[Federal Register Volume 74, Number 93 (Friday, May 15, 2009)]
[Proposed Rules]
[Pages 22848-22867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11329]
[[Page 22848]]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 925
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1263
RIN 2590-AA18
Federal Home Loan Bank Membership for Community Development
Financial Institutions
AGENCY: Federal Housing Finance Board and Federal Housing Finance
Agency.
ACTION: Proposed rule.
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SUMMARY: Pursuant to the requirements of the Federal Home Loan Bank Act
(Bank Act), as amended by section 1206 of the Housing and Economic
Recovery Act of 2008 (HERA), the Federal Housing Finance Agency (FHFA)
proposes to amend its membership regulations to authorize non-federally
insured, CDFI Fund-certified community development financial
institutions (CDFIs) to become members of a Federal Home Loan Bank
(Bank). The newly eligible CDFIs include community development loan
funds, venture capital funds and state-chartered credit unions without
federal insurance. This notice of proposed rulemaking sets out the
eligibility and procedural requirements for CDFIs that wish to become
members of a Bank.
DATES: FHFA will accept written comments on this proposed rule on or
before July 14, 2009.
ADDRESSES: You may submit your comments on the proposed regulation
identified by regulatory information number (RIN) 2590-AA18, by any one
of the following methods:
U.S. Mail, United Parcel Post, Federal Express, or Other
Mail Service: The mailing address for comments is: Alfred M. Pollard,
General Counsel, Attention: Comments/RIN 2590-AA18, Federal Housing
Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552.
Hand Delivered/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA18,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington DC 20552. The package should be logged at the Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
E-mail: Comments to Alfred M. Pollard, General Counsel may
be sent by e-mail to [email protected]. Please include ``RIN 2590-
AA18'' in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at [email protected] to ensure timely receipt by the
agency. Include the following information in the subject line of your
submission: Federal Housing Finance Agency, Proposed Rule: Federal Home
Loan Bank Membership for Community Development Financial Institutions,
RIN 2590-AA18.
We will post all public comments we receive without change,
including any personal information you provide, such as your name and
address, on the FHFA Web site at http://www.fhfa.gov.
FOR FURTHER INFORMATION CONTACT: Sylvia Martinez, Senior Policy
Analyst/Adviser, 202-408-2825, [email protected]; Amy Bogdon,
Senior Advisor, 202-408-2546, [email protected], Division of Federal
Home Loan Bank Regulation; Deattra Perkins, Community Development
Specialist, 202-408-2527, [email protected], Division of Housing
Mission and Goals. For legal questions contact Sharon B. Like,
Associate General Counsel, 202-414-8950, [email protected]. You can
send regular mail to the Federal Housing Finance Agency, Fourth Floor,
1700 G Street, NW., Washington DC 20552. The telephone number for the
Telecommunications Device for the Deaf is 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Regulatory Background
Effective July 30, 2008, Division A of HERA, Public Law No. 110-
289, 122 Stat. 2654 (2008), titled the Federal Housing Finance
Regulatory Reform Act of 2008, created FHFA as an independent agency of
the Federal Government. HERA transferred supervisory and oversight
responsibilities over the Federal National Mortgage Association (Fannie
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the
Federal Home Loan Banks (collectively, Regulated Entities) from the
Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal
Housing Finance Board (FHFB) to FHFA. The Regulated Entities continue
to operate under regulations promulgated by OFHEO and FHFB until such
time as the existing regulations are supplanted by regulations
promulgated by FHFA.
Each Bank is a cooperative institution that is owned by its
members, all of which must comply with certain statutory requirements
in order to become members. To be eligible for Bank membership, an
applicant must be one of the several types of financial institutions
listed in section 4(a)(1) of the Bank Act, must meet certain other
eligibility criteria, and must purchase stock of the Bank, as set forth
in sections 4 and 6 of the Bank Act. See 12 U.S.C. 1424, 1426. The
existing FHFB regulation implementing the membership eligibility and
minimum stock purchase provisions of the Bank Act (Membership
Regulation) is codified at 12 CFR part 925. The proposed rule would
relocate part 925 in its entirety to part 1263, and would amend certain
provisions of the existing Membership Regulation to accommodate the
addition of CDFIs to the institutions that may become Bank members.
As a threshold matter, in order to be eligible for Bank membership,
an applicant must be authorized under federal or state law to become a
member of, purchase stock in, do business with, and maintain deposits
in, the Bank to which the applicant has applied for membership. Prior
to amendment by HERA, section 4(a)(1) provided that any building and
loan association, savings and loan association, cooperative bank,
homestead association, insurance company, savings bank, or federally
insured depository institution (including credit unions) was eligible
to become a Bank member. Thus, until HERA was enacted a CDFI could not
become a member of a Bank unless it also was a federally insured
depository institution, such as a community development bank, thrift or
credit union. As of September 30, 2008, 125 such depository institution
CDFIs had become members of the Bank System. Section 1206 of HERA
amended section 4(a)(1) to make all CDFIs that are certified by the
CDFI Fund of the US Department of the Treasury under the Community
Development Banking and Financial Institutions Act of 1994 (CDFI Act)
eligible to become members of a Bank. See 12 U.S.C. 1424(a)(1) (as
amended). Thus, loan funds, venture capital funds and state-chartered
credit unions without federal deposit insurance are now eligible for
Bank membership provided they are certified by the CDFI Fund and have
the authority under state law to do those things necessary to become a
member, i.e., to buy Bank stock, borrow and pledge collateral. The
proposed rule would apply only to those newly eligible institutions.
CDFIs that also are eligible for membership because they are federally
insured depository
[[Page 22849]]
institutions would continue to follow the existing rules relating to
membership for depository institutions.
All institutions that are eligible for membership under section
4(a)(1) also must comply with certain additional criteria specified in
section 4(a)(1) and (2) in order to be approved for membership.
Specifically, under section 4(a)(1), as amended by HERA, an applicant
must demonstrate that it: (a) Is duly organized under state or federal
law; (b) either is subject to inspection and regulation under banking
or similar laws or is certified as a CDFI under the CDFI Act; and (c)
makes such home mortgage loans as are long-term loans. In addition,
under section 4(a)(2), an insured depository institution applicant
must: (a) Have at least 10 percent of its total assets in residential
mortgage loans (unless it qualifies as a ``community financial
institution'') \1\; (b) be in sound financial condition such that a
Bank may safely make advances to it; (c) have a character of management
that is consistent with sound and economical home financing; and (d)
have a home-financing policy that is consistent with sound and
economical home financing. 12 U.S.C. 1424(a)(1), (2).
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\1\ A ``community financial institution'' is a depository
institution that is insured by the Federal Deposit Insurance
Corporation and has average total assets of $1 billion or less. 12
U.S.C. 1422(10) (as amended). This proposed rulemaking does not
affect the terms under which a ``community financial institution''
may become a member of a Bank.
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The existing Membership Regulation expands on those statutory
requirements and further establishes a review and approval process for
applications for membership in a Bank. See 12 CFR 925.2, 925.3. Any
institution seeking membership in a Bank is required to submit an
application to the Bank for approval.\2\ The Membership Regulation also
includes separate provisions governing the admission of depository
institutions and insurance companies, respectively, recognizing that
each type of institution operates under a different business model and
a different regulatory structure. The proposed rule would follow a
similar approach for CDFIs, and would establish separate provisions for
CDFI applicants, recognizing that they too operate in a different
environment and under a different regulatory structure. The proposed
rule would delineate the documentation and other information that a
CDFI applicant must submit to a Bank as part of a membership
application, as well as the standards that a CDFI applicant must meet
in order to be deemed to have satisfied the various statutory and
regulatory requirements for membership.\3\
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\2\ See 12 CFR 925.2(a). Generally speaking, an institution is
eligible to become a member only of the Bank of the district in
which its principal place of business is located. An institution is
deemed to be located in the state in which it maintains its home
office, established as such in conformity with the laws under which
the institution is organized. See 12 CFR 925.18.
\3\ Although the proposed rule includes provisions relating to
the financial condition of a CDFI applicant, those provisions are
threshold requirements for admission to membership. As is the case
with respect to all other members, a Bank will typically conduct a
more thorough analysis of a CDFI's financial condition and the
adequacy of its collateral when determining whether to make advances
to such members.
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Once a Bank has approved a CDFI for membership, the CDFI must
purchase the required amount of Bank stock in order to complete the
process of becoming a member of the Bank. See 12 U.S.C. 1426. The
specific amount of stock that any new member, including a CDFI, must
purchase is set out in each Bank's capital structure plan, and will
vary from Bank to Bank.\4\ Typically, an institution must purchase a
certain amount of stock in order to become a member, and may be
required to purchase additional stock in order to borrow from the Bank
or to obtain other services from the Bank. In addition to purchasing
stock, any member, including a CDFI, that wishes to borrow from its
Bank must pledge certain types of collateral to secure its repayment
obligation, and must otherwise demonstrate to the Bank that it is
creditworthy. Under the Bank Act, a member may pledge only the
following types of collateral for an advance: (a) Fully disbursed,
whole first mortgages on improved residential property not more than 90
days delinquent, or securities representing a whole interest in such
mortgages; (b) securities issued, insured or guaranteed by the U.S.
Government or any agency thereof; (c) cash or deposits of a Bank; (d)
other real estate-related collateral acceptable to the Bank, provided
its value is readily ascertainable and the Bank can perfect its
interest; and (e) for institutions that qualify as ``community
financial institutions,'' secured loans for small business, agriculture
or community development activities, or securities representing a whole
interest in such secured loans. See 12 U.S.C. 1430(a)(3) (as amended).
Each Bank sets its own lending and collateral policies, which may vary
from Bank to Bank and which will apply to all borrowing members of that
Bank.
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\4\ Because the Chicago Bank has not yet implemented its capital
structure plan, any CDFI that becomes a member of that Bank must
purchase stock in the amount specified by 12 CFR 1263.20 of the
proposed rule, which carries over the provisions from 12 CFR 925.20
of the existing rules.
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Under the Bank Act and FHFA regulations, all members also must
comply with certain community investment and first-time homebuyer
lending standards in order to maintain access to long-term advances.
See 12 U.S.C. 1430(g)(2); 12 CFR part 944. As discussed below, FHFA
believes that any CDFI that becomes a member of a Bank should be able
to satisfy the current community support requirements and therefore is
not proposing to establish community support requirements unique to
CDFIs, but welcomes comment on whether certain CDFIs may have
difficulties in complying with the current requirements that would
warrant establishing separate community support standards for CDFIs.
B. CDFIs
CDFIs are private nonprofit and for-profit financial institutions
providing financial services dedicated to economic development and
community revitalization in underserved markets. The CDFIs comprise
diverse institutional structures and business lines. The four
categories of institutions eligible for CDFI certification and CDFI
Fund financial support are: (1) Federally regulated insured depository
institutions and holding companies (bank CDFIs); (2) credit unions,
whether federally or state chartered; (3) community development loan
funds, which are unregulated institutions specializing in financing of
housing, businesses or community facilities that provide health care,
childcare, educational, cultural or social services; and (4) community
development venture capital funds, which are unregulated institutions
that provide equity and debt-with-equity-features to small and medium-
sized businesses in distressed communities.
The CDFIs serve as intermediary financial institutions that promote
economic growth and stability in low-and-moderate-income communities. A
large number are not-for-profit community development organizations
with a long history of providing lending and services to low-and-
moderate-income communities. They provide a unique range of financial
products and services, such as mortgage financing for low-income and
first-time homebuyers; homeowner or homebuyer counseling; financing for
not-for-profit affordable housing developers; flexible underwriting and
risk capital for needed community facilities; financial literacy
training; technical assistance; and commercial loans and investments to
assist small start-up businesses in low-income areas. Some CDFIs
provide
[[Page 22850]]
community facilities such as child care centers alongside affordable
housing.
Frequently, CDFIs serve communities that are underserved by
conventional financial institutions and may offer products and services
that are not available from conventional financial institutions. Their
lending and community support activities are thus consistent with the
Banks' housing mission. By stabilizing the communities in a Bank's
District, CDFIs can provide added value to that Bank as well as its
members.
There is no single source of information covering all CDFIs, but
reports from the CDFI Fund and other organizations provide a picture of
the industry. A 2007 study by Abt Associates,\5\ which included both
certified and uncertified CDFIs, estimated that there were as many as
1,122 CDFIs throughout the country in 2005. The CDFI Fund reported that
there were 804 certified CDFIs as of March 1, 2008.\6\ Loan funds, most
of which are nonprofit organizations, accounted for 68 percent of the
certified CDFIs. Eighteen percent of certified CDFIs were credit
unions, 10 percent were banks or holding companies, and 3.5 percent
were community venture funds.
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\5\ See Abt Associates, Assessment of Community Development
Financial Institutions Fund (CDFI) Training Program, Training
Program & CDFI Certification, August 17, 2007 (p.2). This estimate
is based on a list of CDFIs that either were included in one of the
CDFI Fund's databases or had received a CDFI Data Project (CDP)
survey in the past three years.
\6\ Community Development Financial Institutions Fund,
``Overview. CDFI Fund Director's presentation before the National
Interagency Community Reinvestment Conference.'' San Francisco:
Federal Reserve Bank of San Francisco, April 1, 2008.
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CDFIs are generally small in asset size. The CDFI Fund reported
that the average asset size for certified CDFIs was $32 million for
depository institutions and $22.5 million for non-depository
institutions.\7\ Despite the typical CDFI's relatively small asset
size, studies demonstrate meaningful impact to low-and-moderate income
communities by these intermediaries. The CDFIs provide diverse
financial services and other benefits to urban, rural and Native
communities. A 2003-2005 trend analysis by the CDFI Fund \8\ reported
that its sample of CDFIs financed over 90,000 units of housing, 80,000
of which were affordable housing units. This group of CDFIs also
provided financing and counseling for over 12,000 first-time homebuyers
over this period. The Opportunity Finance Network, a trade association
of 160 CDFI members, reports that over the past 20 years, its members
financed over 533,394 housing units.\9\ Given the credit conditions
across the country, demand for CDFI products and services is expected
to increase. In a recent survey conducted by the Opportunity Finance
Network, CDFI respondents reported an increase in demand for their
products as a result of the declining availability of bank credit.\10\
However, one common problem facing non-depository CDFIs is that they do
not have access to long-term funding, limiting their ability to provide
housing finance to their communities.
