identification of and 
information on a specific proposed AHP project if required in the 
Bank's discretion, the revolving loan fund's criteria for subsequent 
lending of subsidy principal and interest repayments, and any other 
information required by the Bank.
    (B) The information in the application shall be sufficient for the 
Bank to:
    (1) Determine that the criteria for the initial lending of the 
subsidy, the

[[Page 59291]]

specific proposed project if applicable, and the criteria for 
subsequent lending of subsidy principal and interest repayments, meet 
the eligibility requirements of paragraph (c) of this section; and
    (2) Evaluate the criteria for the initial lending of the subsidy, 
and the specific proposed project if applicable, pursuant to the 
scoring guidelines established by the Bank pursuant to paragraph (d) of 
this section.
    (ii) Review of application. A Bank shall review the application for 
AHP subsidy to determine that the criteria for the initial lending of 
the subsidy, the specific proposed project if applicable, and the 
criteria for subsequent lending of subsidy principal and interest 
repayments, meet the eligibility requirements of paragraph (c) of this 
section, and shall evaluate the criteria for the initial lending of the 
subsidy and the specific proposed project, if applicable, pursuant to 
the scoring guidelines established by the Bank pursuant to paragraph 
(d) of this section.
    (iii) Initial lending of subsidy. (A) The revolving loan fund's 
initial lending of the AHP subsidy shall meet the eligibility 
requirements of this paragraph (c), shall be to projects or households 
meeting the commitments in the approved application for AHP subsidy, 
and shall be subject to the requirements of Sec. Sec.  951.7(a) and 
951.9 of this part, respectively.
    (B) If a project or owner-occupied unit funded under this paragraph 
(c)(13)(iii) is in noncompliance with the commitments in the approved 
AHP application, or is sold or refinanced prior to the end of the 
applicable AHP retention period, the required amount of AHP subsidy 
shall be repaid to the revolving loan fund in accordance with 
Sec. Sec.  951.8 and 951.9 of this part, and the revolving loan fund 
shall re-lend such repaid subsidy, excluding the amounts of AHP subsidy 
principal already repaid to the revolving loan fund, to another project 
or owner-occupied unit meeting the initial lending requirements of this 
paragraph (c)(13)(iii) for the remainder of the retention period.
    (iv) Subsequent lending of AHP subsidy principal and interest 
repayments. (A) AHP subsidy principal and interest repayments received 
by the revolving loan fund from the initial lending of the AHP direct 
subsidy shall be re-lent by the revolving loan fund in accordance with 
the requirements of this paragraph (c)(13)(iv), except that the 
revolving loan fund, in its discretion, may provide part or all of such 
repayments as nonrepayable grants to eligible projects in accordance 
with the requirements of this paragraph (c)(13)(iv).
    (B) The revolving loan fund's subsequent lending of AHP subsidy 
principal and interest repayments shall be for the purchase, 
construction, or rehabilitation of owner-occupied projects for 
households with incomes at or below 80 percent of the median income for 
the area, or of rental projects where at least 20 percent of the units 
are occupied by and affordable for households with incomes at or below 
50 percent of the median income for the area, and shall meet all other 
eligibility requirements of this paragraph (c).
    (C) A Bank may, in its discretion, require the revolving loan 
fund's subsequent lending of subsidy principal and interest repayments 
to be subject to retention period, monitoring, and recapture 
requirements as defined by the Bank in its AHP Implementation Plan.
    (v) Return of unused AHP subsidy. The revolving loan fund shall 
return to the Bank any 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 
established by a Bank's board of directors after consultation with its 
Advisory Council, a Bank, in its discretion, may provide AHP subsidy 
under its competitive application program for the origination of first 
mortgage or rehabilitation loans with subsidized interest rates to AHP-
eligible households through a purchase commitment by an entity that 
will purchase and pool the loans, provided the following requirements 
are met:
    (i) Eligibility requirements. The loan pool sponsor's use of the 
AHP subsidies shall meet the requirements under this paragraph (c)(14), 
and shall not be used for the purpose of providing liquidity to the 
originator or holder of the loans, or paying the loan pool's operating 
or secondary market transaction costs.
    (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 interest-rate reductions as specified in the 
approved application for AHP subsidy to households with incomes at or 
below 80 percent of the median income for the area. 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 and the Bank's agreement with the loan pool 
sponsor, which shall not exceed 1 year from the date of approval of the 
AHP application.
    (B) As an alternative to using a forward commitment, the loan pool 
sponsor may purchase an initial round of loans that were not originated 
pursuant to an AHP-specific forward commitment, provided that the 
entities from which the loans were purchased are required to use the 
proceeds from the initial loan purchases within time limits on the use 
of the AHP subsidy as specified by the Bank in its AHP Implementation 
Plan and the Bank's agreement with the loan pool sponsor, which shall 
not exceed 1 year from the date of approval of the AHP application. The 
proceeds shall be used by such entities to assist households that are 
income-eligible under the approved AHP application during subsequent 
rounds of lending, and such assistance shall be provided in the form of 
a below-market AHP-subsidized interest rate as specified in the 
approved AHP application.
    (iii) Each AHP-assisted owner-occupied unit and rental project 
receiving AHP direct subsidy or a subsidized advance shall be subject 
to the requirements of Sec.  951.7(a), 951.8, and 951.9, respectively, 
of this part.
    (iv) Where AHP direct subsidy is being used to buy down the 
interest rate of a loan or loans from a member or other party, the loan 
pool sponsor shall use the full amount of the AHP direct subsidy to buy 
down the interest rate on a permanent basis at the time of closing on 
such loan or 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 and included in its AHP Implementation Plan 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; or
    (ii) Homebuyer or homeowner 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:

