[Federal Register Volume 76, Number 42 (Thursday, March 3, 2011)]
[Rules and Regulations]
[Pages 11668-11675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4413]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1225

RIN 2590-AA01


Minimum Capital

AGENCY: Federal Housing Finance Board and Federal Housing Finance 
Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final 
rule to implement a provision of the Federal Housing Enterprises 
Financial Safety and Soundness Act, as amended, that provides for a 
temporary increase in the minimum capital level for the entities 
regulated by FHFA--the Federal National Mortgage Association, the 
Federal Home Loan Mortgage Corporation and the Federal Home Loan Banks. 
The final rule establishes standards for imposing a temporary increase 
and for rescinding such an increase, and a time frame for review of 
such an increase.

DATES: This rule is effective April 4, 2011.

FOR FURTHER INFORMATION CONTACT: Christopher T. Curtis, Senior Deputy 
General Counsel, [email protected], (202) 414-8947, or Jamie 
Schwing, Associate General Counsel, [email protected], (202) 414-
3787, (not toll-free numbers), 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. Establishment of the Federal Housing Finance Agency

    The Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654, amended the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) 
(Safety and Soundness Act) to establish FHFA as an independent agency 
of the Federal Government. FHFA was established to oversee the 
operations of the Federal National Mortgage Association, the Federal 
Home Loan Mortgage Corporation (collectively, Enterprises), and the 
Federal Home Loan Banks (Banks) (collectively, regulated entities). 
FHFA is to ensure that the regulated entities operate in a safe and 
sound manner including being capitalized adequately; that their 
operations foster liquid, efficient, competitive and resilient national 
housing finance markets; that they comply with the Safety and Soundness 
Act and their authorizing statutes, and with rules, regulations, 
guidelines and orders issued under those statutes; that they carry out 
their missions through activities authorized and consistent with the 
Safety and Soundness Act and their authorizing statutes; and that the 
activities and operations of the entities are consistent with the 
public interest.\1\ The regulated entities continue to operate under 
regulations promulgated by the Office of Federal Housing Enterprise 
Oversight and the Federal Housing Finance Board, and the relevant 
regulations of the Department of Housing and Urban Development, until 
such time as the existing regulations are supplanted by regulations 
promulgated by FHFA.\2\
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    \1\ 12 U.S.C. 4513.
    \2\ Sections 1302 and 1312 of HERA.
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B. The Bank System Generally

    The twelve Banks are instrumentalities of the United States 
organized under the Federal Home Loan Bank Act (Bank Act).\3\ See 12 
U.S.C. 1423, 1432(a). The Banks are cooperatives: Only members of a 
Bank may purchase the capital stock of a Bank, and only members or 
certain eligible housing associates (such as state housing finance 
agencies) may obtain access to secured loans, known as advances, or 
other products provided by

[[Page 11669]]

a Bank. See 12 U.S.C. 1426(a)(4), 1430(a), 1430(b). Each Bank is 
managed by its own board of directors and serves the public interest by 
enhancing the availability of residential credit through its member 
institutions. See 12 U.S.C. 1427. Any eligible institution (generally a 
federally insured depository institution or state-regulated insurance 
company) may become a member of a Bank if it satisfies certain criteria 
and purchases a specified amount of the Bank's capital stock. See 12 
U.S.C. 1424; 12 CFR part 1263.
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    \3\ Each Bank is generally referred to by the name of the city 
in which it is located. The twelve Banks are located in: Boston, New 
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des 
Moines, Dallas, Topeka, San Francisco, and Seattle.
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    As government-sponsored enterprises, the Banks are granted certain 
privileges under federal law. In light of those privileges, the Banks 
typically can borrow funds at spreads over the rates on U.S. Treasury 
securities of comparable maturity lower than most other entities. The 
Banks pass along a portion of their funding advantage to their 
members--and ultimately to consumers--by providing advances and other 
financial services at rates that would not otherwise be available to 
their members. Consolidated obligations (COs), consisting of bonds and 
discount notes, are the principal funding source for the Banks. The 
Office of Finance issues all COs on behalf of the twelve Banks. 
Although each Bank is primarily liable for the portion of consolidated 
obligations corresponding to the proceeds received by that Bank, each 
Bank is also jointly and severally liable with the other eleven Banks 
for the payment of principal and interest on all COs. 12 CFR 966.9.

C. The Enterprises Generally

    The Enterprises are chartered by Congress for the purpose of 
establishing secondary market facilities for residential mortgages. See 
12 U.S.C. 1716 et seq.; 12 U.S.C. 1451 et seq. Congress established the 
Enterprises to provide stability in the secondary mortgage market for 
residential mortgages, to respond appropriately to the private capital 
market, to provide ongoing assistance to the secondary market for 
residential mortgages, and to promote access to mortgage credit 
throughout the nation. Id.
    On September 6, 2008, the Director of FHFA appointed FHFA as 
conservator of the Enterprises in accordance with the Safety and 
Soundness Act, as amended by HERA. The Enterprises remain under 
conservatorship at this time. Although the Enterprises' substantial 
market presence has been important to restoring market stability, 
neither company would be capable of serving the mortgage market today 
without the ongoing financial support provided by the United States 
Department of Treasury. While reliance on the Treasury Department's 
backing will continue until legislation produces a final resolution to 
the Enterprises' future, FHFA is monitoring the activities of the 
Enterprises to: (a) Limit their risk and exposure by avoiding new lines 
of business; (b) ensure profitability in their new books of business 
without deterring market participation or hindering market recovery; 
and (c) minimize losses on the mortgages already on their books.