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\7\ Community Development Financial Institutions Fund,
``Overview.'' Presented April 1, 2008.
\8\ Community Development Financial Institutions Fund, Three
Year Trend Analysis of Community Investment Impact System
Institutional Level Report Data FY 2003-2005. US Department of the
Treasury. December 2007. The report includes data for 2003 from 223
CDFIs, for 2004 from 236 CDFIs and for 2005 from 173 CDFIs.
\9\ Opportunity Finance Network, Overview: About Opportunity
Finance Network. See http://www.opportunityfinance.net/about/about.aspx. Accessed on December 15, 2008.
\10\ Opportunity Finance Network, Findings from the Third
Quarter 2008 CDFI Market Conditions Survey, October 2008.
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The CDFI Fund of the U.S. Treasury was created to promote economic
revitalization and community development through investment in and
financial and technical assistance to CDFIs. See 12 U.S.C. 4701(b). The
CDFI Fund promotes these purposes through several programs, including
the CDFI Program, the New Markets Tax Credit Program, the Bank
Enterprise Award Program and Native Initiatives. See 12 U.S.C. 4701 et
seq.; 12 CFR part 1805; http://www.cdfifund.gov.
An institution must apply to the CDFI Fund in order to receive
awards under its programs. See 12 U.S.C. 4704; 12 CFR 1805.200. To
receive a CDFI award, an institution must be certified by the CDFI Fund
as a qualifying CDFI under the CDFI Act. An institution may apply for
CDFI certification at any time. If an organization is already certified
as a CDFI, the CDFI Fund may require as a condition for receiving an
award, that a CDFI submit a Certification of Material Events form
attesting that there has been no occurrence that affects the
organization's strategic direction, mission or business operation and,
thereby, its status as a CDFI. An applicant for CDFI certification must
meet each of the following general requirements in order to be
certified as a CDFI:
(i) Is a legal entity at the time of certification application;
(ii) Has a primary mission of promoting community development;
(iii) Is a financing entity;
(iv) Principally serves an economically distressed area, low-income
population, or other population that lacks access to financing (known
as an eligible ``target market'');
(v) Provides technical assistance, training or other development
services in conjunction with its financing activities;
(vi) Is accountable to its target market through representation on
its board or other means; and
(vii) Is a non-governmental entity that is not controlled by one or
more governmental entities (Tribal governments excluded).
See 12 U.S.C. 4702(5); 12 CFR 1805.201.
The CDFI certification eligibility requirements are more fully
elaborated in the CDFI program regulations. See 12 CFR 1805.201. The
CDFI Fund is not a regulator of CDFIs, and does not evaluate their
safety and soundness during either the certification or awards
application processes at the level that would be conducted by a
financial safety and soundness regulator. The CDFI Fund regulations
further state that a CDFI certification does not constitute an opinion
by the CDFI Fund as to the financial viability of the certified CDFI or
that the CDFI will be selected to receive an award from the CDFI Fund.
See 12 CFR 1805.201(a). Thus, receipt of a certification or award alone
does not indicate that a CDFI is financially sound, but only that it
meets the certification or award eligibility criteria.
C. HERA Section 1201
Section 1201 of HERA requires the FHFA Director to consider the
differences between the Banks and the Enterprises in rulemakings that
affect the Banks with respect to the Banks' cooperative ownership
structure, mission of providing liquidity to members, affordable
housing and community development mission, capital structure and joint
and several liability. See 12 U.S.C. 4513(f). In preparing the proposed
rule, the Director considered these factors and determined that the
rule is appropriate, particularly because the proposed amendments would
implement statutory provisions of the Bank Act that apply only to the
Banks. See 12 U.S.C. 1424(a). Nonetheless, FHFA requests comments about
whether these factors should result in a revision of the proposed
amendment as it relates to the Banks.
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II. Analysis of Proposed Rule
A. Relocation of Membership Regulation to Part 1263
The proposed rule would relocate the Membership Regulation in its
entirety from part 925 of the FHFB regulations to part 1263 of the FHFA
regulations. The proposed rule also would amend certain provisions of
the relocated Membership Regulation to allow CDFIs to become Bank
members. Although those amendments are not evident from the regulatory
text of the proposed rule because the provisions are being relocated in
their entirety, any material revisions to the regulatory text are
discussed in this preamble.
B. Scope of the Proposed Regulation
As noted previously, approximately 125 depository institutions that
also are CDFIs have already become members of a Bank by virtue of their
status as federally insured depository institutions. Under the terms of
this proposed rule, any such institutions that seek to become members
of a Bank in the future would be required to follow the existing
membership regulations and procedures applicable for insured depository
institutions. The amendments embodied in this proposed rule are
intended to apply only to those types of CDFIs that were not eligible
for membership prior to the passage of HERA, such as loan funds,
venture capital funds and credit unions with state or private
insurance.
C. Definitions
Consistent with the scope of the proposed regulation, FHFA is
proposing to amend the definitions section of the Membership Regulation
by revising existing definitions and adding new definitions to reflect
the statutory changes related to CDFI members. Thus, section 1263.1 of
the proposed rule defines ``community development financial
institution'' and ``CDFI'' to include any institution that is certified
as a CDFI by the CDFI Fund of the U.S. Department of the Treasury,
other than a bank or savings association that is insured under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) or a credit
union that is insured under the Federal Credit Union Act (12 U.S.C.
1751 et seq.). Because federally insured depository institutions and
credit unions already are eligible for membership under the pre-HERA
law, the definition of CDFI excludes those institutions. The proposal
also defines ``CDFI credit union'' as a state chartered credit union
that has been certified by the CDFI Fund and does not have federal
deposit insurance. The CDFI credit unions are the only types of
depository institution that are affected by the HERA CDFI amendments
and, for reasons stated below, those entities will be evaluated for
financial condition under the same provisions that currently apply to
state chartered credit unions that are currently eligible for
membership because they are insured by the National Credit Union
Administration (NCUA).
The proposed rule also adds or revises several other definitions in
order to accommodate the admission of CDFIs to Bank membership. Those
defined terms are ``appropriate regulator,'' ``CDFI Fund,'' ``gross
revenues,'' ``operating expenses,'' ``restricted assets,'' ``total
assets,'' and ``unrestricted cash and cash equivalents.'' The proposal
would revise the existing definition of ``appropriate regulator'' to
add CDFI credit unions to the list of financial institutions included
within the current rule. As noted previously, FHFA is proposing to
subject CDFI credit unions to the same financial condition provisions
that apply to state chartered credit unions that are insured by the
NCUA, and these definitions are consistent with that approach. Most of
the other new definitions relate to terms that are used elsewhere in
the proposal to measure the financial condition and performance of
those CDFIs that are not subject to state or federal regulation.
Generally speaking, these financial definitions are intended to reflect
the terms used in the financial performance standards employed by the
CDFI Fund or by third-party auditors experienced in assessing the
financial performance of the CDFIs. FHFA requests comments on whether
the proposed definitions are appropriate in the context of assessing
the financial condition of CDFI applicants.
Apart from those new or revised definitions, the proposed rule
carries over into part 1263 all of the existing definitions from the
Membership Regulation, some of which include minor clarifying or
technical changes.
D. Application Process
Subpart B of the current Membership Regulation includes several
provisions--Sec. Sec. 925.2 to 925.5--relating to the process for the
submission and consideration of applications for membership. The
proposed rule would relocate all of those provisions without
substantive change to proposed Sec. Sec. 1263.2, 1263.3, 1263.4, and
1263.5, respectively. The proposed rule would make minor changes to
certain of those provisions, none of which are intended to change the
substance of those provisions.
E. Eligibility Requirements
Subpart C of the current Membership Regulation includes 13
provisions relating principally to the eligibility requirements for
membership and how they are to be applied to the various types of
institutions that may become members of a Bank. Some of these
regulatory provisions are readily applicable to CDFIs in the same
manner as other financial institutions, but others require some
adaptation to reflect the unique characteristics of CDFIs. The proposed
rule would amend certain of these provisions to address the statutory
changes that have allowed CDFIs to become members. In proposing these
amendments, FHFA has sought to develop regulatory standards that
recognize the unique characteristics of CDFIs and the valuable
contribution they make to their communities, while remaining
sufficiently rigorous to comply with the statutory requirements.
General eligibility requirements. Section 4(a)(1) of the Bank Act
requires that all applicants for Bank membership meet certain
requirements for membership. These requirements are currently listed in
Sec. 925.6(a) of the Membership Regulation and are being retained in
the proposed rule at proposed Sec. 1263.6(a). With respect to proposed
Sec. 1263.6(a), the only change to the existing regulatory text would
be to add ``community development financial institution'' to the list
of entities eligible for membership. As discussed above, that term has
been defined to exclude federally insured depository institutions and
credit unions, because such institutions are already authorized to
become Bank members.
Section 4(a)(2) of the Bank Act further requires any ``insured
depository institution'' applicant to have at least 10 percent of its
assets in residential mortgage loans, be in sound financial condition,
and have sound management and home financing policy. 12 U.S.C.
1424(a)(2). The term ``insured depository institution'' is defined in
the Bank Act to include any federally-insured bank, savings association
or credit union, and thus does not include the newly-eligible CDFIs or
insurance companies. See 12 U.S.C. 1422(9). Nonetheless, the Bank Act
does not preclude FHFA from applying these concepts to other types of
applicants, based on its authority to ensure that the Banks operate in
a safe and sound manner and carry out their public policy missions.
Indeed, FHFA's predecessor agency, FHFB, exercised that authority to
require all applicants without federal deposit insurance, i.e.,
insurance companies, to have mortgage-
[[Page 22852]]
related assets that reflect a commitment to housing finance. 12 CFR
925.6(c); See 58 FR 43522 (Aug. 17, 1993). FHFB reasoned that such an
approach treated all applicants in an equitable and consistent manner,
and was consistent with the housing finance mission of the Banks. See
id. at 43531-43533. FHFA believes that rationale can apply as well to
the newly eligible CDFI applicants, and thus is proposing to require
such CDFI applicants to have mortgage related assets that reflect a
commitment to housing finance. FHFA expects that the Banks will assess
the commitment to housing finance requirements in light of the unique
community development focus of the business of CDFIs. Because the
language of the current regulation already applies to any applicant
that is not an insured depository institution, no amendment to proposed
Sec. 1263.6(c) is necessary to affect this change.
In a similar manner, the proposed rule would require the newly
eligible CDFI applicants to satisfy requirements relating to financial
condition, character of management and home financing policy. When FHFB
extended those provisions to insurance companies, it reasoned that they
were sufficiently important to concepts of safety and soundness and the
housing finance mission to warrant doing so. See 58 FR at 43533. FHFA
believes that the same rationale should apply to the newly eligible
category of CDFI applicants. Thus, the proposed rule would retain the
provisions within Subpart C, which would be amended as necessary to
implement the CDFI provisions of HERA. The amendments to particular
provisions within Subpart C are discussed separately below.
Duly organized requirement. Section 4(a)(1)(A) of the Bank Act
requires that an applicant for membership be duly organized under the
laws of any state or of the United States. 12 U.S.C. 1424(a)(1)(A).
Section 1263.7 of the proposed rule would amend the current language of
Sec. 925.7, which implements this provision, to provide that a newly
eligible CDFI applicant shall be deemed to be duly organized if it is
incorporated under state law. The current regulation allows an
applicant to satisfy this provision if it is chartered as one of
several types of depository institutions or as an insurance company.
Because most CDFIs will not have such a charter, FHFA believes that
being incorporated under state law is sufficient to demonstrate that a
CDFI meets this requirement of the statute.
Inspection and regulation requirement. Section 4(a)(1)(B) of the
Bank Act generally requires an applicant for membership to be subject
to inspection and regulation under state or federal banking or similar
laws. In the case of a CDFI, the statute imposes an alternative
requirement, which is that the applicant be certified by the CDFI Fund.
See 12 U.S.C. 1424(a)(1)(B). Accordingly, newly-eligible CDFI
applicants are not required to meet the inspection and regulation
requirement and, therefore, there is no need to amend the existing
regulatory language, which would be carried over into proposed Sec.
1263.8. As discussed earlier, the requirement that a CDFI applicant be
certified by the CDFI Fund in order to be eligible for membership is
addressed by the definition of ``CDFI'' in proposed Sec. 1263.1. The
proposed rule, however, does make certain clarifying revisions to the
existing regulation text of proposed Sec. 1263.8, which are not
intended to alter the substance of the provision.
Long-term mortgage loans requirement. Section 4(a)(1)(C) of the
Bank Act requires that an applicant for membership make long-term home
mortgage loans. 12 U.S.C. 1424(a)(1)(C). ``Long-term'' is defined in
Sec. 925.1 to include loans with a term to maturity of five years or
greater. 12 CFR 925.1. ``Home mortgage loan'' is defined in Sec. 925.1
to include, among other things, first mortgages on one-to-four family
or multifamily property, and mortgage pass-through securities backed by
such mortgages. See id. Section 925.9 of the Membership Regulation,
which implements these provisions, provides that an applicant is deemed
to meet this requirement if, based on the applicant's most recent
regulatory financial report filed with its appropriate regulator, the
applicant originates or purchases long-term home mortgage loans. 12 CFR
925.9. Some newly-eligible CDFI applicants, such as loan funds and
venture capital funds, do not file regulatory financial reports.
Accordingly, proposed Sec. 1263.9 would amend the existing language to
provide that a Bank shall determine whether a CDFI applicant meets the
``makes long-term home mortgage loans'' requirement based on other
documentation provided to the Bank, and contemplates that a Bank can
decide what level of documentation can best allow it to determine
whether a particular type of CDFI satisfies this requirement.
Financial condition requirements. The current Membership Regulation
includes two separate provisions relating to the financial condition of
applicants for membership. Section 925.11 relates to depository
institutions (which includes federally insured state chartered credit
unions), while Sec. 925.16 relates to insurance companies. The
proposed rule would relocate those provisions to proposed Sec. Sec.