[[Page 59292]]

    (i) Certain prepayment fees. Prepayment fees imposed by a Bank on a 
member for a subsidized advance that is prepaid, unless:
    (A) The project is in financial distress that cannot be remedied 
through a project modification pursuant to Sec.  951.5(f) of this part;
    (B) The prepayment of the subsidized advance is necessary to retain 
the project's affordability and income targeting commitments;
    (C) Subsequent to such prepayment, the project will continue to 
comply with the terms of the approved AHP application and the 
requirements of this part for the duration of the original retention 
period;
    (D) Any unused AHP subsidy is returned to the Bank and made 
available for other AHP projects; and
    (E) The amount of AHP subsidy used for the prepayment fee may not 
exceed the amount of the member's prepayment fee to the Bank.
    (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 AHP direct subsidies to a project.
    (d) Scoring of applications. (1) In general. A Bank shall establish 
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 5 
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; and
    (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 9 scoring 
criteria:
    (i) Use of donated or conveyed government-owned or other 
properties. The financing of housing using a significant proportion, as 
defined by the Bank in its AHP Implementation Plan, 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, 
adopted by the Bank 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;

[[Page 59293]]

    (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 infill 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 2 financial institutions; or
    (L) In-District projects. The financing of housing located in the 
Bank's District.
    (vii) Second District priority: defined housing need in the 
District. The satisfaction of a housing need in the Bank's District, as 
defined by the Bank in its AHP Implementation Plan. 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.
    (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.
    (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 4 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 AHP 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 subsidy. A Bank shall establish and 
implement policies, including 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. If a Bank cancels any AHP application approvals 
due to lack of such progress, the Bank shall make the AHP subsidies 
available for other AHP-eligible projects.
    (3) Compliance upon disbursement of AHP subsidies. A Bank shall 
establish and implement policies for determining, prior to its initial 
disbursement of AHP subsidies for an approved project, and prior to 
each 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. If a Bank cancels any AHP application approvals due to 
noncompliance with eligibility requirements of paragraph (c) of this 
section, the Bank shall make the AHP subsidies available for other AHP-
eligible projects.
    (4) Changes in approved AHP subsidy amount where a direct subsidy 
is used

[[Page 59294]]