D. The Proposed Rule

    On February 8, 2010, FHFA published in the Federal Register a 
proposed rule that set forth standards and procedures FHFA would employ 
to determine whether to require or rescind a temporary increase in the 
minimum capital levels of a regulated entity or entities pursuant to 12 
U.S.C. 4612(d). The 60-day comment period closed on April 9, 2010. See 
Federal Register 75 FR 6151 (February 8, 2010).
    Section 1111 of HERA amended section 1362 of the Safety and 
Soundness Act to provide additional authorities for FHFA regarding 
minimum capital requirements. Section 1362(a) establishes a minimum 
capital level for the Enterprises, while section 1362(b) incorporates 
the minimum capital level for the Federal Home Loan Banks established 
by the Federal Home Loan Bank Act (Bank Act).\4\ The section explicitly 
authorizes the Director, by regulation, to provide for capital levels 
higher than the minimum levels specified for the Enterprises or the 
Banks to promote safe and sound operations.\5\ Also, section 1362(e) 
provides for additional capital and reserve requirements to be issued 
by order or regulation with respect to a product or activity.\6\ 
Section 1362(f) provides for a periodic review of core capital 
maintained by an Enterprise, the amount of capital retained by the 
Banks and the minimum capital levels set forth for the regulated 
entities required under this section.\7\
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    \4\ The Bank Act's current minimum capital requirements apply to 
the eleven banks that have converted to the capital structure 
provided in the Bank Act as amended by the Gramm-Leach-Bliley Act of 
1999, see Bank Act section 6(a)(2), 12 U.S.C. 1426(a)(2), but do not 
apply to the Federal Home Loan Bank of Chicago. The Federal Home 
Loan Bank of Chicago is subject to capital requirements as set forth 
in a 2007 Cease and Desist Order, as amended. See 74 FR 5597 
(January 30, 2009). As a result, the definition of ``minimum capital 
level'' as set forth in the proposed regulation is structured to 
take into account the current supervisory status of the Federal Home 
Loan Bank of Chicago.
    \5\ 12 U.S.C. 4612(c).
    \6\ Id. at (e).
    \7\ Id. at (f).
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    In addition, section 1362(d) provides that the Director, by order, 
may temporarily increase an established minimum capital level, when the 
Director determines ``that such an increase is necessary and consistent 
with the prudential regulation and the safe and sound operations of a 
regulated entity.'' \8\ The section also provides that the Director 
shall rescind the temporary minimum capital level when the Director 
determines circumstances no longer justify the temporary level.\9\ To 
implement section 1362(d), the Director must issue regulations setting 
forth standards for the imposition of a temporary increase, standards 
and procedures that will be used to make the determination regarding 
rescission, and a time frame for periodic review of any temporary 
increase in the minimum capital level to make a determination regarding 
rescission.\10\
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    \8\ Id. at (d)(1).
    \9\ Id. at (d)(2).
    \10\ Id. at (d)(3).
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    Section 1362(d) recognized the need for the Director to be able to 
respond when necessary to conditions affecting a regulated entity by 
imposing an appropriately higher capital requirement in an expeditious 
manner. The proposed rule also sets forth procedures and standards as 
required in the Safety and Soundness Act for a temporary increase in 
the minimum capital levels of the Enterprises or the Banks, including a 
determination to order an increase, to rescind all or part of the 
increase, and the time for periodic review of an increase as provided 
in section 1362(d).

E. Consideration of Differences Between the Banks and the Enterprises

    Section 1201 of HERA (codified at 12 U.S.C. 4513(f)) requires the 
Director, when promulgating regulations relating to the Banks, to 
consider the following differences between the Banks and the 
Enterprises: Cooperative ownership structure; mission of providing 
liquidity to members; affordable housing and community development 
mission; capital structure; and joint and several liability. The 
Director also may consider any other differences that are deemed 
appropriate. In preparing this final rule, FHFA considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors, and determined that the rule is appropriate.
    In particular, FHFA has evaluated the relevance of the factors that 
are part of the standard for determining that a change in the minimum 
capital standard is appropriate, and added a factor that is unique to 
the Banks: The ratio of a

[[Page 11670]]

Bank's market value of equity to the par value of its capital stock. 
FHFA also considered the Banks' circumstances when crafting the 
procedural elements of the rule, including the relevance of the Banks' 
capital structure plans, and concluded that the statutory requirement 
that the Banks operate under capital structure plans does not require 
that a different rule be crafted specifically for them, although a 
Bank's capital structure plan will undoubtedly be relevant to the steps 
a Bank would take to meet a new, increased minimum capital level. As a 
tool supportive of safety and soundness, the capital authority 
conferred by the statute and implemented in this regulation will, 
overall, be supportive of the Banks' unique structure and mission.

II. Final Rule

A. Comments

    In the proposed rule, FHFA provided for notice of a temporary 
increase in a regulated entity's minimum capital requirement; standards 
for imposing a temporary increase in minimum capital; standards for 
rescission of a temporary increase; timeframe for review of temporary 
increase for the purpose of rescission; requirements for written plans 
to augment capital; and promulgation of future guidance. FHFA received 
a total of five comment letters on the proposed rule. Comments were 
received from the Federal Home Loan Bank of Boston (Boston Bank); the 
Federal Home Loan Bank of Dallas (Dallas Bank); the Federal Home Loan 
Bank of San Francisco (San Francisco Bank); a joint letter from the 
Federal Home Loan Banks of Atlanta, Chicago, Des Moines, Indianapolis, 
Pittsburgh, Seattle and Topeka (Joint Bank Letter); and a letter from a 
private citizen (consisting of a one sentence statement regarding 
``limitations on seller financing'' that was not germane to the 
rulemaking).
    FHFA has considered all of the comments in developing the final 
rule. FHFA accepted some of the commenters' recommendations and has 
made changes in the final rule, although the basic approach adopted in 
the proposed rule remains the same. The changes made in the final rule 
improve upon the basic approach proposed by FHFA by clarifying certain 
provisions and by improving the structure of the rule. Specific 
comments, FHFA's responses, and changes adopted in the final rule are 
described in greater detail below in the sections describing the 
relevant rule provisions.