1263.11 and 1263.16, respectively, and would amend both of them to
incorporate language relating to CDFI applicants.
In proposed Sec. 1263.11, FHFA would require CDFI credit unions to
comply with the same financial condition requirements that currently
apply to state chartered credit unions that are insured by the
NCUA.\11\ All credit unions chartered by a particular state operate
under the same state laws and regulations. All are subject to oversight
by the same state regulatory agency and would have the same financial
reporting and examination requirements at the state level. Thus, for
this category of CDFI, FHFA believes that it is most appropriate for
the Banks to evaluate financial condition under the same regulatory
provisions that apply to all other credit union and depository
institution applicants. Those provisions are set out in proposed Sec.
1263.11(a) and (b) and require the Banks to evaluate the financial
condition of the applicants based on information in the regulatory
financial reports they file with their applicable regulators, their
audited financial statements, and the examination reports prepared by
their regulators. The key distinction for CDFI credit unions is that
they are not subject to oversight by the NCUA and consequently do not
file financial regulatory reports with the NCUA. Nonetheless, the CDFI
credit unions should file comparable reports with their appropriate
state regulator, and FHFA believes that those documents can be used by
the Banks to assess the financial condition of the CDFI credit unions,
applying the same criteria as in the existing regulations. To the
extent that any state chartered credit unions without NCUA insurance
may not in fact file regulatory financial reports with their state
regulator that are comparable to those filed by NCUA-regulated credit
unions, or are not required to have audited financial statements or
submit to regulatory examinations, FHFA requests comments on what other
documentation such entities would prepare that would provide the Banks
with comparable information about their financial condition.
---------------------------------------------------------------------------
\11\ As of December 31, 2008, 955 credit unions were members of
the Bank System. Of that number, 476 are state chartered and 479 are
federal credit unions.
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To bring the CDFI credit unions within the scope of the current
financial condition requirements for depository institutions, the
proposed rule would amend the existing regulatory text in two
locations. The first amendment
[[Page 22853]]
would revise proposed Sec. 1263.11(a) to list the types of depository
institutions that are subject to its provisions and to include CDFI
credit unions within that list. The second amendment would add a new
provision, proposed Sec. 1263.11(b)(3)(iii), which would require all
CDFI credit unions to meet certain performance trend criteria. Under
the current regulation, the only depository institutions that must
satisfy those criteria are institutions with a composite examination
rating of ``2'' or ``3''. Because the CDFI credit unions are not
subject to oversight by the NCUA and because the Banks may be less
familiar with state examination ratings, FHFA believes that it is
prudent to require all such CDFI credit unions to demonstrate that
their earnings, nonperforming assets, and allowance for loan and lease
losses are consistent with the existing performance criteria. Apart
from those amendments, proposed Sec. 1263.11 would retain all of the
language from the existing Sec. 925.11. FHFA requests comments on
whether the application of these standards is appropriate for CDFI
credit unions and whether the nature or extent of oversight and
examination by a state regulator differs in any manner that would
require any of the provisions in this section to be modified. For
example, the current rule requires the submission of quarterly
regulatory financial reports and information from a regulatory
examination report. To the extent that any state chartered CDFI credit
unions might not have quarterly reports, financial statements audited
by a certified public accountant or regulatory examination reports,
FHFA seeks information on the types of financial condition statements
and regulatory reports that such entities do submit and what types of
examination and rating are provided by the state regulators.
For all other CDFIs, such as CDFI loan funds and venture capital
funds, FHFA is proposing new financial condition requirements. These
requirements would be incorporated into the existing provisions
relating to insurance companies, set out in proposed Sec. 1263.16(b).
Institutions in this category of CDFIs are not subject to the same
degree of state or federal oversight as are depository institutions and
insurance companies. Thus, they may not be able to provide the Banks
with documentation similar to examination reports or periodic
regulatory financial reports to aid the Banks in assessing their
financial condition. Although these CDFIs will have been certified by
the CDFI Fund, that process does not include an assessment of the
CDFI's financial condition. Moreover, the type and extent of available
financial documentation will differ for the various categories of
CDFIs. Although some CDFI loan funds and venture capital funds may be
able to obtain private ratings that would be analogous to those
relating to depository institutions, those are not routinely generated.
Because of those differences, FHFA is proposing to establish separate
financial documentation requirements and approval standards for
assessing the financial condition of this category of CDFIs, which are
intended to be analogous to those applicable to other applicants, while
taking into account the unique characteristics of CDFIs.
The structure of proposed Sec. 1263.16(b) would generally parallel
that used for depository institutions, i.e., the regulation would
identify the types of financial documents that a Bank must review in
assessing a CDFI's financial condition and would establish standards
for determining whether an applicant's financial condition is
sufficiently sound to admit it to Bank membership. Those amendments are
described below.
Section 1263.16(b)(1) of the proposed rule would specify two
categories of financial documents that a Bank must obtain and review
when assessing a CDFI's financial condition, and would authorize a Bank
to request any additional documents that it deems necessary to
assessing the financial condition of the CDFI applicant. The first
category of documentation relates to financial statements, and requires
the submission of an independent audit that has been conducted within
the prior year by a certified public accounting firm, in accordance
with generally accepted auditing standards (GAAS), as well as more
recent quarterly financial statements, if those are available. An
applicant also must submit financial statements for the two years prior
to the most recent audited financial statement. At a minimum, all such
financial statements must include income and expense statements,
statements of activities, statements of financial position, and
statements of cash flows. The financial statements for the most recent
year also must include detailed disclosures or schedules relating to
the affiliates of the CDFI applicant regarding the financial position
of each affiliate, their lines of business, and the relationship
between the affiliates and the applicant CDFI.
FHFA believes that the use of a GAAS-consistent audited financial
statement is a uniform and reliable means by which an applicant can
demonstrate to a Bank that it is in sound financial condition,
particularly in the absence of the regulatory financial and examination
reports that the Banks typically consider in evaluating other
depository institutions and insurance companies for membership.
Nonetheless, FHFA requests comments on whether there might be
alternatives to GAAS-compliant audited financial statements that would
allow a Bank to assess accurately the financial condition of a CDFI
applicant. If certain CDFIs do not typically obtain audited financial
statements, FHFA might consider allowing the Banks to use alternative
financial statements, but asks that any persons recommending such
alternatives provide detailed information about the quality of such
alternatives and the frequency at which they would be prepared.
Examples of such alternatives might include financial statements that,
while not prepared by a certified public accounting firm, would be
substantially similar to audited financial statements, or financial
statements prepared by a CDFI that have some other means of assuring
that they accurately present its financial condition. FHFA will
consider allowing the use of such alternative financial statements in
the final rule if it can be reasonably assured that the Banks can rely
on them to determine that the CDFI applicant is in sound financial
condition.
Section 1263.16(b)(1)(ii) and (iii) of the proposed rule further
requires a CDFI applicant to provide the Bank with a copy of the
certification it has received from the CDFI Fund, as well as any other
financial information concerning its financial condition that is
requested by the Bank. With respect to the issue of certification, each
CDFI applicant generally must provide a certification issued by the
CDFI Fund no more than three years prior to the date of the CDFI's
application for Bank membership. If an applicant's CDFI certification
does not meet that requirement, the applicant must submit to the Bank a
written statement that there have been no material events or
occurrences since the date of certification that would adversely affect
its strategic direction, mission, or business operations, and thereby
its status as a CDFI.
Section 1263.16(b)(2) of the proposed rule sets out minimum
financial condition standards that a CDFI must meet in order to become
a member of a Bank. Those standards relate to net assets, earnings,
loan loss reserves, and liquidity, and are described below.
Net asset ratio. The proposed rule would require that a CDFI
applicant have a ratio of net assets to total assets
[[Page 22854]]
of at least 20 percent, which is intended to address the capital
adequacy of the CDFI. For purposes of this provision, ``net assets'' is
to be calculated as the residual value of assets (including restricted
assets) over liabilities and is to be based on information derived from
the applicant's most recent financial statements.
FHFA is proposing this approach because it understands that the
inclusion of restricted assets within net assets is consistent with the
approach used by the CDFI Fund and others in the CDFI industry, as well
as with the accounting standards for nonprofit entities. Restricted
assets typically appear on CDFI balance sheets when donor or government
funds are specifically designated as capital, and are thereby
``restricted'' as to their possible uses. When used in this manner, the
capital may be classified as restricted, but it is nonetheless
available to absorb any losses. For example, the CDFI Fund commonly
awards funding for loan loss reserves, which may serve to lower a
CDFI's borrowing costs. FHFA requests comment on the inclusion of
restricted assets in the net asset ratio, and on the proposed use of a
minimum net asset ratio of 20 percent for membership eligibility.
Earnings. The proposed rule would require a CDFI applicant to
demonstrate that it has some earnings capacity. Thus, an applicant must
show that it has generated a positive net income for any two of the
three most recent years. For purposes of this provision, net income
would be defined as gross revenues less total expenses, based on
information derived from the applicant's most recent financial
statements. In the definitions section of the regulation, the proposal
defines ``gross revenues'' to mean total revenues received from all
sources, including earnings from operations, grants and other donor
contributions. This requirement is adapted from the earnings
requirement for insured depository institutions in the current
regulation, which requires that the applicant's adjusted net income be
positive in four of the six most recent calendar quarters. Because
CDFIs may not typically file quarterly regulatory reports, and
generally obtain an audit of their financial statements only once a
year, FHFA proposes to require that earnings be positive in two of the
three most recent years, rather than four of the six most recent
calendar quarters. FHFA requests comment on the appropriateness of this
measure of earnings and on the proposed minimum eligibility standard.
Loan loss reserves. The proposed rule would require that an
applicant's ratio of loan loss reserves to loans and leases 90 or more
days delinquent, including loans sold with full recourse, be not less
than 30 percent. The information to determine compliance with this
provision should be derived from the applicant's most recent financial
statements. Loan loss reserves, which help the CDFIs self-insure
against losses, are defined within this provision to mean a specified
balance sheet account that reflects the amount reserved for loans
expected to be uncollectible. The proposed rule is intended to provide
a flexible and relative standard, to acknowledge the CDFIs' mission and
loan origination practices while also requiring a buffer to protect the
organization's continued solvency and ongoing operation. The 30 percent
threshold is half of the requirement that would apply to depository
institution applicants. FHFA is proposing to allow the lower ratio in
recognition of a historically lower delinquency rate among CDFI-
originated loans, which have performed equal to or better than prime
loans. As noted, the CDFIs' fundamental mission is to stabilize
communities. Most CDFIs hold the loans they make and, consequently, the
risk in portfolio. These two conditions prompt the use of careful
underwriting, intensive homeowner and financial counseling, and
subsidies to assure borrower affordability. CDFIs have the ability to
modify a loan in response to a borrower's adverse life event, thus
preventing a foreclosure. Given these unique circumstances, lower loan
loss reserves would permit more capital to go to borrowers. However,
given current housing market conditions, FHFA requests comment on the
appropriateness of the proposed loan loss reserve measure, the
rationale for the different standard for CDFIs, or whether there are
any alternative standards that might also serve this purpose.
Liquidity ratio. The proposed rule would require that an
applicant's operating liquidity ratio be no less than 1.0 for the
current year, i.e., the year during which a CDFI applies for
membership, as well as in at least one of the two years preceding the
current year. The operating liquidity ratio is to include in the
numerator unrestricted cash and cash equivalents and in the denominator
the average quarterly operating expense for the four most recent
quarters. FHFA believes that this operating liquidity ratio provides a
measure of funds available to pay expenses and creditors by requiring a
CDFI to have sufficient liquidity to cover average operating expenses
for one quarter. FHFA requests comment on the appropriateness of the
proposed requirement for operating liquidity.
Self-Sufficiency or Sustainability Ratio. The self-sufficiency or
sustainability ratio is a measure used to evaluate the extent to which
a CDFI can cover its expenses from earned revenue and, by inference,
the CDFI's independence from grants and loans. The ratio is computed as
earned revenue divided by total expenses. Full self-sufficiency is
achieved when a CDFI achieves a ratio of 1.0 (100 percent) or greater.
However, self-sufficiency ratios are affected by the type of services
and grant programs operated by the CDFI. In some cases, the self-
sufficiency ratio may not adequately portray the financial condition of
the CDFI, and too stringent a ratio could countermand the service
delivery requirements for certification by the CDFI Fund. See 12 U.S.C.
4701(b). The proposed rule does not include a requirement for the self-
sufficiency ratio, but FHFA seeks comment on whether to include a
standard for the self-sufficiency ratio as part of the minimum
financial condition standards for CDFI members and, if so, what the
threshold standard should be.\12\
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\12\ By way of reference, between 2003 and 2005, the
sustainability ratio for CDFI loan funds averaged around 65 percent;
the median was 63 percent. Venture capital funds, which have a
different business line, had a sustainability ratio of 68 percent.
Credit unions principally dedicated to lending would be expected to
consistently have ratios in excess of 100 percent. See Approaches to
CDFI Sustainability: Report prepared by the Aspen Institute Economic
Opportunities Program, for the Department of the Treasury, Community
Development Financial Institutions Fund, July 2008.
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CDFI Bank Holding Companies. FHFA understands that there are some
bank holding companies that are certified as CDFIs, but it is not
including that category of institution in the proposed rule. Any bank
holding company would, by definition, control a federally insured
commercial bank, which is eligible for Bank membership in its own
right. Given that authority, FHFA believes that the appropriate vehicle
for Bank membership for such enterprises is through the existing
process for insured depository institutions. Nonetheless, FHFA requests
comment on whether it should include in the final rule additional
provisions relating to bank holding company membership based on CDFI
status. To the extent that any commenters address this issue, FHFA also
asks that they provide information about specific holding companies
that operate as CDFIs, their relationships to their depository
institution subsidiaries, and how membership via the CDFI
[[Page 22855]]
provisions would provide benefits not available as a result of the
depository institution becoming a member.
Character of Management. The current Sec. 925.12 requires that an
applicant's character of management be consistent with sound and
economical home financing. To meet the existing requirement, an
applicant must provide the Bank with a certification that it has not,
since the applicant's most recent regulatory examination report, been
subject to any enforcement actions, criminal, civil or administrative
proceedings, or criminal, civil or administrative monetary liabilities,
lawsuits or judgments.