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 reuse 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) 
of this part, 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 made 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) Adoption of the AHP Implementation Plan required pursuant to 
Sec.  951.3 of this part; and
    (ii) Approving or disapproving the applications for AHP subsidy 
pursuant to Sec.  951.5(e) of this part.
    (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 shall 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:
    (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 in the Bank's homeownership set-aside program, with such time of 
enrollment by the member defined by the Bank in its AHP Implementation 
Plan;
    (ii) Complete a homebuyer or homeowner counseling program provided 
by, or based on one provided by, an organization experienced in 
homebuyer or homeowner counseling, in the case of households that are 
first-time homebuyers; and
    (iii) Are first-time homebuyers, in the case of households 
receiving funds pursuant to the first-time homebuyer requirement in 
Sec.  951.2(b)(2) of this part, and meet such other eligibility 
criteria that may be established by the Bank in its AHP Implementation 
Plan, such as a matching funds requirement, homebuyer or homeowner 
counseling requirement for households that are not first-time 
homebuyers, 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 or manufactured housing, 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) of this part.
    (6) Financial or other concessions. The Bank may, in its 
discretion, require members and other lenders to provide financial or 
other concessions, as defined by the Bank in its AHP Implementation 
Plan, to households in connection with providing the AHP direct subsidy 
or financing to the household.
    (7) Financing costs. The rate of interest, points, fees, and any 
other charges for all loans made 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) Cash back to household. A member may provide cash back to a 
household at closing on the mortgage loan in an amount not exceeding 
$250, as determined by the Bank in its AHP Implementation Plan, and a 
member shall use any AHP direct subsidy exceeding such amount that is 
beyond what is needed at closing for closing costs and the approved 
mortgage amount as a credit to reduce the principal of the mortgage 
loan or as a credit toward the household's monthly payments on the 
mortgage loan.
    (d) Approval of AHP applications. A 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 direct 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.

[[Page 59295]]

    (2) Reservation of homeownership set-aside subsidies. A Bank shall 
establish and implement policies for reservation of homeownership set-
aside subsidies for households enrolled in the Bank's homeownership 
set-aside program. The policies shall provide that set-aside subsidies 
be reserved no more than 2 years in advance of the Bank's time limit in 
its AHP Implementation Plan for draw-down and use of the subsidies by 
the household and the reservation of subsidies be made from the set-
aside allocation of the year in which the Bank makes the reservation.
    (3) Progress towards use of AHP direct subsidy. A Bank shall 
establish and implement policies, including 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. If a Bank cancels 
any AHP application approvals due to lack of such progress, 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 for owner-occupied and rental projects. (i) Adoption and 
implementation. Pursuant to written policies established by a Bank, the 
Bank shall monitor each AHP owner-occupied and rental project under its 
competitive application program prior to, and within a reasonable 
period of time after, project completion to determine, at a minimum, 
whether:
    (A) The project is making satisfactory progress towards completion, 
in compliance with the commitments made in the approved AHP 
application, Bank policies, and the requirements of this part;
    (B) Following completion of the project, satisfactory progress is 
being made towards occupancy of the project by eligible households; and
    (C) Within a reasonable period of time after project completion, 
the project meets the following requirements, at a minimum:
    (1) The AHP subsidies were used for eligible purposes according to 
the commitments made in the approved AHP application;
    (2) The household incomes and rents comply with the income 
targeting and rent commitments made in the approved AHP application;
    (3) The project's 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) Each AHP-assisted unit of an owner-occupied project and rental 
project is subject to AHP retention agreements that meet the 
requirements of Sec.  951.9(a)(7) or (a)(8), respectively, of this 
part; and
    (5) The services and activities committed to in the approved AHP 
application have been provided in connection with the project.
    (ii) Back-up and other project documentation. The Bank's written 
monitoring policies 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.
    (iii) Sampling plan. The Bank shall not use a sampling plan to 
select the projects to be monitored under this paragraph (a)(1), but 
may use a reasonable risk-based sampling plan to review the back-up 
project documentation.
    (2) Reliance on long-term tax credit monitoring for rental 
projects. For completed AHP rental projects that have been allocated 
federal Low-Income Housing Tax Credits (tax credits), a Bank may, in 
its discretion, for purposes of long-term AHP monitoring under its 
competitive application program, rely on the monitoring by the state-
designated housing credit agency administering the tax credits of the 
income targeting and rent requirements applicable under the Low-Income 
Housing Tax Credit Program, and the Bank need not obtain and review 
reports from such agency or otherwise monitor the projects' long-term 
AHP compliance.
    (3) Reliance on other long-term governmental monitoring for rental 
projects. For completed AHP rental projects that received funds other 
than tax credits from federal, state, or local government entities, a 
Bank may, in its discretion, for purposes of long-term AHP monitoring 
under its competitive application program, rely on the monitoring by 
such entities of the income targeting and rent requirements applicable 
under their programs, provided that the Bank can show that:
    (i) The compliance profiles regarding income targeting, rent, and 
retention period requirements of the AHP and the other programs are 
substantively equivalent;
    (ii) The entity has demonstrated and continues to demonstrate its 
ability to monitor the project;
    (iii) 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
    (iv) The Bank reviews the reports from the monitoring entity to 
confirm that they comply with the Bank's monitoring policies.
    (4) Long-term monitoring policies for rental projects. (i) Adoption 
and implementation. In cases where a Bank does not rely on monitoring 
by a federal, state, or local government entity pursuant to paragraphs 
(a)(2) or (a)(3) of this section, pursuant to written policies 
established by the Bank, the Bank shall monitor completed AHP rental 
projects under its competitive application program, commencing in the 
second year after project completion to determine, at a minimum, 
whether during the full 15-year retention period, the household incomes 
and rents comply with the income targeting and rent commitments, 
respectively, made in the approved AHP applications.
    (ii) Annual project owner certifications; backup and other project 
documentation. A Bank's written monitoring policies 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 made in the approved AHP application;
    (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.
    (iii) Risk factors and other monitoring. (A) Risk factors; other 
monitoring. A Bank's written monitoring policies 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 of the project provided by a federal, 
state, or local government entity.
    (B) Risk-based sampling plan. A Bank may use a reasonable, risk-
based sampling plan to select the rental projects to be monitored under 
this paragraph (a)(4), and to review the annual project owner 
certifications, back-up, and any other project documentation. The risk-
based sampling plan and its basis shall be in writing.
    (5) Annual adjustment of targeting commitments. For purposes of