B. Final Rule Provisions

1. General Comment
    Three Bank letters offered similar comments regarding the 
application of section 1201 of the Housing and Economic Recovery Act of 
2008 (HERA) requiring the Director to consider the differences between 
the Banks and the Enterprises before promulgating regulations, or 
taking formal or informal actions of general applicability relating to 
the Banks. The commenters noted that the proposed rule does not 
indicate whether the Director conducted the review required under 
section 1201, and lacks a statement to that effect, which typically has 
been included in most agency actions promulgated by FHFA.\11\ FHFA 
agrees with the commenters that this rule is subject to HERA section 
1201. As noted above, FHFA has reviewed the rule in the context of the 
differences enumerated in section 1201 and has determined that it is 
appropriate.
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    \11\ Joint Bank Letter, section I., at 1-2; Boston Bank Letter, 
section I., at 1; and Dallas Bank Letter, section I., at 2.
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    The three Bank letters also suggest that FHFA should consider 
separating the requirements for temporary increases for the Banks and 
the Enterprises into separate rules. FHFA did not agree with the 
commenters' suggestion, as the rule has been crafted taking into 
account the differences between the regulated entities. As the rule is 
structured, there is sufficient regulatory flexibility to evaluate and 
respond to the unique circumstances that may impact one or more 
regulated entities causing the Director to impose, or rescind, a 
temporary increase. Separating the proposed rule into two rulemakings 
would not enhance FHFA's ability to respond to unique or institution-
specific circumstances.
2. Section 1225.2--Definitions
    FHFA has adopted the definitions as proposed. FHFA did not receive 
any comments that addressed the proposed definitions.
3. Section 1225.3--Procedures
    All of the Banks commented on proposed Sec.  1225.3, which sets 
forth the requirements for notice of a temporary increase in the 
minimum capital requirement. As a general matter, the Banks objected to 
the length of the time period for the notice of a temporary increase in 
the minimum capital requirement and the potential impact the provision 
could have on existing timelines built into each Bank's capital plan. 
The San Francisco Bank commented that ``these time periods for response 
and compliance with respect to something so fundamentally critical to a 
Bank as its capital level are unrealistically short in light of the 
possible strategic financial management changes and other actions [a 
Bank] may need to take in order to meet the increased requirement * * * 
for purposes of the Final Rule, a notice period of at least 60 days, 
with at least 30 days to respond, is more appropriate.'' \12\ The San 
Francisco Bank also stated that the final rule should indicate that the 
effective date of any required increase should take into account a 
Bank's compliance with the terms of its capital plan, including 
applicable notice requirements, and that the order should be subject to 
a more formal procedure, including an opportunity for a hearing under 
12 CFR Part 907.\13\
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    \12\ San Francisco Bank, section I., at 1.
    \13\ San Francisco Bank, section I., at 1-2. See also Dallas 
Bank, section II., at 3, stating that ``the final rule should 
clarify whether the effective date for a temporary minimum capital 
requirement refers to the date on which [a Bank] is required to 
issue additional capital stock to its members or the date on which 
the [Bank] must implement the steps under its capital plan that are 
required to impose a change in the minimum stock requirement of that 
[Bank's] members * * *. The Dallas Bank suggests that the notice 
period in the final rule take into account that the [Banks] are 
bound to operate in compliance with the terms of their capital plans 
with respect to increases in their members' minimum stock purchase 
requirement and that a temporary increase in the minimum stock 
purchase requirement may require an amendment to [a Bank's] capital 
plan.''
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    FHFA considered the comment and did not make the requested changes. 
The statutory provision is designed to elicit an immediate response, if 
necessary, by the subject institution to an unusual condition. A Bank 
would be able to address capital-plan issues in its response to a 
temporary capital increase notice; however, the terms of a capital plan 
do not limit the Director's power under this statutory provision. A 
hearing requirement would not be consistent with the need for rapid 
action, and is not provided in other capital contexts, such as the 
prompt corrective action (PCA) framework.\14\
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    \14\ Sections 1361-1369(D) of the Safety and Soundness Act (12 
U.S.C. 4611-4623).
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    Two of the Banks suggested that the final rule cross-reference 12 
CFR 1229.11 for requiring Banks to temporarily increase minimum 
capital. The Joint Bank Letter states: ``In promulgating 12 CFR Part 
1229, the FHFA recognized that the [Banks] are limited in their ability 
to quickly raise additional capital because of the [Bank's] cooperative 
capital stock structure and capital plans. In light of these 
limitations, the FHFA requires

[[Page 11671]]