The proposed rule would amend the existing provision by replacing
the reference to ``applicant'' with a listing of the types of entities
to which proposed Sec. 1263.12(a) would apply. The list would include
the institutions currently covered by this provision, i.e., depository
institutions and insurance companies, and also would add CDFI credit
unions to that category. As noted previously, because state chartered
credit unions that are insured by NCUA must comply with this provision,
FHFA believes that those provisions should apply as well to state
chartered credit unions that qualify as CDFI credit union applicants.
Because certain of the newly-eligible CDFIs, such as loan funds and
venture capital funds, are not regulated and, therefore, do not undergo
regulatory examinations and are not subject to enforcement actions, the
proposed rule would amend proposed Sec. 1263.12(b) to require such
applicants to provide to the Bank the same certification, except for
enforcement actions, with respect to the past three years. In light of
the fact that these CDFIs are not subject to CAMELS-type ratings
produced by the banking regulators, which evaluate an institution's
management, FHFA requests comment on whether there are any other means
by which a Bank can assess the character of a CDFI applicant's
management.
Home Financing Policy. Under the current Membership Regulation,
applicants with a ``Satisfactory'' or better Community Reinvestment Act
(CRA) rating are deemed to meet the requirement that their home
financing policy is consistent with sound and economical home
financing. Section 1263.13(b) of the proposed rule would retain the
existing requirement that applicants not subject to the CRA--such as
CDFI applicants--must provide a written justification, acceptable to
the Bank, explaining how and why their home financing policy is
consistent with the Bank System's housing finance mission.
Rebuttable Presumptions. Section 925.17 of the Membership
Regulation allows presumptions of compliance or noncompliance with
certain membership eligibility requirements to be rebutted, upon
meeting certain requirements set forth in that regulation. The proposed
rule would amend the regulatory language to enable newly-eligible CDFI
applicants to rebut presumptive noncompliance with such membership
eligibility requirements, in the same manner as other applicants may do
under the current regulations.
Accordingly, the proposed rule would extend the existing rebuttal
provisions relating to presumptive noncompliance with the financial
condition and character of management requirements to CDFI applicants.
Such applicants could rebut those presumptions by submitting a written
justification providing substantial evidence, acceptable to the Bank,
demonstrating that their financial condition and character of
management are both consistent with the standards for approval as
members.
Proposed Sec. 1263.17(e)(2) would provide that if a CDFI applicant
or any of its directors or senior officers has been the subject of any
criminal, civil or administrative proceedings reflecting upon
creditworthiness, business judgment, or moral turpitude in the past
three years, the applicant must provide a written analysis indicating
that the proceedings will not likely have a significantly deleterious
effect on the applicant's operations. The written analysis must address
the severity of the charges, and any mitigating action taken by the
applicant or its directors or senior officers.
Proposed Sec. 1263.17(e)(3) would provide that if there are any
known potential criminal, civil or administrative monetary liabilities,
material pending lawsuits, or unsatisfied judgments against the CDFI
applicant or any of its directors or senior officers in the past three
years that are significant to the applicant's operations, the applicant
must provide a written analysis acceptable to the Bank indicating that
the liabilities, lawsuits or judgments will not likely cause the
applicant to fall below its applicable net asset ratio set forth in
proposed Sec. 1263.16(b)(2)(i). The written analysis shall state the
likelihood of the applicant or its directors or senior officers
prevailing, and the financial consequences if the applicant or its
directors or senior officers do not prevail.
F. Subpart D--Stock Purchase Requirements
The proposed rule would make various technical changes to the stock
purchase requirements currently set forth in various provisions of
Subpart D. At present, the minimum stock purchase requirements
specified in Sec. 925.20(a) are based on statutory provisions that
cease to apply to a Bank once it has converted its capital structure to
the form required by the Gramm-Leach-Bliley Act (GLB Act). Because all
but one of the Banks has completed its capital conversion, proposed
Sec. 1263.20 is being amended to add language to indicate that the
minimum stock purchase requirement for a member shall be the minimums
specified in each Bank's capital structure plan. For members of the
Bank that has not converted, the stock purchase requirement shall
continue to be as specified in the Membership Regulation. The proposed
rule also makes some conforming changes to proposed Sec. Sec. 1263.21
and 1263.22, both of which relate to distinctions based on conversion
to the GLB Act capital structure.
G. Other Subparts
The proposed rule makes no substantive changes in any of the
remaining subparts of the Membership Regulation. In Subpart H, relating
to the reacquisition of membership, the proposed rule would delete
language from the current Sec. 925.30(b) relating to institutions that
withdrew from membership prior to December 31, 1997, as the passage of
time has rendered that language moot.
H. Community Support Amendment--Part 944
Section 10(g)(1) of the Bank Act requires FHFA to establish
standards of community investment or service for members of the Banks
to maintain continued access to long-term Bank advances, taking into
account factors such as a member's performance under the CRA and the
member's record of lending to first-time homebuyers. See 12 U.S.C.
1430(g)(1), (2). The FHFB regulation setting forth such ``community
support'' standards is at 12 CFR part 944. Under these provisions, a
Bank member that is subject to the CRA is deemed to meet the CRA
standard if its most recent CRA evaluation is ``outstanding'' or
``satisfactory.'' See 12 CFR 944.3(b)(1). A member also is presumed to
meet the first-time homebuyer lending standard if its CRA evaluation is
``outstanding'' and there are no public comments or other
[[Page 22856]]
information to the contrary. 12 CFR 944.3(c). Members that are not
subject to the CRA, such as credit unions and insurance companies, are
only required to meet the first-time homebuyer lending standard. Id.
Because the newly eligible CDFIs are not subject to the CRA, they would
only be subject to the first-time homebuyer lending standard. Section
944.3(c)(1) includes a non-exclusive list of eligible activities that
meet the first-time homebuyer lending standard, such as: having an
established record of lending to first-time homebuyers; providing
homeownership counseling programs for first-time homebuyers; providing
or participating in marketing plans and related outreach programs
targeted to first-time homebuyers; and providing technical assistance
or financial support to organizations that assist first-time
homebuyers. See id. at 944.3(c)(1).
FHFA believes that a CDFI should be able to comply with these
requirements, even if it is not subject to the CRA and may have limited
experience in lending to first-time homebuyers. Nonetheless, FHFA
requests comments on whether it is appropriate to apply the current
requirements to CDFIs or whether it would be appropriate to adopt an
alternative community support standard for CDFIs that recognizes their
unique mission and business practices while still complying with this
statutory requirement.
I. Community Financial Institution Amendments
Apart from the amendments authorizing certified CDFIs to become
Bank members, HERA included certain other amendments relating to
``community development activities.'' Section 1211 of HERA amended the
Bank Act to broaden the circumstances under which ``community financial
institutions'' (CFI), which are FDIC-insured members with average total
assets of $1 billion or less, may obtain advances. Specifically, HERA
allowed CFIs to obtain long-term advances for the purpose of funding
``community development activities'' and further allowed CFIs to pledge
secured loans for ``community development activities'' as collateral
for their advances. Because a CFI must be an institution with FDIC
insurance, it does not appear that any of the newly eligible CDFIs, all
of which would lack FDIC insurance, would be eligible to take advantage
of these amendments to the advances and collateral provisions of the
Bank Act. Nonetheless, the Finance Agency requests comments on whether
there is any basis in the legislative history to HERA or otherwise on
which it could reasonably rely to construe the new CFI provisions as
applying to CDFIs as well as CFIs.
III. Paperwork Reduction Act
The information collection contained in the current Membership
Regulation, entitled ``Members of the Banks,'' has been assigned
control number 2590-0003 by the Office of Management and Budget (OMB).
The proposed rule, if adopted as a final rule, would not substantively
or materially modify the approved information collection. Consequently,
FHFA has not submitted any information to OMB for review under the
Paperwork Reduction Act of 1995. 44 U.S.C. 3501, et seq.
IV. Regulatory Flexibility Act
The proposed rule, if adopted as a final rule, will apply only to
the Banks, which do not come within the meaning of ``small entities,''
as defined in the Regulatory Flexibility Act (RFA). See 5 U.S.C.
601(6). Therefore, in accordance with section 605(b) of the RFA, 5
U.S.C. 605(b), the General Counsel of FHFA hereby certifies that the
proposed rule, if promulgated as a final rule, will not have a
significant economic impact on a substantial number of small entities.
List of Subjects in 12 CFR Parts 925 and 1263
Federal home loan banks, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, FHFA proposes to amend
chapters IX and XII of title 12 of the Code of Federal Regulations as
follows:
CHAPTER IX--FEDERAL HOUSING FINANCE BOARD
PART 925--MEMBERS OF THE BANKS
1. Transfer 12 CFR part 925 from chapter IX, subchapter D, to
chapter XII, subchapter D and redesignate as 12 CFR part 1263.
2. Newly redesignated part 1263 is revised to read as follows:
PART 1263--MEMBERS OF THE BANKS
Subpart A--Definitions
Sec.
1263.1 Definitions.
Subpart B--Membership Application Process
1263.2 Membership application requirements.
1263.3 Decision on application.
1263.4 Automatic membership.
1263.5 Appeals.
Subpart C--Eligibility Requirements
1263.6 General eligibility requirements.
1263.7 Duly organized requirement.
1263.8 Subject to inspection and regulation requirement.
1263.9 Makes long-term home mortgage loans requirement.
1263.10 Ten percent requirement for certain insured depository
institution applicants.
1263.11 Financial condition requirement for depository institutions
and CDFI credit unions.
1263.12 Character of management requirement.
1263.13 Home financing policy requirement.
1263.14 De novo insured depository institution applicants.
1263.15 Recent merger or acquisition applicants.
1263.16 Financial condition requirement for insurance company and
certain CDFI applicants.
1263.17 Rebuttable presumptions.
1263.18 Determination of appropriate Bank district for membership.
Subpart D--Stock Requirements
1263.19 Par value and price of stock.
1263.20 Stock purchase.
1263.21 Issuance and form of stock.
1263.22 Adjustments in stock holdings.
1263.23 Excess stock.
Subpart E--Consolidations Involving Members
1263.24 Consolidations involving members.
Subpart F--Withdrawal and Removal From Membership
1263.26 Voluntary withdrawal from membership.
1263.27 Involuntary termination of membership.
Subpart G--Orderly Liquidation of Advances and Redemption of Stock
1263.29 Disposition of claims.
Subpart H--Reacquisition of Membership
1263.30 Readmission to membership.
Subpart I--Bank Access to Information
1263.31 Reports and examinations.
Subpart J--Membership Insignia
1263.32 Official membership insignia.
Authority: 12 U.S.C. 1422, 1423, 1424, 1426, 1430, 1442, 4511,
4513.
Subpart A--Definitions
Sec. 1263.1 Definitions.
For purposes of this part:
Adjusted net income means net income, excluding extraordinary items
such as income received from, or expense incurred in, sales of
securities or fixed assets, reported on a regulatory financial report.
Aggregate unpaid loan principal means the aggregate unpaid
principal of a subscriber's or member's home mortgage loans, home-
purchase contracts and similar obligations.
Allowance for loan and lease losses means a specified balance-sheet
account
[[Page 22857]]
held to fund potential losses on loans or leases, that is reported on a
regulatory financial report.
Appropriate regulator means:
(1) In the case of an insured depository institution or CDFI credit
union, the Federal Deposit Insurance Corporation, Board of Governors of
the Federal Reserve System, National Credit Union Administration,
Office of the Comptroller of the Currency, Office of Thrift
Supervision, or appropriate state regulator that has regulatory
authority over, or is empowered to institute enforcement action
against, the institution, as applicable, and
(2) In the case of an insurance company, an appropriate state
regulator accredited by the National Association of Insurance
Commissioners.
Bank Act means the Federal Home Loan Bank Act, as amended (12
U.S.C. 1421 through 1449).
CDFI credit union means a state chartered credit union that has
been certified as a CDFI by the CDFI Fund and that does not have
federal share insurance.
CDFI Fund means the Community Development Financial Institutions
Fund established under section 104(a) of the Community Development
Banking and Financial Institutions Act of 1994 (12 U.S.C. 4701 et
seq.).
CFI asset cap means $1 billion, as adjusted annually by FHFA,
beginning in 2009, to reflect any percentage increase in the preceding
year's Consumer Price Index (CPI) for all urban consumers, as published
by the U.S. Department of Labor.
Class A stock means capital stock issued by a Bank, including
subclasses, that has the characteristics specified in section
6(a)(4)(A)(i) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(i)) and
applicable FHFA regulations.
Class B stock means capital stock issued by a Bank, including
subclasses, that has the characteristics specified in section
6(a)(4)(A)(ii) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(ii)) and
applicable FHFA regulations.
Combination business or farm property means real property for which
the total appraised value is attributable to residential, and business
or farm uses.
Community development financial institution or CDFI means an
institution that is certified as a community development financial
institution by the CDFI Fund under the Community Development Banking
and Financial Institutions Act of 1994 (12 U.S.C. 4701 et seq.), other
than a bank or savings association insured under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.) or a credit union insured under
the Federal Credit Union Act (12 U.S.C. 1751 et seq.).
Community financial institution or CFI means an institution:
(1) The deposits of which are insured under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.); and
(2) The total assets of which, as of the date of a particular
transaction, are less than the CFI asset cap, with total assets being
calculated as an average of total assets over three years, with such
average being based on the institution's regulatory financial reports
filed with its appropriate regulator for the most recent calendar
quarter and the immediately preceding 11 calendar quarters.
Composite regulatory examination rating means a composite rating
assigned to an institution following the guidelines of the Uniform
Financial Institutions Rating System (issued by the Federal Financial
Institutions Examination Council), including a CAMELS rating or other
similar rating, contained in a written regulatory examination report.
Consolidation includes a consolidation, a merger, or a purchase of
all of the assets and assumption of all of the liabilities of an entity
by another entity.
Director means the Director of FHFA or his or her designee.
Dwelling unit means a single room or a unified combination of rooms
designed for residential use.