[[Page 59296]]

determining compliance with the targeting commitments in an approved 
AHP application for both initial and long-term AHP 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 of this part, for the household occupying the unit.
    (b) Homeownership set-aside programs: Monitoring policies. (1) 
Adoption and implementation. Pursuant to written policies adopted by a 
Bank, the Bank shall monitor 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) of this part 
and the Bank's homeownership set-aside program policies; and
    (ii) All other applicable eligibility requirements in Sec.  
951.6(c) of this part 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) of this part.
    (2) Member certifications; back-up and other documentation. The 
Bank's written monitoring policies 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) of this part;
    (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.
    (3) Sampling plan. The 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, but not the member 
certifications required in paragraph (b)(2) of this section. The 
sampling plan and its basis shall be in writing.


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 commitments made in 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) of this part; 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 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; and
    (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

[[Page 59297]]

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 member. The member has been notified of the 
requirements of this part as they may be amended from time to time, 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 or project 
owner in which the project sponsor or project owner agrees 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) of 
this part.
    (ii) Noncompliance by a project sponsor or owner. (A) Agreement. 
The member shall have in place an agreement with each project sponsor 
or project owner in which the project sponsor or project owner agrees 
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) of this part, 
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) of this 
part (if applicable).
    (5) Project monitoring. (i) Monitoring by the member. The member 
shall comply with the monitoring requirements applicable to it, as 
established by the Bank in its monitoring policies pursuant to Sec.  
951.7 of this part.
    (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 pursuant to Sec.  951.7 of this part.
    (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 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); and
    (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) of this part, 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; or
    (B) To the member or project sponsor. To the member or project 
sponsor for reuse 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); and
    (iv) The obligation to repay AHP subsidy to the Bank shall 
terminate after any foreclosure.

[[Page 59298]]

    (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) If authorized by the Bank, in its discretion, the households 
are relocated, due to the exercise of eminent domain, or for expansion 
of housing or services, 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; and
    (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 both lent and re-lent by a revolving loan fund 
pursuant to Sec.  951.5(c)(13) of this part.
    (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; or
    (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 or owners. A Bank 
shall have in place an agreement with each project sponsor or project 
owner, in which the project sponsor or project owner agrees to repay 
AHP subsidies directly to the Bank in accordance with the requirements 
of Sec.  951.8(b)(2)(ii) of this part (if applicable).
    (c) Application to existing AHP projects and units. 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, and project owners 
receiving AHP subsidies under the competitive application program, and 
between Banks, members and unit owners under the homeownership set-
aside program. 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, 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(a) of this part 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.

[[Page 59299]]

    (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) of this part, 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) of this part 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: September 13, 2006.

    By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
[FR Doc. 06-8492 Filed 10-5-06; 8:45 am]
BILLING CODE 6725-01-P