undercapitalized and significantly undercapitalized [Banks] to submit a 
capital restoration plan * * *. We believe that it would be helpful to 
apply the same capital restoration plan requirements to [a Bank] in the 
event the FHFA temporarily increases the minimum capital requirement, 
particularly given the close interaction of these two provisions of the 
regulations.'' \15\
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    \15\ Joint Bank Letter, section II., at 3. See also Boston Bank, 
section II., at 2.
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    FHFA considered the comments and determined that it would retain 
the provision as proposed. FHFA determined that the differences between 
the PCA regulation and the proposed rule reflect differences in the 
respective statutory provisions. The PCA statute sets out defined time 
periods for capital restoration plans; section 1362(d) does not, giving 
the Director discretion regarding timing of increasing the minimum 
capital requirement. The rule seeks to retain that flexibility. 
However, in response to the commenters' more general objection that the 
practicalities of capital-raising by Federal Home Loan Banks require a 
longer time period than the notice and reply periods prescribed in the 
rule, FHFA notes that the concept of those periods is not necessarily 
that the regulated entity be able to come into compliance with the new 
requirement within 30 days after notification by the Director, but 
rather that the regulated entity have an opportunity to respond to the 
agency on the appropriateness of the temporary increased capital level 
within that period. Depending upon a particular Federal Home Loan 
Bank's circumstances, there may be a period between the setting of the 
new capital level and the regulated entity's compliance with it during 
which the regulated entity would be undercapitalized and subject to the 
statute's restrictions on activities by undercapitalized entities, 
notably capital distributions. Similarly, if that same entity is also 
determined to be undercapitalized under the PCA capital classification 
process--which also proceeds on a 30-day notice (Safety and Soundness 
Act section 1368(c))--it would be subject to those restrictions until 
its capital restoration plan is approved and implemented. It is 
appropriate that those restrictions apply to an entity whose capital 
level is not adequate to the risks to which it is subject.
4. Section 1225.4(a)(1)--Current or Anticipated Declines in the Value 
of Assets Held
    The Dallas Bank commented that FHFA should clarify the ``nature and 
magnitude of the decline in the value of assets that would warrant an 
order to temporarily increase minimum capital levels.'' \16\ According 
to the Dallas Bank, current or anticipated declines in asset values may 
not accurately reflect the underlying economic value of the asset. The 
Dallas Bank commented that a temporary increase in minimum capital in 
``instances of temporary illiquidity or market volatility with respect 
to a regulated entity's assets could prove to be harmful to the [Bank] 
and to its membership given member sensitivity and concerns regarding 
additional capital calls.'' \17\
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    \16\ Dallas Bank, section III.A., at 3.
    \17\ Id. See also San Francisco Bank, section II.A., at 2; and 
Joint Bank Letter, section III.A., at 4. According to the Joint 
Comment Letter, the current provision ``could be pro-cyclical and 
lead to long-lasting declines in membership and business volume, 
further weakening the affected [Bank]. The FHFA should consider 
clarifying the nature and magnitude of the decline in the value of 
assets that would warrant an order to temporarily increase minimum 
capital levels.''
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    FHFA considered the comment and did not make the requested change. 
FHFA concluded that amending the provision in the suggested manner 
would not be feasible, as the provision is meant to be applied on a 
case-by-case basis. FHFA also notes that, with respect to instances 
involving ``illiquid or volatile'' markets, concerns regarding 
potential harm caused by a proposed capital increase could be addressed 
by a regulated entity in its response to the notice of a temporary 
increase in the minimum capital requirement.
    The Boston Bank also commented that ``the concept of basing a 
temporary increase in the minimum capital requirements of [a Bank] on 
`anticipated' declines is hard for us to understand as it is generally 
recognized that it is not possible to predict market movements and 
future prices.'' \18\ The Boston Bank suggested that FHFA should limit 
the standard to current ``decline[s] in the [market] value of assets 
that would warrant an order to temporarily increase minimum capital 
levels.'' \19\
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    \18\ Boston Bank, section III.A., at 3.
    \19\ Id.
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    FHFA considered the comment and concluded that since capital often 
acts as a lagging indicator, delaying action until a decline is 
recognized may be inconsistent with the need for prompt action. The 
proposed regulation would provide FHFA with an additional regulatory 
tool to address potential problems that may arise as the result of 
relying solely on a lagging indicator such as capital. Certain assets 
on an entity's balance sheet are valued based on historical cost and 
may not reflect all available information as to the assets' actual 
values. Therefore, FHFA has not made the requested change.
    Although FHFA did not adopt the proposed comments, it ultimately 
determined that it was appropriate to remove the phrase ``the amounts 
of a regulated entity's mortgage-backed securities'' to avoid singling 
out any particular category of assets in the provision.
5. Section 1225.4(a)(2)--Credit (including Counterparty), Market, 
Operational and Other Risks Facing a Regulated Entity
    FHFA did not receive comments on this provision. However, the 
phrase ``a depreciation in the value of its capital or assets, a 
decline in liquidity, or'' was removed from the provision. FHFA 
determined that the language was redundant, as declines in capital and 
assets and concerns about liquidity are addressed in Sec.  1225.4(a)(1) 
and Sec.  1225.4(a)(3), respectively.
6. Section 1225.4(a)(4)--Compliance With Regulations, Written Orders or 
Agreement
    The Boston Bank commented that the standard should apply only to 
``material non-compliance with regulations, written orders or 
agreements that negatively impact [a Bank's] financial health or that 
are indicative of its potential risk of failure.'' The comment further 
states that ``Without clarification, it would appear that any violation 
of any regulation, order or agreement could permit the FHFA to order [a 
Bank] to increase temporary minimum capital levels.'' \20\
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    \20\ Boston Bank, section III.B., at 3. See also Dallas Bank, 
section III.B., at 3-4; Joint Bank Letter, section III.B., at 4; and 
San Francisco Bank, section II.B., at 2.
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    FHFA considered the comment and agreed that the standard should 
apply only to material non-compliance with a regulation, order, or 
agreement. FHFA did not intend the provision to require a capital 
increase in response to an immaterial infraction. FHFA did not agree 
with the Boston Bank comment that the factor relate only to material 
non-compliance with some regulations, orders or agreements, those 
asserted to negatively impact financial health, because all material 
violations could potentially have a negative impact on financial 
health, if only because of the remediation that might be required.