Enforcement action means any written notice, directive, order or
agreement initiated by an applicant for Bank membership or by its
appropriate regulator to address any operational, financial, managerial
or other deficiencies of the applicant identified by such regulator,
but does not include a board of directors resolution adopted by the
applicant in response to examination weaknesses identified by such
regulator.
Funded residential construction loan means the portion of a loan
secured by real property made to finance the on-site construction of
dwelling units on one-to-four family property or multifamily property
disbursed to the borrower.
Gross revenues means, in the case of a CDFI applicant, total
revenues received from all sources, including grants and other donor
contributions and earnings from operations.
Home mortgage loan means:
(1) A loan, whether or not fully amortizing, or an interest in such
a loan, which is secured by a mortgage, deed of trust, or other
security agreement that creates a first lien on one of the following
interests in property:
(i) One-to-four family property or multifamily property, in fee
simple;
(ii) A leasehold on one-to-four family property or multifamily
property under a lease of not less than 99 years that is renewable, or
under a lease having a period of not less than 50 years to run from the
date the mortgage was executed; or
(iii) Combination business or farm property where at least 50
percent of the total appraised value of the combined property is
attributable to the residential portion of the property or, in the case
of any community financial institution, combination business or farm
property, on which is located a permanent structure actually used as a
residence (other than for temporary or seasonal housing), where the
residence constitutes an integral part of the property; or
(2) A mortgage pass-through security that represents an undivided
ownership interest in:
(i) Long-term loans, provided that, at the time of issuance of the
security, all of the loans meet the requirements of paragraph (1) of
this definition; or
(ii) A security that represents an undivided ownership interest in
long-term loans, provided that, at the time of issuance of the
security, all of the loans meet the requirements of paragraph (1) of
this definition.
Insured depository institution means an insured depository
institution as defined in section 2(9) of the Bank Act, as amended (12
U.S.C. 1422(9)).
Long-term means a term to maturity of five years or greater.
Manufactured housing means a manufactured home as defined in
section 603(6) of the Manufactured Home Construction and Safety
Standards Act of 1974, as amended (42 U.S.C. 5402(6)).
Multifamily property means:
(1) Real property that is solely residential and includes five or
more dwelling units;
(2) Real property that includes five or more dwelling units
combined with commercial units, provided that the property is primarily
residential; or
(3) Nursing homes, dormitories, or homes for the elderly.
Nonperforming loans and leases means the sum of the following,
reported on a regulatory financial report:
(1) Loans and leases that have been past due for 90 days (60 days
in the case of credit union applicants) or longer but are still
accruing;
(2) Loans and leases on a nonaccrual basis; and
(3) Restructured loans and leases (not already reported as
nonperforming).
Nonresidential real property means real property that is not used
for
[[Page 22858]]
residential purposes, including business or industrial property,
hotels, motels, churches, hospitals, educational and charitable
institution buildings or facilities, clubs, lodges, association
buildings, golf courses, recreational facilities, farm property not
containing a dwelling unit, or similar types of property.
One-to-four family property means:
(1) Real property that is solely residential, including one-to-four
family dwelling units or more than four family dwelling units if each
dwelling unit is separated from the other dwelling units by dividing
walls that extend from ground to roof, such as row houses, townhouses
or similar types of property;
(2) Manufactured housing if applicable state law defines the
purchase or holding of manufactured housing as the purchase or holding
of real property;
(3) Individual condominium dwelling units or interests in
individual cooperative housing dwelling units that are part of a
condominium or cooperative building without regard to the number of
total dwelling units therein; or
(4) Real property which includes one-to-four family dwelling units
combined with commercial units, provided the property is primarily
residential.
Operating expenses means, in the case of a CDFI applicant, expenses
for business operations, including, but not limited to, staff salaries
and benefits, professional fees, interest, loan loss provision, and
depreciation, contained in the applicant's audited financial
statements.
Other real estate owned means all other real estate owned (i.e.,
foreclosed and repossessed real estate), reported on a regulatory
financial report, and does not include direct and indirect investments
in real estate ventures.
Regulatory examination report means a written report of examination
prepared by the applicant's appropriate regulator, containing, in the
case of insured depository institution applicants, a composite rating
assigned to the institution following the guidelines of the Uniform
Financial Institutions Rating System, including a CAMELS rating or
other similar rating.
Regulatory financial report means a financial report that an
applicant is required to file with its appropriate regulator on a
specific periodic basis, including the quarterly call report for
commercial banks, thrift financial report for savings associations,
quarterly or semi-annual call report for credit unions, the National
Association of Insurance Commissioners' annual or quarterly report for
insurance companies, or other similar report, including such report
maintained by the appropriate regulator on a computer on-line database.
Residential mortgage loan means any one of the following types of
loans, whether or not fully amortizing:
(1) Home mortgage loans;
(2) Funded residential construction loans;
(3) Loans secured by manufactured housing whether or not defined by
state law as secured by an interest in real property;
(4) Loans secured by junior liens on one-to-four family property or
multifamily property;
(5) Mortgage pass-through securities representing an undivided
ownership interest in:
(i) Loans that meet the requirements of paragraphs (1) through (4)
of this definition at the time of issuance of the security;
(ii) Securities representing an undivided ownership interest in
loans, provided that, at the time of issuance of the security, all of
the loans meet the requirements of paragraphs (1) through (4) of this
definition; or
(iii) Mortgage debt securities as defined in paragraph (6) of this
definition;
(6) Mortgage debt securities secured by:
(i) Loans, provided that, at the time of issuance of the security,
substantially all of the loans meet the requirements of paragraphs (1)
through (4) of this definition;
(ii) Securities that meet the requirements of paragraph (5) of this
definition; or
(iii) Securities secured by assets, provided that, at the time of
issuance of the security, all of the assets meet the requirements of
paragraphs (1) through (5) of this definition;
(7) Home mortgage loans secured by a leasehold interest, as defined
in paragraph (1)(ii) of the definition of ``home mortgage loan,''
except that the period of the lease term may be for any duration; or
(8) Loans that finance properties or activities that, if made by a
member, would satisfy the statutory requirements for the CIP
established under section 10(i) of the Bank Act (12 U.S.C. 1430(i)), or
the regulatory requirements established for any CICA program.
Restricted assets means both permanently restricted assets and
temporarily restricted assets, as those terms are used in Financial
Accounting Standard No. 117, or any successor publication.
Total assets means the total assets reported on a regulatory
financial report or, in the case of a CDFI applicant, the total assets
contained in the applicant's audited financial statements.
Unrestricted cash and cash equivalents means, in the case of a CDFI
applicant, cash and highly liquid assets that can be easily converted
into cash that are not restricted in a manner that prevents their use
in paying expenses, as contained in the applicant's audited financial
statements.
Subpart B--Membership Application Process
Sec. 1263.2 Membership application requirements.
(a) Application. An applicant for membership in a Bank shall submit
to that Bank an application that satisfies the requirements of this
part. The application shall include a written resolution or
certification duly adopted by the applicant's board of directors, or by
an individual with authority to act on behalf of the applicant's board
of directors, of the following:
(1) Applicant review. Applicant has reviewed the requirements of
this part and, as required by this part, has provided to the best of
applicant's knowledge the most recent, accurate and complete
information available; and
(2) Duty to supplement. Applicant will promptly supplement the
application with any relevant information that comes to applicant's
attention prior to the Bank's decision on whether to approve or deny
the application, and if the Bank's decision is appealed pursuant to
Sec. 1263.5, prior to resolution of any appeal by FHFA.
(b) Digest. The Bank shall prepare a written digest for each
applicant stating whether or not the applicant meets each of the
requirements in Sec. Sec. 1263.6 to 1263.18, the Bank's findings and
the reasons therefor.
(c) File. The Bank shall maintain a membership file for each
applicant for at least three years after the Bank decides whether to
approve or deny membership or, in the case of an appeal to FHFA, for
three years after the resolution of the appeal. The membership file
shall contain at a minimum:
(1) Digest. The digest required by paragraph (b) of this section.
(2) Required documents. All documents required by Sec. Sec. 1263.6
to 1263.18, including those documents required to establish or rebut a
presumption under this part, shall be described in and attached to the
digest. The Bank may retain in the file only the relevant portions of
the regulatory financial reports required by this part. If an
applicant's appropriate regulator
[[Page 22859]]
requires return or destruction of a regulatory examination report, the
date that the report is returned or destroyed shall be noted in the
file.
(3) Additional documents. Any additional document submitted by the
applicant, or otherwise obtained or generated by the Bank, concerning
the applicant.
(4) Decision resolution. The decision resolution described in Sec.
1263.3(b).
Sec. 1263.3 Decision on application.
(a) Authority. FHFA hereby authorizes the Banks to approve or deny
all applications for membership, subject to the requirements of this
part. The authority to approve membership applications may be exercised
only by a committee of the Bank's board of directors, the Bank
president, or a senior officer who reports directly to the Bank
president, other than an officer with responsibility for business
development.
(b) Decision resolution. For each applicant, the Bank shall prepare
a written resolution duly adopted by the Bank's board of directors, by
a committee of the board of directors, or by an officer with delegated
authority to approve membership applications. The decision resolution
shall state:
(1) That the statements in the digest are accurate to the best of
the Bank's knowledge, and are based on a diligent and comprehensive
review of all available information identified in the digest; and
(2) The Bank's decision and the reasons therefor. Decisions to
approve an application should state specifically that: the applicant is
authorized under the laws of the United States and the laws of the
appropriate state to become a member of, purchase stock in, do business
with, and maintain deposits in, the Bank to which the applicant has
applied; and the applicant meets all of the membership eligibility
criteria of the Bank Act and this part.
(c) Action on applications. The Bank shall act on an application
within 60 calendar days of the date the Bank deems the application to
be complete. An application is ``complete'' when a Bank has obtained
all the information required by this part, and any other information
the Bank deems necessary, to process the application. If an application
that was deemed complete subsequently is deemed incomplete because the
Bank determines during the review process that additional information
is necessary to process the application, the Bank may stop the 60-day
clock until the application again is deemed complete, and then resume
the clock where it left off. The Bank shall notify an applicant in
writing when its application is deemed by the Bank to be complete, and
shall maintain a copy of such letter in the applicant's membership
file. The Bank shall notify an applicant if the 60-day clock is
stopped, and when the clock is resumed, and shall maintain a written
record of such notifications in the applicant's membership file. Within
three business days of a Bank's decision on an application, the Bank
shall provide the applicant and FHFA with a copy of the Bank's decision
resolution.
Sec. 1263.4 Automatic membership.
(a) Automatic membership for certain charter conversions. An
insured depository institution member that converts from one charter
type to another automatically shall become a member of the Bank of
which the converting institution was a member on the effective date of
such conversion, provided that the converting institution continues to
be an insured depository institution and the assets of the institution
immediately before and immediately after the conversion are not
materially different. In such case, all relationships existing between
the member and the Bank at the time of such conversion may continue.
(b) Automatic membership for transfers. Any member whose membership
is transferred pursuant to Sec. 1263.18(d) automatically shall become
a member of the Bank to which it transfers.
(c) Automatic membership, in the Bank's discretion, for certain
consolidations. (1) If a member institution (or institutions) and a
nonmember institution are consolidated and the consolidated institution
has its principal place of business in a state in the same Bank
district as the disappearing institution (or institutions), and the
consolidated institution will operate under the charter of the
nonmember institution, on the effective date of the consolidation, the
consolidated institution may, in the discretion of the Bank of which
the disappearing institution (or institutions) was a member immediately
prior to the effective date of the consolidation, automatically become
a member of such Bank upon the purchase of the minimum amount of Bank
stock required for membership in that Bank as required by Sec.
1263.20, provided that:
(i) 90 percent or more of the total assets of the consolidated
institution are derived from the total assets of the disappearing
member institution (or institutions); and
(ii) The consolidated institution provides written notice to such
Bank, within 60 calendar days after the effective date of the
consolidation, that it desires to be a member of the Bank.
(2) The provisions of Sec. 1263.24(b)(4)(i) shall apply, and upon
approval of automatic membership by the Bank, the provisions of Sec.
1263.24(c) and (d) shall apply.
Sec. 1263.5 Appeals.
(a) Appeals by applicants--(1) Filing procedure. Within 90 calendar
days of the date of a Bank's decision to deny an application for
membership, the applicant may file a written appeal of the decision
with FHFA.
(2) Documents. The applicant's appeal shall be addressed to the
Deputy Director for Federal Home Loan Bank Regulation, Federal Housing
Finance Agency, 1625 Eye Street, NW., Washington, DC 20006, with a copy
to the Bank, and shall include the following documents:
(i) Bank's decision resolution. A copy of the Bank's decision
resolution; and
(ii) Basis for appeal. A statement of the basis for the appeal by
the applicant with sufficient facts, information, analysis and
explanation to rebut any applicable presumptions and otherwise support
the applicant's position.
(b) Record for appeal--(1) Copy of membership file. Upon receiving
a copy of an appeal, the Bank whose action has been appealed (appellee
Bank) shall provide FHFA with a copy of the applicant's complete
membership file. Until FHFA resolves the appeal, the appellee Bank
shall supplement the materials provided to FHFA as any new materials
are received.
(2) Additional information. FHFA may request additional information
or further supporting arguments from the appellant, the appellee Bank
or any other party that FHFA deems appropriate.
(c) Deciding appeals. FHFA shall consider the record for appeal
described in paragraph (b) of this section and shall resolve the appeal
based on the requirements of the Bank Act and this part within 90
calendar days of the date the appeal is filed with FHFA. In deciding
the appeal, FHFA shall apply the presumptions in this part, unless the
appellant or appellee Bank presents evidence to rebut a presumption as
provided in Sec. 1263.17.
Subpart C--Eligibility Requirements
Sec. 1263.6 General eligibility requirements.