[[Page 11672]]

7. Section 1225.4(a)(5)--Unsafe or Unsound Operations or Practices, or 
Circumstances That Reflect Unsafe and Unsound Conduct by a Regulated 
Entity
    FHFA removed this provision from the final rule, as the remaining 
standards address specific conditions and practices. As well, to the 
extent that an unsafe or unsound condition is identified by the 
Director, FHFA determined that Sec.  1225.4(a)(9), Other Conditions as 
Detailed by the Director, would be a more appropriate vehicle for 
responding to such a contingency.
8. Section 1225.4(a)(6)--Housing Finance Market Conditions
    The San Francisco Bank suggested that the factor be deleted from 
the final rule because it believes it to be vague and that ``the 
relevance of this factor to a Regulated Entity's capital level is 
unclear, except to the extent that housing finance market conditions 
result in a decline in the value of housing-related assets held by the 
[Banks].'' The comment also states that this matter is already covered 
by Section 1225.4(a)(1).\21\
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    \21\ San Francisco Bank, section II.C., at 2-3. See also Joint 
Bank Letter, section III.C., at 4; and Dallas Bank, section III.C., 
at 4.
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    FHFA considered the comment and decided to retain the provision as 
proposed. Housing market conditions other than asset values, such as 
market volatility and prepayment risk, may pose risks to a regulated 
entity that could warrant holding additional capital.
9. Section 1225.4(a)(7)--Level of Reserves or Retained Earnings
    The Dallas Bank commented that FHFA should focus on ``the aggregate 
capital levels of the [Bank]'' as a more accurate gauge of a Bank's 
financial health instead of focusing on specific types of capital.\22\ 
The San Francisco Bank suggested that the standard ``be expanded to 
ensure that, in addition to considering reserves and retained earnings 
in determining a Regulated Entity's financial health, the Finance 
Agency is recognizing the Regulated Entity's demonstrated commitment 
and actions toward building retained earnings, and also is taking into 
consideration the aggregate capital levels of the Regulated Entity, 
which provides a more accurate indication of a Regulated Entity's 
health or risk of failure.'' \23\
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    \22\ Dallas Bank, section III.D., at 4. See also San Francisco 
Bank, section II.D., at 3.
    \23\ San Francisco Bank, section II.D., at 3.
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    FHFA did not agree with the comment and will retain the provision 
as proposed. Specific elements of capital can have independent 
significance. For example, retained earnings are relevant to a Bank's 
ability to maintain the par value of its capital stock, which is 
important to the financial stability of a Federal Home Loan Bank and of 
the System. Further, while this provision is a factor, among possible 
others, that may be used by the Director to make a determination 
regarding capital, it does not set a specific requirement. Finally, 
with respect to recognition of a Bank's commitment to build retained 
earnings, such activity would most appropriately be evaluated on a 
case-by-case basis and could be addressed in the Bank's response to a 
notice of capital increase.
10. Section 1225.4(a)(8)--Initiatives, Operations, Products, or 
Practices That Entail Heightened Risk
    FHFA did not receive comment regarding this provision. The 
provision will be adopted as proposed.
11. Section 1225.4(a)(9)--The Ratio of the Market Value of Equity to 
the Par Value of Capital Stock
    The Dallas Bank questioned the inclusion of the MVE/PVCS ratio in 
the proposed rule, stating: ``In the final capital classification rule 
issued just eight months ago, the FHFA indicated it would `continue to 
weigh whether it would be appropriate to propose a separate target for 
retained earnings and/or MVE/PVCS, either as a stand-alone regulation 
or as part of any risk-based capital proposal. * * * We are unaware of 
any subsequent FHFA rulemaking, guidance, analysis or pronouncements 
concerning the utility and applicability of MVE/PVCS.'' \24\ The Dallas 
Bank also noted that ``neither the [Banks], their member institutions 
nor other stakeholders would be able to determine ahead of time with 
any certainty--perhaps not until after a temporary order has been 
issued--how the FHFA applies this factor on an ongoing basis.'' \25\ 
The Bank also requests that in the final rule, FHFA ``detail its 
thinking, including the results of any studies or analysis it has 
conducted, on how this factor should be defined and applied'' or ``use 
the release of the final rule to provide clear definitions and 
explanations of how this factor may be applied.'' \26\
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    \24\ Dallas Bank, section III.E., at 4. See also Joint Bank 
Letter III.D., at 4.
    \25\ Dallas Bank, section III.E., at 4.
    \26\ Id. See also Joint Bank Letter, section III.D., at 4 
stating ``[w]ithout analytically supported guidance, it is difficult 
to judge fully the appropriateness of using MVE/PVCS as a factor in 
determining [a Bank's] minimum capital requirement.''
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    The Dallas Bank also expressed concern with the MVE/PVCS ratio for 
two reasons: (i) ``The proposed rule does not define `[the] market 
value of equity''' and (ii) ``the rule places no parameters or 
standards for the FHFA to use in applying this ratio.'' \27\ The Joint 
Comment Letter requested additional information in the final rule 
regarding FHFA's ``thinking, including the results of any studies or 
analysis it has conducted, on how this factor should be defined and 
applied.'' \28\ The Joint Bank Letter also indicated that FHFA should 
``define MVE (including during periods of severe market illiquidity)'' 
and indicate ``why it is appropriate to use the MVE/PVCS ratio to 
determine whether a [Bank's] minimum capital should be increased.'' 
\29\
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    \27\ Dallas Bank, section III.E., at 5.
    \28\ Joint Bank Letter, section III.D., at 5.
    \29\ Id.
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    The Joint Bank Letter asked FHFA to address two specific questions:
    (1) ``Is MVE for purposes of the temporary minimum capital 
regulation defined as set forth in 12 CFR 932.5 * * * as the market 
value of total capital (defined as Class A stock, general allowance for 
losses, Class B stock and retained earnings) or otherwise?'' and
    (2) ``Will MVE be defined in accordance with the liquidation value, 
or the going-concern value, of the [Bank]?'' \30\
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    \30\ Id.
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    The Joint Bank Letter concludes with an expression of general 
concern regarding the use of MVE/PVCS as a factor related to a 
temporary increase in minimum capital without considering the existing 
risk-based capital regime, and the letter urges FHFA to consider this 
standard in a separate rulemaking.\31\
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    \31\ Id. at 6.
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    The Boston Bank commented that FHFA should ``clarify the definition 
of the market value of equity (MVE) by reference to 12 CFR 932.5.'' The 
Bank also commented that it remained ``generally concerned with using 
MVE/PVCS as a factor for imposing a temporary minimum capital increase 
without consideration of the existing risk-based capital regulatory 
framework that already takes this relationship into consideration to 
some extent in establishing [a Bank's] risk-based capital 
requirements.'' \32\
---------------------------------------------------------------------------