(a) Requirements. Any building and loan association, savings and
loan association, cooperative bank, homestead association, insurance
company, savings bank, community
[[Page 22860]]
development financial institution, or insured depository institution,
upon application satisfying all of the requirements of the Bank Act and
this part, shall be eligible to become a member of a Bank if:
(1) It is duly organized under the laws of any State or of the
United States;
(2) It is subject to inspection and regulation under the banking
laws, or under similar laws, of any State or of the United States;
(3) It makes long-term home mortgage loans;
(4) Its financial condition is such that advances may be safely
made to it;
(5) The character of its management is consistent with sound and
economical home financing; and
(6) Its home financing policy is consistent with sound and
economical home financing.
(b) Additional eligibility requirement for insured depository
institutions other than community financial institutions. In order to
be eligible to become a member of a Bank, an insured depository
institution applicant other than a community financial institution also
must have at least 10 percent of its total assets in residential
mortgage loans.
(c) Additional eligibility requirement for applicants that are not
insured depository institutions. In order to be eligible to become a
member of a Bank, an applicant that is not an insured depository
institution also must have mortgage-related assets that reflect a
commitment to housing finance, as determined by the Bank in its
discretion.
(d) Ineligibility. Except as otherwise provided in this part, if an
applicant does not satisfy the requirements of this part, the applicant
is ineligible for membership.
Sec. 1263.7 Duly organized requirement.
An applicant shall be deemed to be duly organized, as required by
section 4(a)(1)(A) of the Bank Act (12 U.S.C. 1424(a)(1)(A)) and Sec.
1263.6(a)(1) of this part, if it is chartered by a state or federal
agency as a building and loan association, savings and loan
association, cooperative bank, homestead association, insurance
company, savings bank, or insured depository institution, or in the
case of a CDFI applicant, is incorporated under state law.
Sec. 1263.8 Subject to inspection and regulation requirement.
An applicant shall be deemed to be subject to inspection and
regulation, as required by section 4(a)(1)(B) of the Bank Act (12
U.S.C. 1424 (a)(1)(B)) and Sec. 1263.6(a)(2) of this part, if, in the
case of an insured depository institution or insurance company
applicant, it is subject to inspection and regulation by its
appropriate regulator.
Sec. 1263.9 Makes long-term home mortgage loans requirement.
An applicant shall be deemed to make long-term home mortgage loans,
as required by section 4(a)(1)(C) of the Bank Act (12 U.S.C.
1424(a)(1)(C)) and Sec. 1263.6(a)(3) of this part if, based on the
applicant's most recent regulatory financial report filed with its
appropriate regulator, or other documentation provided to the Bank in
the case of a CDFI applicant that does not file such reports, the
applicant originates or purchases long-term home mortgage loans.
Sec. 1263.10 Ten percent requirement for certain insured depository
institution applicants.
An insured depository institution applicant that is subject to the
10 percent requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C.
1424(a)(2)(A)) and Sec. 1263.6(b) of this part shall be deemed to be
in compliance with such requirement if, based on the applicant's most
recent regulatory financial report filed with its appropriate
regulator, the applicant has at least 10 percent of its total assets in
residential mortgage loans, except that any assets used to secure
mortgage debt securities as described in paragraph (6) of the
definition of ``residential mortgage loan'' set forth in Sec. 1263.1
shall not be used to meet this requirement.
Sec. 1263.11 Financial condition requirement for depository
institutions and CDFI credit unions.
(a) Review requirement. In determining whether a building and loan
association, savings and loan association, cooperative bank, homestead
association, savings bank, insured depository institution, or CDFI
credit union has complied with the financial condition requirement of
section 4(a)(2)(B) of the Bank Act (12 U.S.C. 1424(a)(2)(B)) and Sec.
1263.6(a)(4) of this part, the Bank shall obtain as a part of the
membership application and review each of the following documents:
(1) Regulatory financial reports. The regulatory financial reports
filed by the applicant with its appropriate regulator for the last six
calendar quarters and three year-ends preceding the date the Bank
receives the application;
(2) Financial statement. In order of preference: the most recent
independent audit of the applicant conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm which submits a report on the applicant; the most recent
independent audit of the applicant's parent holding company conducted
in accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the consolidated
holding company but not on the applicant separately; the most recent
directors' examination of the applicant conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm; the most recent directors' examination of the applicant performed
by other external auditors; the most recent review of the applicant's
financial statements by external auditors; the most recent compilation
of the applicant's financial statements by external auditors; or the
most recent audit of other procedures of the applicant;
(3) Regulatory examination report. The applicant's most recent
available regulatory examination report prepared by its appropriate
regulator, a summary prepared by the Bank of the applicant's strengths
and weaknesses as cited in the regulatory examination report, and a
summary prepared by the Bank or applicant of actions taken by the
applicant to respond to examination weaknesses;
(4) Enforcement actions. A description prepared by the Bank or
applicant of any outstanding enforcement actions against the applicant,
responses by the applicant, reports as required by the enforcement
action, and verbal or written indications, if available, from the
appropriate regulator of how the applicant is complying with the terms
of the enforcement action; and
(5) Additional information. Any other relevant document or
information concerning the applicant that comes to the Bank's attention
in reviewing the applicant's financial condition.
(b) Standards. An applicant of the type described in paragraph (a)
of this section shall be deemed to be in compliance with the financial
condition requirement of section 4(a)(2)(B) of the Bank Act (12 U.S.C.
1424(a)(2)(B)) and Sec. 1263.6(a)(4) of this part, if:
(1) Recent composite regulatory examination rating. The applicant
has received a composite regulatory examination rating from its
appropriate regulator within two years preceding the date the Bank
receives the application;
(2) Capital requirement. The applicant meets all of its minimum
statutory and regulatory capital requirements as reported in its most
recent quarter-end
[[Page 22861]]
regulatory financial report filed with its appropriate regulator; and
(3) Minimum performance standard. (i) Except as provided in
paragraph (b)(3)(iii) of this section, the applicant's most recent
composite regulatory examination rating from its appropriate regulator
within the past two years was ``1;'' or was ``2'' or ``3'' and, based
on the applicant's most recent regulatory financial report filed with
its appropriate regulator, the applicant satisfied all of the following
performance trend criteria:
(A) Earnings. The applicant's adjusted net income was positive in
four of the six most recent calendar quarters;
(B) Nonperforming assets. The applicant's nonperforming loans and
leases plus other real estate owned, did not exceed 10 percent of its
total loans and leases plus other real estate owned, in the most recent
calendar quarter; and
(C) Allowance for loan and lease losses. The applicant's ratio of
its allowance for loan and lease losses plus the allocated transfer
risk reserve to nonperforming loans and leases was 60 percent or
greater during four of the six most recent calendar quarters.
(ii) For applicants that are not required to report financial data
to their appropriate regulator on a quarterly basis, the information
required in paragraph (b)(3)(i) of this section may be reported on a
semiannual basis.
(iii) a CDFI credit union applicant must meet the performance trend
criteria in paragraph (b)(3)(i) of this section irrespective of its
composite regulatory examination rating.
(c) Eligible collateral not considered. The availability of
sufficient eligible collateral to secure advances to the applicant is
presumed and shall not be considered in determining whether an
applicant is in the financial condition required by section 4(a)(2)(B)
of the Bank Act (12 U.S.C. 1424(a)(2)(B)) and Sec. 1263.6(a)(4) of
this part.
Sec. 1263.12 Character of management requirement.
(a) General. A building and loan association, savings and loan
association, cooperative bank, homestead association, savings bank,
insured depository institution, insurance company, and CDFI credit
union shall be deemed to be in compliance with the character of
management requirement of Sec. 1263.6(a)(5), if the applicant provides
to the Bank an unqualified written certification duly adopted by the
applicant's board of directors, or by an individual with authority to
act on behalf of the applicant's board of directors, that:
(1) Enforcement actions. Neither the applicant nor any of its
directors or senior officers is subject to, or operating under, any
enforcement action instituted by its appropriate regulator;
(2) Criminal, civil or administrative proceedings. Neither the
applicant nor any of its directors or senior officers has been the
subject of any criminal, civil or administrative proceedings reflecting
upon creditworthiness, business judgment, or moral turpitude since the
most recent regulatory examination report; and
(3) Criminal, civil or administrative monetary liabilities,
lawsuits or judgments. There are no known potential criminal, civil or
administrative monetary liabilities, material pending lawsuits, or
unsatisfied judgments against the applicant or any of its directors or
senior officers since the most recent regulatory examination report,
that are significant to the applicant's operations.
(b) CDFIs other than CDFI credit unions. A CDFI applicant other
than a CDFI credit union shall be deemed to be in compliance with the
character of management requirement of Sec. 1263.6(a)(5), if the
applicant provides an unqualified written certification duly adopted by
the applicant's board of directors, or by an individual with authority
to act on behalf of the applicant's board of directors, that:
(1) Neither the applicant nor any of its directors or senior
officers has been the subject of any criminal, civil or administrative
proceedings reflecting upon creditworthiness, business judgment, or
moral turpitude in the past three years; and
(2) There are no known potential criminal, civil or administrative
monetary liabilities, material pending lawsuits, or unsatisfied
judgments against the applicant or any of its directors or senior
officers arising within the past three years that are significant to
the applicant's operations.
Sec. 1263.13 Home financing policy requirement.
(a) Standard. An applicant shall be deemed to be in compliance with
the home financing policy requirement of Sec. 1263.6(a)(6) if the
applicant has received a Community Reinvestment Act (CRA) rating of
``Satisfactory'' or better on its most recent formal, or if
unavailable, informal or preliminary, CRA performance evaluation.
(b) Written justification required. An applicant that is not
subject to the CRA shall file as part of its application for membership
a written justification acceptable to the Bank of how and why the
applicant's home financing policy is consistent with the Bank System's
housing finance mission.
Sec. 1263.14 De novo insured depository institution applicants.
(a) Duly organized, subject to inspection and regulation, financial
condition and character of management requirements. An insured
depository institution applicant whose date of charter approval is
within three years prior to the date the Bank receives the applicant's
application for membership in the Bank (de novo applicant) is deemed to
meet the requirements of Sec. Sec. 1263.7, 1263.8, 1263.11 and
1263.12.
(b) Makes long-term home mortgage loans requirement. A de novo
applicant shall be deemed to make long-term home mortgage loans as
required by Sec. 1263.9 if it has filed as part of its application for
membership a written justification acceptable to the Bank of how its
home financing credit policy and lending practices will include
originating or purchasing long-term home mortgage loans.
(c) 10 percent requirement--(1) One-year requirement. A de novo
applicant that is subject to the 10 percent requirement of section
4(a)(2)(A) of the Bank Act (12 U.S.C. 1424(a)(2)(A)) and Sec.
1263.6(b) of this part shall have until one year after commencing its
initial business operations to meet the 10 percent requirement of Sec.
1263.10.
(2) Conditional approval. A de novo applicant shall be
conditionally deemed to be in compliance with the 10 percent
requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C.
1424(a)(2)(A)) and Sec. 1263.6(b) of this part. A de novo applicant
that receives such conditional membership approval is subject to the
stock purchase requirements established by FHFA regulation or the
Bank's capital plan, as applicable, as well as the FHFA regulations
governing advances to members.
(3) Approval. A de novo applicant shall be deemed to be in
compliance with the 10 percent requirement of section 4(a)(2)(A) of the
Bank Act (12 U.S.C. 1424(a)(2)(A)) and Sec. 1263.6(b) of this part
upon receipt by the Bank from the applicant, within one year after
commencement of the applicant's initial business operations, of
evidence acceptable to the Bank that the applicant satisfies the 10
percent requirement.
(4) Conditional approval deemed null and void. If the requirements
of paragraph (c)(3) of this section are not satisfied, a de novo
applicant shall be deemed to be in noncompliance with the 10 percent
requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C.
1424(a)(2)(A)) and Sec. 1263.6(b) of this
[[Page 22862]]
part, and its conditional membership approval is deemed null and void.
(5) Treatment of outstanding advances and Bank stock. If a de novo
applicant's conditional membership approval is deemed null and void
pursuant to paragraph (c)(4) of this section, the liquidation of any
outstanding indebtedness owed by the applicant to the Bank and
redemption of stock of such Bank shall be carried out in accordance
with Sec. 1263.29.
(d) Home financing policy requirement--(1) Conditional approval. A
de novo applicant that has not received its first formal, or, if
unavailable, informal or preliminary, Community Reinvestment Act (CRA)
performance evaluation, shall be conditionally deemed to be in
compliance with the home financing policy requirement of section
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.
1263.6(a)(6) of this part, if the applicant has filed as part of its
application for membership a written justification acceptable to the
Bank of how and why its home financing credit policy and lending
practices will meet the credit needs of its community. An applicant
that receives such conditional membership approval is subject to the
stock purchase requirements established by FHFA regulation or the
Bank's capital plan, as applicable, as well as the FHFA regulations
governing advances to members.
(2) Approval. A de novo applicant that has been granted conditional
approval under paragraph (d)(1) of this section shall be deemed to be
in compliance with the home financing policy requirement of section
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.
1263.6(a)(6) of this part upon receipt by the Bank of evidence from the
applicant that it received a CRA rating of ``Satisfactory'' or better
on its first formal, or if unavailable, informal or preliminary, CRA
performance evaluation.
(3) Conditional approval deemed null and void. If the de novo
applicant's first such CRA rating is ``Needs to Improve'' or
``Substantial Non-Compliance,'' the applicant shall be deemed to be in
noncompliance with the home financing policy requirement of section
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.
1263.6(a)(6) of this part, subject to rebuttal by the applicant under
Sec. 1263.17(f), and its conditional membership approval is deemed
null and void.
(4) Treatment of outstanding advances and Bank stock. If the
applicant's conditional membership approval is deemed null and void
pursuant to paragraph (d)(3) of this section, the liquidation of any
outstanding indebtedness owed by the applicant to the Bank and
redemption of stock of such Bank shall be carried out in accordance
with Sec. 1263.29.
Sec. 1263.15 Recent merger or acquisition applicants.
An applicant that merged with or acquired another institution prior
to the date the Bank receives its application for membership is subject
to the requirements of Sec. Sec. 1263.7 to 1263.13 except as provided
in this section.
(a) Financial condition requirement--(1) Regulatory financial
reports. For purposes of Sec. 1263.11(a)(1), an applicant that, as a
result of a merger or acquisition preceding the date the Bank receives
its application for membership, has not yet filed regulatory financial
reports with its appropriate regulator for the last six calendar
quarters and three year-ends preceding such date, shall provide any
regulatory financial reports that the applicant has filed with its
appropriate regulator.