    \32\ Boston Bank, section III.C., at 3.
---------------------------------------------------------------------------

    The San Francisco Bank commented that using an MVE/PVCS ratio could 
result in a ``double charging'' effect on a Bank. According to the San 
Francisco Bank ``the existing risk-based regulation

[[Page 11673]]

already imposes an additional risk-based capital charge on any [Bank] 
that has a market value of total capital less than 85% of the book 
value of its total capital, so that using an MVE/PVCS ratio to impose 
an additional increase in [a Bank's] minimum capital requirement would 
have the effect of `double charging' that [Bank] on the basis of the 
same criteria.'' \33\ The San Francisco Bank also stated that the 
proposed rule does not define ``market value of equity.'' The letter 
notes that ``If the Agency determines MVE with reference to liquidation 
value, then we do not believe that such a measure provides a sound 
basis for increasing [a Bank's] minimum capital level. * * * Instead, 
we encourage the Finance Agency to develop an MVE model that reflects 
certain going concern assumptions and makes MVE determinations in the 
context of other factors, including market conditions.'' \34\ The San 
Francisco Bank concluded with a recommendation to establish 
``parameters or standards'' surrounding the use of the MVE/PVCS ratio. 
According to the San Francisco Bank, ``[t]here's no indication * * * at 
what level(s) the Director would consider it appropriate to increase [a 
Bank's] minimum capital requirement based on this ratio.'' \35\
---------------------------------------------------------------------------

    \33\ San Francisco Bank, section II.E., at 3.
    \34\ Id.
    \35\ Id.
---------------------------------------------------------------------------

    FHFA considered and did not adopt the Dallas Bank's comment to 
provide additional detail regarding the application of the MVE/PVCS 
ratio. FHFA concluded that the factor would be applied on a case-by-
case basis, considering the specific circumstances of a particular 
Bank. In instances where a Bank has a low MVE/PVCS ratio, this rule 
would serve as one reason, among many, for a Bank to address the issue.
    FHFA also considered the questions posed by the Dallas Bank. FHFA 
concluded that use of the MVE/PVCS ratio is an important element in 
assessing the financial health of an institution. The use of the MVE/
PVCS ratio also provides a useful indicator of capital strength in 
addition to capital ratios that are based on generally accepted 
accounting principles. However, it is only one factor among a number 
enumerated in the rule that the Director may consider in assessing 
whether a Bank should hold more capital. That assessment is 
sufficiently case-specific such that it is not feasible to provide 
general rules or parameters around the use of any particular factor.
    With respect to the comment offered in the Joint Bank Letter, FHFA 
does intend that, for purposes of this factor, the Director would look 
to market value of equity as calculated by a Bank using a method 
approved by the agency under 12 CFR 932.5. The issue of going-concern 
versus liquidation value, however, is an accounting issue that is not 
applicable to the calculation of that ratio. However, MVE/PVCS ratio is 
only one factor among a number enumerated in the rule that the Director 
may consider in assessing whether a Bank should hold more capital. That 
assessment is sufficiently case-specific that it is not feasible to 
provide general rules or parameters around the use of any particular 
factor. The Joint Bank Letter also asked for a separate rulemaking for 
the provision. FHFA did not agree with the comment. FHFA believes that 
a separate rulemaking to address the existing risk-based capital 
regime, including the role of MVE in it, may be appropriate, but such a 
rulemaking, unlike this rule, would not address the need to address 
temporary or unusual circumstances.
    FHFA also considered the comment offered by the Boston Bank 
regarding its general concern regarding use of the MVE/PVCS ratio as a 
factor for imposing an increase. FHFA notes that any decision to impose 
a temporary increase in the minimum capital requirement would consider 
the existing minimum capital requirements. The MVE would be used as one 
factor in evaluating the financial condition of a Bank in the event 
that a Bank's existing capital position is determined to be 
insufficient.
    Finally, FHFA considered the San Francisco Bank's comment regarding 
establishment of standards and parameters for the provision. FHFA does 
not agree that standards or parameters should be set around the use of 
the MVE/PVCS ratio. It is not necessary or appropriate to determine in 
advance the significance of a shortfall of this ratio in consideration 
of the other factors identified in this rule. FHFA did not adopt the 
Bank's recommendation.
12. Section 1225.4(a)(10)--Other Conditions as Detailed by the Director
    The Joint Bank Letter suggested that FHFA provide guidance on 
``what other conditions might be relevant in determining whether to 
impose temporary increases in minimum capital levels * * * and provide 
the [Banks] a chance to comment on any new proposed standards.'' \36\ 
FHFA considered the comment and retained the provision as proposed. The 
purpose of the provision is to address factors that are unforeseeable 
under current circumstances but that turn out to be relevant at a later 
date. FHFA has determined that a provision that allows the agency to 
respond to unforeseen circumstances without substantial delay is 
prudent, reasonable, and necessary.
---------------------------------------------------------------------------

    \36\ Joint Bank Letter, section III.E., at 6. See also Dallas 
Bank, section III.F., at 5; and San Francisco Bank, section II.F., 
at 4.
---------------------------------------------------------------------------

13. Section 1225.4(a)(11)--Written Plan To Augment Capital
    The Joint Bank Letter noted that the requirement to submit a 
written plan to augment capital is a procedural requirement and not a 
standard or factor. The Joint Bank Letter suggested that the 
requirement be moved to a different section of the rule.\37\ FHFA 
agreed with the comment and the final rule incorporates the provision 
in Sec.  1225.3, regarding procedures.
---------------------------------------------------------------------------

    \37\ Joint Bank Letter, section III.F., at 6. See also Boston 
Bank, section III.D., at 4; and Dallas Bank, section III.G., at 5.
---------------------------------------------------------------------------