(2) Performance trend criteria. For purposes of Sec.
1263.11(b)(3)(i)(A) to (C), an applicant that, as a result of a merger
or acquisition preceding the date the Bank receives its application for
membership, has not yet filed combined regulatory financial reports
with its appropriate regulator for the last six calendar quarters
preceding such date, shall provide pro forma combined financial
statements for those calendar quarters in which actual combined
regulatory financial reports are unavailable.
(b) Home financing policy requirement. For purposes of Sec.
1263.13, an applicant that, as a result of a merger or acquisition
preceding the date the Bank receives its application for membership,
has not received its first formal, or if unavailable, informal or
preliminary, Community Reinvestment Act performance evaluation, shall
file as part of its application a written justification acceptable to
the Bank of how and why the applicant's home financing credit policy
and lending practices will meet the credit needs of its community.
(c) Makes long-term home mortgage loans requirement; 10 percent
requirement. For purposes of determining compliance with Sec. Sec.
1263.9 and 1263.10, a Bank may, in its discretion, permit an applicant
that, as a result of a merger or acquisition preceding the date the
Bank receives its application for membership, has not yet filed a
consolidated regulatory financial report as a combined entity with its
appropriate regulator, to provide the combined pro forma financial
statement for the combined entity filed with the regulator that
approved the merger or acquisition.
Sec. 1263.16 Financial condition requirement for insurance company
and certain CDFI applicants.
(a) Insurance companies. An insurance company applicant shall be
deemed to meet the financial condition requirement of Sec.
1263.6(a)(4) if, based on the information contained in the applicant's
most recent regulatory financial report filed with its appropriate
regulator, the applicant meets all of its minimum statutory and
regulatory capital requirements and the capital standards established
by the National Association of Insurance Commissioners.
(b) CDFIs other than CDFI credit unions--(1) Review requirement. In
determining whether a CDFI applicant, other than a CDFI credit union,
has complied with the financial condition requirement of Sec.
1263.6(a)(4), the Bank shall obtain as a part of the membership
application and review each of the following documents:
(i) Financial statements. An independent audit conducted within the
prior year in accordance with generally accepted auditing standards by
a certified public accounting firm, plus more recent quarterly
statements, if available, and financial statements for the two years
prior to the most recent audited financial statement. At a minimum, all
such financial statements must include income and expense statements,
statements of activities, statements of financial position, and
statements of cash flows. The financial statement for the most recent
year must include separate schedules or disclosures of the financial
position of each of the applicant's affiliates, descriptions of their
lines of business, detailed financial disclosures of the relationship
between the applicant and its affiliates (such as indebtedness or
subordinate debt obligations), disclosures of interlocking
directorships with each affiliate, and identification of temporary and
permanently restricted funds and the requirements of these
restrictions.
(ii) CDFI Fund certification. The certification that the applicant
has received from the CDFI Fund. If the certification is more than
three years old, the applicant must also submit a written statement
certifying that there have been no material events or occurrences since
the date of certification that would adversely affect its strategic
direction, mission, or business operations.
[[Page 22863]]
(iii) Additional information. Any other relevant document or
information concerning the financial condition of the applicant
requested by the Bank and that is not contained in the applicant's
financial statements.
(2) Standards. A CDFI applicant, other than a CDFI credit union,
shall be deemed to be in compliance with the financial condition
requirement of Sec. 1263.6(a)(4) if it meets all of the following
minimum financial standards:
(i) Net asset ratio. The applicant's ratio of net assets to total
assets is at least 20 percent, with net and total assets including
restricted assets, where net assets is calculated as the residual value
of assets over liabilities and is based on information derived from the
applicant's most recent financial statements;
(ii) Earnings. The applicant has shown a positive net income for
two of the three most recent years, where net income is calculated as
gross revenues less total expenses and is based on information derived
from the applicant's most recent financial statements;
(iii) Loan loss reserves. The applicant's ratio of loan loss
reserves to loans and leases 90 days or more delinquent (including
loans sold with full recourse) is at least 30 percent, where loan loss
reserves are a specified balance sheet account that reflects the amount
reserved for loans expected to be uncollectible and are based on
information derived from the applicant's most recent financial
statements;
(iv) Liquidity. The applicant has an operating liquidity ratio of
at least 1.0 for the current year, and for one or both of the two
preceding years, where the numerator of the ratio includes unrestricted
cash and cash equivalents and the denominator of the ratio is the
average quarterly operating expense for the four most recent quarters.
Sec. 1263.17 Rebuttable presumptions.
(a) Rebutting presumptive compliance. The presumption that an
applicant meeting the requirements of Sec. Sec. 1263.7 to 1263.16 is
in compliance with section 4(a) of the Bank Act (12 U.S.C. 1424(a)) and
Sec. 1263.6(a) and (b) of this part, may be rebutted, and the Bank may
deny membership to the applicant, if the Bank obtains substantial
evidence to overcome the presumption of compliance.
(b) Rebutting presumptive noncompliance. The presumption that an
applicant not meeting a particular requirement of Sec. Sec. 1263.8,
1263.11, 1263.12, 1263.13, or 1263.16 is in noncompliance with section
4(a) of the Bank Act (12 U.S.C. 1424(a)) and Sec. 1263.6(a)(2), (4),
(5), or (6) of this part, may be rebutted, and the applicant shall be
deemed to meet such requirement, if the applicable requirements in this
section are satisfied.
(c) Presumptive noncompliance by insurance company applicant with
``subject to inspection and regulation'' requirement of Sec. 1263.8.
If an insurance company applicant is not subject to inspection and
regulation by an appropriate state regulator accredited by the National
Association of Insurance Commissioners (NAIC), as required by Sec.
1263.8, the applicant or the Bank shall prepare a written justification
that provides substantial evidence acceptable to the Bank that the
applicant is subject to inspection and regulation as required by Sec.
1263.6(a)(2), notwithstanding the lack of NAIC accreditation.
(d) Presumptive noncompliance with financial condition requirements
of Sec. Sec. 1263.11 and 1263.16--(1) Applicants subject to Sec.
1263.11. For applicants subject to Sec. 1263.11, in the case of an
applicant's lack of a composite regulatory examination rating within
the two-year period required by Sec. 1263.11(b)(1), a variance from
the rating required by Sec. 1263.11(b)(3)(i), or a variance from a
performance trend criterion required by Sec. 1263.11(b)(3)(i), the
applicant or the Bank shall prepare a written justification pertaining
to such requirement that provides substantial evidence acceptable to
the Bank that the applicant is in the financial condition required by
Sec. 1263.6(a)(4), notwithstanding the lack of rating or variance.
(2) Applicants subject to Sec. 1263.16. For applicants subject to
Sec. 1263.16, in the case of an insurance company applicant's variance
from a capital requirement or standard of Sec. 1263.16(a) or in the
case of a CDFI applicant's variance from the standards of Sec.
1263.16(b), the applicant or the Bank shall prepare a written
justification pertaining to such requirement or standard that provides
substantial evidence acceptable to the Bank that the applicant is in
the financial condition required by Sec. 1263.6(a)(4), notwithstanding
the variance.
(e) Presumptive noncompliance with character of management
requirement of Sec. 1263.12--(1) Enforcement actions. If an applicant
or any of its directors or senior officers is subject to, or operating
under, any enforcement action instituted by its appropriate regulator,
the applicant shall provide or the Bank shall obtain:
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the applicant or its directors
or senior officers are in substantial compliance with all aspects of
the enforcement action; or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the applicant or its directors or senior officers are
in substantial compliance with all aspects of the enforcement action.
The written analysis shall state each action the applicant or its
directors or senior officers are required to take by the enforcement
action, the actions actually taken by the applicant or its directors or
senior officers, and whether the applicant regards this as substantial
compliance with all aspects of the enforcement action.
(2) Criminal, civil or administrative proceedings. If an applicant
or any of its directors or senior officers has been the subject of any
criminal, civil or administrative proceedings reflecting upon
creditworthiness, business judgment, or moral turpitude since the most
recent regulatory examination report, or in the case of a CDFI
applicant, during the past three years, the applicant shall provide or
the Bank shall obtain:
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the proceedings will not likely
result in enforcement action; or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the proceedings will not likely result in enforcement
action, or in the case of a CDFI applicant, that the proceedings will
not likely have a significantly deleterious effect on the applicant's
operations. The written analysis shall state the severity of the
charges, and any mitigating action taken by the applicant or its
directors or senior officers.
(3) Criminal, civil or administrative monetary liabilities,
lawsuits or judgments. If there are any known potential criminal, civil
or administrative monetary liabilities, material pending lawsuits, or
unsatisfied judgments against the applicant or any of its directors or
senior officers since the most recent regulatory examination report, or
in the case of a CDFI applicant, occurring within the past three years,
that are significant to the applicant's operations, the applicant shall
provide or the Bank shall obtain:
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the liabilities, lawsuits or
judgments will not likely cause the applicant to fall below its
[[Page 22864]]
applicable capital requirements set forth in Sec. Sec. 1263.11(b)(2)
and 1263.16(a); or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the liabilities, lawsuits or judgments will not likely
cause the applicant to fall below its applicable capital requirements
set forth in Sec. 1263.11(b)(2) or Sec. 1263.16(a), or the net asset
ratio set forth in Sec. 1263.16(b)(2)(i). The written analysis shall
state the likelihood of the applicant or its directors or senior
officers prevailing, and the financial consequences if the applicant or
its directors or senior officers do not prevail.
(f) Presumptive noncompliance with home financing policy
requirements of Sec. Sec. 1263.13 and 1263.14(d). If an applicant
received a ``Substantial Non-Compliance'' rating on its most recent
formal, or if unavailable, informal or preliminary, Community
Reinvestment Act (CRA) performance evaluation, or a ``Needs to
Improve'' CRA rating on its most recent formal, or if unavailable,
informal or preliminary, CRA performance evaluation and a CRA rating of
``Needs to Improve'' or better on any immediately preceding CRA
performance evaluation, the applicant shall provide or the Bank shall
obtain:
(1) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator of the applicant's recent
satisfactory CRA performance, including any corrective action that
substantially improved upon the deficiencies cited in the most recent
CRA performance evaluation(s); or
(2) Written analysis. A written analysis acceptable to the Bank
demonstrating that the CRA rating is unrelated to home financing, and
providing substantial evidence of how and why the applicant's home
financing credit policy and lending practices meet the credit needs of
its community.
Sec. 1263.18 Determination of appropriate Bank district for
membership.
(a) Eligibility. (1) An institution eligible to become a member of
a Bank under the Bank Act and this part may become a member only of the
Bank of the district in which the institution's principal place of
business is located, except as provided in paragraph (a)(2) of this
section. A member shall promptly notify its Bank in writing whenever it
relocates its principal place of business to another state and the Bank
shall inform FHFA in writing of any such relocation.
(2) An institution eligible to become a member of a Bank under the
Bank Act and this part may become a member of the Bank of a district
adjoining the district in which the institution's principal place of
business is located, if demanded by convenience and then only with the
approval of FHFA.
(b) Principal place of business. Except as otherwise designated in
accordance with this section, the principal place of business of an
institution is the state in which the institution maintains its home
office established as such in conformity with the laws under which the
institution is organized.
(c) Designation of principal place of business. (1) A member or an
applicant for membership may request in writing to the Bank in the
district where the institution maintains its home office that a state
other than the state in which it maintains its home office be
designated as its principal place of business. Within 90 calendar days
of receipt of such written request, the board of directors of the Bank
in the district where the institution maintains its home office shall
designate a state other than the state where the institution maintains
its home office as the institution's principal place of business,
provided all of the following criteria are satisfied:
(i) At least 80 percent of the institution's accounting books,
records and ledgers are maintained, located or held in such designated
state;
(ii) A majority of meetings of the institution's board of directors
and constituent committees are conducted in such designated state; and
(iii) A majority of the institution's five highest paid officers
have their place of employment located in such designated state.
(2) Written notice of a designation made pursuant to paragraph
(c)(1) of this section shall be sent to the Bank in the district
containing the designated state, FHFA and the institution.
(3) The notice of designation made pursuant to paragraph (c)(1) of
this section shall include the state designated as the principal place
of business and the resulting Bank to which membership will be
transferred.
(4) If the board of directors of the Bank in the district where the
institution maintains its home office fails to make the designation
requested by the member or applicant pursuant to paragraph (c)(1) of
this section, then the member or applicant may request in writing that
FHFA make the designation.
(d) Transfer of membership. (1) No transfer of membership from one
Bank to another Bank shall take effect until the Banks involved reach
agreement on a method of orderly transfer.
(2) In the event that the Banks involved fail to agree on a method
of orderly transfer, the FHFA shall determine the conditions under
which the transfer shall take place.
(e) Effect of transfer. A transfer of membership pursuant to this
section shall be effective for all purposes, but shall not affect
voting rights in the year of the transfer and shall not be subject to
the provisions on termination of membership set forth in section 6 of
the Bank Act (12 U.S.C. 1426) or Sec. Sec. 1263.26 and 1263.27, nor
the restriction on reacquiring Bank membership set forth in Sec.
1263.30.
Subpart D--Stock Requirements
Sec. 1263.19 Par value and price of stock.
The capital stock of each Bank shall be sold at par, unless the
Director has fixed a higher price.
Sec. 1263.20 Stock purchase.
(a) Minimum stock purchase. Each member shall purchase stock in the
Bank of which it is a member in an amount specified by the Bank's
capital plan, except that each member of a Bank that has not converted
to the capital structure authorized by the GLB Act shall purchase stock
in the Bank in an amount equal to the greater of:
(1) $500;
(2) 1 percent of the member's aggregate unpaid loan principal; or
(3) 5 percent of the member's aggregate amount of outstanding
advances.
(b) Timing of minimum stock purchase. (1) Within 60 calendar days
after an institution is approved for membership in a Bank, the
institution shall purchase its minimum stock requirement as set forth
in paragraph (a) of this section.