14. Section 1225.4--Standards and Factors
    The San Francisco Bank commented that standards regarding 
rescission of an increase are not addressed. The letter recommends 
reducing uncertainty in the area by ``addressing in the Proposed Rule 
such critical issues as the size of a fluctuation that would weigh 
significantly in favor of the issuance or rescission of a temporary 
order.'' \38\ FHFA considered the comment and revised the section to 
add clarity to the standards regarding rescission of an increase. In 
addition, although FHFA did not receive specific comment regarding 
proposed Sec.  1225.4(c), FHFA determined that the provision clearly 
addresses a procedural as opposed to substantive matter. FHFA has 
redesignated the provision as Sec.  1225.3(e).
---------------------------------------------------------------------------

    \38\ San Francisco Bank, section II.E., at 3.
---------------------------------------------------------------------------

15. Section 1225.4(d)--Promulgation of Future Guidance
    Three Banks expressed concern regarding proposed Sec.  1255.4(d) 
detailing the Director's authority to issue guidance regarding the 
regulation.\39\ Two Banks suggested that FHFA remove Sec.  1225.4(d) 
from the regulation based on concerns regarding application of the 
Administrative Procedure Act.\40\ In the alternative, the three Bank 
commenters suggested that ``to the extent that guidance expands or adds 
substantive detail to the existing regulation, it

[[Page 11674]]

would be better for the guidance to be issued as a formal rulemaking 
and subject to the requirements of the Administrative Procedure Act, 
with advance notice and an opportunity to comment by the [Banks] and 
their members.'' \41\ FHFA considered the comment, but included the 
proposed provision in the final rule. FHFA will review each issue as it 
arises and take appropriate action, including notice and comment 
rulemaking, and promulgation of guidance with or without comment, 
depending on the nature of the issue. FHFA has also redesignated this 
provision as new Sec.  1225.5 of the final rule.
---------------------------------------------------------------------------

    \39\ Joint Bank Letter, section IV., at 6; San Francisco Bank, 
section III., at 4; and Dallas Bank, section IV., at 6.
    \40\ Dallas Bank, section IV., at 6-7; and Joint Bank Letter, 
section IV., at 7.
    \41\ See e.g., San Francisco Bank, section III., at 4.
---------------------------------------------------------------------------

16. Sections 932.2 and Sec.  932.3
    FHFA is also amending the Banks' capital regulations to remove 
Sec.  932.2(b) and Sec.  932.3(b) which allowed the regulator to raise 
the Banks' capital requirements for reasons of safety and soundness. 
These specific regulations were adopted pursuant to the Finance Board's 
general safety and soundness authority under old section 2A(a)(3)(A) of 
the Bank Act, a section which was removed by HERA. Final Rule: Capital 
Requirements for the Federal Home Loan Banks, 66 FR 8262, 8282-83 
(January 30, 2001). Given that FHFA is adopting new part 1225 of its 
regulations and the fact that the Safety and Soundness Act as amended 
by HERA provides specific authority under which the Director may raise 
the Banks' minimum capital requirements, FHFA no longer views Sec.  
932.2(b) and Sec.  932.3(b) as controlling and is removing these 
provisions.

III. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for Review.

IV. Regulatory Flexibility Act

    The final rule applies only to the Banks and the Enterprises, which 
do not come within the meaning of small entities as defined in the 
Regulatory Flexibility Act (RFA). See 5. U.S.C. 650(b), FHFA certifies 
that this final rule will not have significant economic impact on a 
substantial number of small entities.

List of Subjects

12 CFR Part 932

    Credit, Federal Home Loan Banks, Reporting and recordkeeping 
requirements.

12 CFR Part 1225

    Federal Home Loan Banks, Federal National Mortgage Association, 
Federal Home Loan Mortgage Corporation, Capital, Filings, Minimum 
capital, Procedures, Standards.

    Accordingly, for the reasons stated in the Supplementary 
Information, under the authority of 12 U.S.C. 4513, 4526 and 4612, the 
Federal Housing Finance Agency amends Chapters IX and XII of Title 12 
of the Code of Federal Regulations as follows:

Chapter IX--Federal Housing Finance Board

PART 932--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS

0
1. Revise the authority citation for part 932 to read as follows:

    Authority: 12 U.S.C. 1426, 1440, 1443, 1446, 4513, 4526.


0
2. Revise Sec.  932.2 to read as follows:


Sec.  932.2  Total capital requirement.

    Each Bank shall maintain at all times:
    (a) Total capital in an amount at least equal to 4.0 percent of the 
Bank's total assets; and
    (b) A leverage ratio of total capital to total assets of at least 
5.0 percent of the Bank's total assets. For purposes of determining the 
leverage ratio, total capital shall be computed by multiplying the 
Bank's permanent capital by 1.5 and adding to this product all other 
components of total capital.

0
3. Revise Sec.  932.3 to read as follows:


Sec.  932.3  Risk-based capital requirement.

    Each Bank shall maintain at all times permanent capital in an 
amount at least equal to the sum of its credit risk capital 
requirement, its market risk capital requirement, and its operations 
risk capital requirement, calculated in accordance with Sec. Sec.  
932.4, 932.5 and 932.6, respectively.

Chapter XII--Federal Housing Finance Agency

Subchapter B--Entity Regulations

0
4. Add part 1225 to subchapter B to read as follows:

PART 1225--MINIMUM CAPITAL--TEMPORARY INCREASE

Sec.
1225.1 Purpose.
1225.2 Definitions.
1225.3 Procedures.
1225.4 Standards and factors.
1225.5 Guidances.

    Authority: 12 U.S.C. 4513, 4526 and 4612.


Sec.  1225.1  Purpose.

    FHFA is responsible for ensuring the safe and sound operation of 
regulated entities. In furtherance of that responsibility, this part 
sets forth standards and procedures FHFA will employ to determine 
whether to require or rescind a temporary increase in the minimum 
capital levels for a regulated entity or entities pursuant to 12 U.S.C. 
4612(d).


Sec.  1225.2  Definitions.

    For purposes of this part, the term:
    Enterprise means the Federal National Mortgage Association or the 
Federal Home Loan Mortgage Corporation; and the term Enterprises means, 
collectively, the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation.
    Minimum capital level means the lowest amount of capital meeting 
any regulation or orders issued pursuant to 12 U.S.C. 1426(a)(2) and 12 
U.S.C. 4612, or any similar requirement established for a Federal Home 
Loan Bank by regulation, order or other action.
    Regulated entity means--
    (1) The Federal National Mortgage Association and any affiliate 
thereof;
    (2) The Federal Home Loan Mortgage Corporation and any affiliate 
thereof; and
    (3) Any Federal Home Loan Bank.
    Rescission means a removal in whole or in part of an increase in 
the temporary minimum capital level.


Sec.  1225.3  Procedures.

    (a) Information--(1) Information to the regulated entity or 
entities. If the Director determines, based on standards enunciated in 
this part, that a temporary increase in the minimum capital level is 
necessary, the Director will provide notice to the affected regulated 
entity or entities 30 days in advance of the date that the temporary 
minimum capital requirement becomes effective, unless the Director 
determines that an exigency exists that does not permit such notice or 
the Director determines a longer time period would be appropriate.
    (2) Information to the Government. The Director shall inform the 
Secretary of the Treasury, the Secretary of Housing and Urban 
Development, and the Chairman of the Securities and Exchange Commission 
of a temporary increase in the minimum capital level contemporaneously 
with informing the affected regulated entity or entities.
    (b) Comments. The affected regulated entity or entities may provide 
comments

[[Page 11675]]

regarding or objections to the temporary increase to FHFA within 15 
days or such other period as the Director determines appropriate under 
the circumstances. The Director may determine to modify, delay, or 
rescind the announced temporary increase in response to such comments 
or objection, but no further notice is required for the temporary 
increase to become effective upon the date originally determined by the 
Director.
    (c) Communication. The Director shall transmit notice of a 
temporary increase or rescission of a temporary increase in the minimum 
capital level in writing, using electronic or such other means as 
appropriate. Such communication shall set forth, at a minimum, the 
bases for the Director's determination, the amount of increase or 
decrease in the minimum capital level, the anticipated duration of such 
increase, and a description of the procedures for requesting a 
rescission of the temporary increase in the minimum capital level.
    (d) Written plan. In making a finding under this part, the Director 
may require a written plan to augment capital to be submitted on a 
timely basis to address the methods by which such temporary increase 
may be attained and the time period for reaching the new temporary 
minimum capital level.
    (e) Time frame for review of temporary increase for purpose of 
rescission.--(1) Absent an earlier determination to rescind in whole or 
in part a temporary increase in the minimum capital level for a 
regulated entity or entities, the Director shall no less than every 12 
months, consider the need to maintain, modify, or rescind such 
increase.
    (2) A regulated entity or regulated entities may at any time 
request in writing such review by the Director.


Sec.  1225.4  Standards and factors.

    (a) Standard for imposing a temporary increase. In making a 
determination to increase temporarily a minimum capital requirement for 
a regulated entity or entities, the Director will consider the 
necessity and consistency of such an increase with the prudential 
regulation and the safe and sound operations of a regulated entity. The 
Director may impose a temporary minimum-capital increase if 
consideration of one or more of the following factors leads the 
Director to the judgment that the current minimum capital requirement 
for a regulated entity is insufficient to address the entity's risks:
    (1) Current or anticipated declines in the value of assets held by 
a regulated entity; the amounts of mortgage-backed securities issued or 
guaranteed by the regulated entity; and, its ability to access 
liquidity and funding;
    (2) Credit (including counterparty), market, operational and other 
risks facing a regulated entity, especially where an increase in risks 
is foreseeable and consequential;
    (3) Current or projected declines in the capital held by a 
regulated entity;
    (4) A regulated entity's material non-compliance with regulations, 
written orders, or agreements;
    (5) Housing finance market conditions;
    (6) Level of reserves or retained earnings;
    (7) Initiatives, operations, products, or practices that entail 
heightened risk;
    (8) With respect to a Bank, the ratio of the market value of its 
equity to par value of its capital stock where the market value of 
equity is the value calculated and reported by the Bank as ``market 
value of total capital'' under 12 CFR 932.5(a)(1)(ii)(A); or
    (9) Other conditions as detailed by the Director in the notice 
provided under Sec.  1225.3.
    (b) Standard for rescission of a temporary increase. In making a 
determination to rescind a temporary increase in the minimum capital 
level for a regulated entity or entities, whether in full or in part, 
the Director will consider the consistency of such a rescission with 
the prudential regulation and safe and sound operations of a regulated 
entity. The Director will rescind, in full or in part, a temporary 
minimum capital increase if consideration of one or more of the 
following factors leads the Director to the judgment that rescission of 
a temporary minimum-capital increase for a regulated entity is 
appropriate considering the entity's risks:
    (1) Changes to the circumstances or facts that led to the 
imposition of a temporary increase in the minimum capital levels;
    (2) The meeting of targets set for a regulated entity in advance of 
any capital or capital-related plan agreed to by the Director;
    (3) Changed circumstances or facts based on new developments 
occurring since the imposition of the temporary increase in the minimum 
capital level, particularly where the original problems or concerns 
have been successfully addressed or alleviated in whole or in part; or
    (4) Such other standard as the Director may consider as detailed by 
the Director in the notice provided under Sec.  1225.3.


Sec.  1225.5  Guidances.

    The Director may determine, from time to time, issue guidance to 
elaborate, to refine or to provide new information regarding standards 
or procedures contained herein.

    Dated: February 22, 2011.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2011-4413 Filed 3-2-11; 8:45 am]
BILLING CODE 8070-01-P