(2) In the case of a Bank that has not converted to the capital
structure authorized by the GLB Act, an institution that has been
approved for membership may elect to purchase its minimum stock
requirement in installments, provided that not less than one-fourth of
the total amount shall be purchased within 60 calendar days of the date
of approval of membership, and that a further sum of not less than one-
fourth of such total shall be purchased at the end of each succeeding
period of four months from the date of approval of membership.
(c) Commencement of membership. An institution that has been
approved for membership shall become a member at the time it purchases
its minimum stock requirement or the first installment thereof pursuant
to this section.
(d) Failure to purchase minimum stock requirement. If an
institution that
[[Page 22865]]
has submitted an application and been approved for membership fails to
purchase its minimum stock requirement or its first installment within
60 calendar days of the date of its approval for membership, such
approval shall be null and void and the institution, if it wants to
become a member, shall be required to submit a new application for
membership.
(e) Reports. The Bank shall make reports to FHFA setting forth
purchases by institutions approved for membership of their minimum
stock requirement pursuant to this section in accordance with the
instructions provided in the Data Reporting Manual issued by FHFA, as
amended from time to time.
Sec. 1263.21 Issuance and form of stock.
(a) A Bank shall issue to each new member, as of the effective date
of membership, stock in the member's name for the amount of stock
purchased and paid for in full.
(b) If the member purchases stock in installments, the stock shall
be issued in installments with the appropriate number of shares issued
after each payment is made.
(c) A Bank that has not converted to the capital structure
authorized by the GLB Act may issue stock in certificated or
uncertificated form at the discretion of the Bank.
(d) A Bank that has not converted to the capital structure
authorized by the GLB Act may convert all outstanding certificated
stock to uncertificated form at its discretion.
Sec. 1263.22 Adjustments in stock holdings.
(a) Adjustment in general. A Bank may from time to time increase or
decrease the amount of stock any member is required to hold.
(b)(1) Annual adjustment. A Bank shall calculate annually, in the
manner set forth in Sec. 1263.20(a), each member's required minimum
holdings of stock in the Bank in which it is a member using calendar
year-end financial data provided by the member to the Bank, pursuant to
Sec. 1263.31(d), and shall notify each member of the adjustment. The
notice shall clearly state that the Bank's calculation of each member's
minimum stock holdings is to be used to determine the number of votes
that the member may cast in that year's election of directors and shall
identify the state within the district in which the member will vote. A
member that does not agree with the Bank's calculation of the minimum
stock requirement or with the identification of its voting state may
request FHFA to review the Bank's determination. FHFA shall promptly
determine the member's minimum required holdings and its proper voting
state, which determination shall be final.
(2) Redemption of excess shares. If, in the case of a Bank that has
not converted to the capital structure authorized by the GLB Act and
after the annual adjustment required by paragraph (b)(1) of this
section is made, the amount of stock that a member is required to hold
is decreased, the Bank may, in its discretion and upon proper
application of the member, retire such excess stock, and the Bank shall
pay for each share upon surrender of the stock an amount equal to the
par value thereof (except that if at any time FHFA finds that the paid-
in capital of a Bank is or is likely to be impaired as a result of
losses in or depreciation of the assets held, the Bank shall on the
order of FHFA withhold from the amount to be paid in retirement of the
stock a pro rata share of the amount of such impairment as determined
by FHFA) or, at its election, the Bank may credit any part of such
payment against the member's debt to the Bank. The Bank's authority to
retire such excess stock shall be further subject to the limitations of
section 6(f) of the Bank Act (12 U.S.C. 1426(f)).
(c) A member's stock holdings shall not be reduced under this
section to an amount less than required by sections 6(b) and 10(c) of
the Bank Act (12 U.S.C. 1426(b), 1430(c)).
Sec. 1263.23 Excess stock.
(a) Sale of excess stock. Subject to the restriction in paragraph
(b) of this section, a member may purchase excess stock as long as the
purchase is approved by the member's Bank and is permitted by the laws
under which the member operates.
(b) Restriction. Any Bank with excess stock greater than 1 percent
of its total assets shall not declare or pay any dividends in the form
of additional shares of Bank stock or otherwise issue any excess stock.
A Bank shall not issue excess stock, as a dividend or otherwise, if
after the issuance, the outstanding excess stock at the Bank would be
greater than 1 percent of its total assets.
Subpart E--Consolidations Involving Members
Sec. 1263.24 Consolidations involving members.
(a) Consolidation of members. Upon the consolidation of two or more
institutions that are members of the same Bank into one institution
operating under the charter of one of the consolidating institutions,
the membership of the surviving institution shall continue and the
membership of each disappearing institution shall terminate on the
cancellation of its charter. Upon the consolidation of two or more
institutions, at least two of which are members of different Banks,
into one institution operating under the charter of one of the
consolidating institutions, the membership of the surviving institution
shall continue and the membership of each disappearing institution
shall terminate upon cancellation of its charter, provided, however,
that if more than 80 percent of the assets of the consolidated
institution are derived from the assets of a disappearing institution,
then the consolidated institution shall continue to be a member of the
Bank of which that disappearing institution was a member prior to the
consolidation, and the membership of the other institutions shall
terminate upon the effective date of the consolidation.
(b) Consolidation into nonmember--(1) In general. Upon the
consolidation of a member into an institution that is not a member of a
Bank, where the consolidated institution operates under the charter of
the nonmember institution, the membership of the disappearing
institution shall terminate upon the cancellation of its charter.
(2) Notification. If a member has consolidated into a nonmember
that has its principal place of business in a state in the same Bank
district as the former member, the consolidated institution shall have
60 calendar days after the cancellation of the charter of the former
member within which to notify the Bank of the former member that the
consolidated institution intends to apply for membership in such Bank.
If the consolidated institution does not so notify the Bank by the end
of the period, the Bank shall require the liquidation of any
outstanding indebtedness owed by the former member, shall settle all
outstanding business transactions with the former member, and shall
redeem or repurchase the Bank stock owned by the former member in
accordance with Sec. 1263.29.
(3) Application. If such a consolidated institution has notified
the appropriate Bank of its intent to apply for membership, the
consolidated institution shall submit an application for membership
within 60 calendar days of so notifying the Bank. If the consolidated
institution does not submit an application for membership by the end of
the period, the Bank shall require the liquidation of any outstanding
indebtedness owed by the former member, shall settle all outstanding
business transactions with the former
[[Page 22866]]
member, and shall redeem or repurchase the Bank stock owned by the
former member in accordance with Sec. 1263.29.
(4) Outstanding indebtedness. If a member has consolidated into a
nonmember institution, the Bank need not require the former member or
its successor to liquidate any outstanding indebtedness owed to the
Bank or to redeem its Bank stock, as otherwise may be required under
Sec. 1263.29, during:
(i) The initial 60 calendar-day notification period;
(ii) The 60 calendar-day period following receipt of a notification
that the consolidated institution intends to apply for membership; and
(iii) The period of time during which the Bank processes the
application for membership.
(5) Approval of membership. If the application of such a
consolidated institution is approved, the consolidated institution
shall become a member of that Bank upon the purchase of the amount of
Bank stock required by section 6 of the Bank Act (12 U.S.C. 1426). If a
Bank's capital plan has not taken effect, the amount of stock that the
consolidated institution is required to own shall be as provided in
Sec. Sec. 1263.20 and 1263.22. If the capital plan for the Bank has
taken effect, the amount of stock that the consolidated institution is
required to own shall be equal to the minimum investment established by
the capital plan for that Bank.
(6) Disapproval of membership. If the Bank disapproves the
application for membership of the consolidated institution, the Bank
shall require the liquidation of any outstanding indebtedness owed by,
and the settlement of all other outstanding business transactions with,
the former member, and shall redeem or repurchase the Bank stock owned
by the former member in accordance with Sec. 1263.29.
(c) Dividends on acquired Bank stock. A consolidated institution
shall be entitled to receive dividends on the Bank stock that it
acquires as a result of a consolidation with a member in accordance
with applicable FHFA regulations.
(d) Stock transfers. With regard to any transfer of Bank stock from
a disappearing member to the surviving or consolidated member, as
appropriate, for which the approval of FHFA is required pursuant to
section 6(f) of the Bank Act (12 U.S.C. 1426(f)), as in effect prior to
November 12, 1999, such transfer shall be deemed to be approved by FHFA
by compliance in all applicable respects with the requirements of this
section.
Subpart F--Withdrawal and Removal From Membership
Sec. 1263.26 Voluntary withdrawal from membership.
(a) In general. (1) Any institution may withdraw from membership by
providing to the Bank written notice of its intent to withdraw from
membership. A member that has so notified its Bank shall be entitled to
have continued access to the benefits of membership until the effective
date of its withdrawal, but the Bank need not commit to providing any
further services, including advances, to a withdrawing member that
would mature or otherwise terminate subsequent to the effective date of
the withdrawal. A member may cancel its notice of withdrawal at any
time prior to its effective date by providing a written cancellation
notice to the Bank. A Bank may impose a fee on a member that cancels a
notice of withdrawal, provided that the fee or the manner of its
calculation is specified in the Bank's capital plan.
(2) A Bank shall notify FHFA within 10 calendar days of receipt of
any notice of withdrawal or notice of cancellation of withdrawal from
membership.
(b) Effective date of withdrawal. The membership of an institution
that has submitted a notice of withdrawal shall terminate as of the
date on which the last of the applicable stock redemption periods ends
for the stock that the member is required to hold, as of the date that
the notice of withdrawal is submitted, under the terms of a Bank's
capital plan as a condition of membership, unless the institution has
cancelled its notice of withdrawal prior to the effective date of the
termination of its membership.
(c) Stock redemption periods. The receipt by a Bank of a notice of
withdrawal shall commence the applicable 6-month and 5-year stock
redemption periods, respectively, for all of the Class A and Class B
stock held by that member that is not already subject to a pending
request for redemption. In the case of an institution the membership of
which has been terminated as a result of a merger or other
consolidation into a nonmember or into a member of another Bank, the
applicable stock redemption periods for any stock that is not subject
to a pending notice of redemption shall be deemed to commence on the
date on which the charter of the former member is cancelled.
(d) Certification. No institution may withdraw from membership
unless, on the date that the membership is to terminate, there is in
effect a certification from FHFA that the withdrawal of a member will
not cause the Bank System to fail to satisfy its requirements under
section 21B(f)(2)(C) of the Bank Act (12 U.S.C. 1441b(f)(2)(C)) to
contribute toward the interest payments owed on obligations issued by
the Resolution Funding Corporation.
Sec. 1263.27 Involuntary termination of membership.
(a) Grounds. The board of directors of a Bank may terminate the
membership of any institution that:
(1) Fails to comply with any requirement of the Bank Act, any
regulation adopted by FHFA, or any requirement of the Bank's capital
plan;
(2) Becomes insolvent or otherwise subject to the appointment of a
conservator, receiver, or other legal custodian under federal or state
law; or
(3) Would jeopardize the safety or soundness of the Bank if it were
to remain a member.
(b) Stock redemption periods. The applicable 6-month and 5-year
stock redemption periods, respectively, for all of the Class A and
Class B stock owned by a member and not already subject to a pending
request for redemption, shall commence on the date that the Bank
terminates the institution's membership.
(c) Membership rights. An institution whose membership is
terminated involuntarily under this section shall cease being a member
as of the date on which the board of directors of the Bank acts to
terminate the membership, and the institution shall have no right to
obtain any of the benefits of membership after that date, but shall be
entitled to receive any dividends declared on its stock until the stock
is redeemed or repurchased by the Bank.
Subpart G--Orderly Liquidation of Advances and Redemption of Stock
Sec. 1263.29 Disposition of claims.
(a) In general. If an institution withdraws from membership or its
membership is otherwise terminated, the Bank shall determine an orderly
manner for liquidating all outstanding indebtedness owed by that member
to the Bank and for settling all other claims against the member. After
all such obligations and claims have been extinguished or settled, the
Bank shall return to the member all collateral pledged by the member to
the Bank to secure its obligations to the Bank.
(b) Bank stock. If an institution that has withdrawn from
membership or that otherwise has had its membership terminated remains
indebted to the Bank or has outstanding any business
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transactions with the Bank after the effective date of its termination
of membership, the Bank shall not redeem or repurchase any Bank stock
that is required to support the indebtedness or the business
transactions until after all such indebtedness and business
transactions have been extinguished or settled.
Subpart H--Reacquisition of Membership
Sec. 1263.30 Readmission to membership.
(a) In general. An institution that has withdrawn from membership
or otherwise has had its membership terminated and which has divested
all of its shares of Bank stock, may not be readmitted to membership in
any Bank, or acquire any capital stock of any Bank, for a period of 5
years from the date on which its membership terminated and it divested
all of its shares of Bank stock.
(b) Exceptions. An institution that transfers membership between
two Banks without interruption shall not be deemed to have withdrawn
from Bank membership or had its membership terminated.
Subpart I--Bank Access to Information
Sec. 1263.31 Reports and examinations.
As a condition precedent to Bank membership, each member:
(a) Consents to such examinations as the Bank or FHFA may require
for purposes of the Bank Act;
(b) Agrees that reports of examinations by local, state or federal
agencies or institutions may be furnished by such authorities to the
Bank or FHFA upon request;
(c) Agrees to give the Bank or the appropriate Federal banking
agency, upon request, such information as the Bank or the appropriate
Federal banking agency may need to compile and publish cost of funds
indices and to publish other reports or statistical summaries
pertaining to the activities of Bank members;
(d) Agrees to provide the Bank with calendar year-end financial
data each year, for purposes of making the calculation described in
Sec. 1263.22(b)(1); and
(e) Agrees to provide the Bank with copies of reports of condition
and operations required to be filed with the member's appropriate
Federal banking agency, if applicable, within 20 calendar days of
filing, as well as copies of any annual report of condition and
operations required to be filed.
Subpart J--Membership Insignia
Sec. 1263.32 Official membership insignia.
Members may display the approved insignia of membership on their
documents, advertising and quarters, and likewise use the words
``Member Federal Home Loan Bank System.''
Dated: May 7, 2009.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E9-11329 Filed 5-14-09; 8:45 am]
BILLING CODE 8070-01-P