[Federal Register Volume 77, Number 194 (Friday, October 5, 2012)]
[Notices]
[Pages 60988-60996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-24639]


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FEDERAL HOUSING FINANCE AGENCY

[No. 2012-N-14]


Advisory Bulletin on Collateralization of Advances and Other 
Credit Products Provided by Federal Home Loan Banks to Insurance 
Company Members

AGENCY: Federal Housing Finance Agency.

ACTION: Notice with request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is requesting 
comments on a proposed Advisory Bulletin which would set forth 
standards to guide agency staff in its supervision of secured lending 
to insurance company members by the Federal Home Loan Banks (Banks).

DATES: Written comments must be received on or before December 4, 2012.

ADDRESSES: You may submit your comments, identified by FHFA notice 
number 2012-N-14, by any of the following methods:
     Email: Comments to Alfred M. Pollard, General Counsel may 
be sent by email to [email protected]. Please include ``2012-N-14'' 
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 email 
to FHFA at [email protected] to ensure timely receipt by FHFA. 
Please include ``2012-N-14'' in the subject line of the message.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/2012-N-14, Federal 
Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, 
DC 20024.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/2012-N-14, 
Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., 
Washington, DC 20024. The package should be logged at the FHFA Guard 
Desk, First Floor, on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Neil Crowley, Deputy General Counsel, 
Office of General Counsel, [email protected], (202) 649-3055; 
Joseph A. McKenzie, Associate Director, Division of Bank Regulation, 
Bank Analysis Branch, [email protected], (202) 649-3270; or 
Thomas Doolittle, Senior Financial Analyst, Division of Bank 
Regulation, Bank Analysis Branch, [email protected], (202) 649-
3273 (these are not toll-free numbers), Federal Housing Finance Agency, 
400 7th Street SW., Washington, DC 20024. The telephone number for the 
Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of this Notice and the 
attached Advisory Bulletin. Copies of all comments will be posted 
without change, including any personal information you provide, such as 
your name, and address (mailing or email), and telephone numbers, on 
FHFA's Internet Web site at http://www.fhfa.gov. In addition, copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m. at the Federal 
Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, 
DC 20024. To make an appointment to inspect comments, please call the 
Office of General Counsel at (202) 649-3084.

II. Background

    The Federal Home Loan Bank System consists of twelve regional Banks 
and the Office of Finance (OF). The Banks are instrumentalities of the 
United States organized under the Federal Home Loan Bank Act (Bank 
Act).\1\ The Banks are cooperatives; only an institution that is a 
member of a Bank

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may purchase its capital stock, and only members or certain eligible 
non-member housing associates (such as state housing finance agencies) 
may obtain access to secured loans, known as advances, or other 
products provided by a Bank.\2\ Each Bank is managed by its own board 
of directors and serves the public interest by enhancing the 
availability of residential mortgage and community lending credit 
through its member institutions.\3\ Generally, any federally insured 
depository institution (i.e., a commercial bank, thrift, or credit 
union) or state-regulated insurance company, or any entity certified as 
a Community Development Financial Institution (CDFI) by the United 
States Department of Treasury, may become a member of a Bank if it 
satisfies certain criteria and purchases a specified amount of the 
Bank's capital stock.\4\
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    \1\ See 12 U.S.C. 1423, 1432(a).
    \2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
    \3\ See 12 U.S.C. 1427.
    \4\ See 12 U.S.C. 1424; 12 CFR part 1263.
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    Section 10(a) of the Bank Act authorizes each Bank to make secured 
advances to its members, each of which must be fully secured by certain 
types of eligible collateral enumerated in the statute.\5\ Part 1266 of 
FHFA's regulations implements and expands upon the statutory 
requirements pertaining to Bank advances by addressing, among other 
things: the types and amounts of collateral that a Bank may or must 
accept when making advances; the priority of Bank claims to such 
collateral in relation to other creditors; and requirements regarding 
the valuation and verification of the existence of pledged 
collateral.\6\
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    \5\ Section 10(a)(3) of the Bank Act enumerates five categories 
of collateral that are eligible to secure Bank advances: (1) Current 
whole first mortgage loans on improved residential property and 
securities representing a whole interest in such mortgages; (2) 
securities that are issued, guaranteed, or insured by the United 
States Government, or any agency thereof; (3) deposits of a Bank; 
(4) other real-estate related collateral acceptable to the Bank if 
it has a readily ascertainable value and the Bank can perfect its 
security interest in the collateral; and (5) (for certain smaller 
insured depository 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).
    \6\ See 12 CFR part 1266.
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    FHFA is an independent agency of the Federal government that is 
responsible for the supervision and oversight of the Banks, as well as 
Fannie Mae and Freddie Mac. The Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (Safety and Soundness Act) invests the 
Director of FHFA with general regulatory authority over those regulated 
entities and charges him with ensuring that they operate in a safe and 
sound manner, comply with applicable laws, and carry out their 
respective policy missions.\7\ The Director is authorized to exercise 
whatever incidental powers are necessary or appropriate to fulfill his 
duties and responsibilities in overseeing the regulated entities, and 
to issue any regulations, guidelines or orders as are necessary to 
carry out his duties.\8\ Advisory Bulletins are documents through which 
the agency provides guidance to its regulated entities regarding 
particular supervisory issues. Although Advisory Bulletins do not have 
the force of a regulation or an order, they reflect the position of 
FHFA staff on the particular issues addressed and are followed by FHFA 
staff in carrying out the agency's supervisory responsibilities.
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    \7\ See 12 U.S.C. 4511(b); 12 U.S.C. 4513(a).
    \8\ See 12 U.S.C. 4513(a)(2), 4526(a).
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III. The Advisory Bulletin on Insurance Company Collateral

    Lending to insurance companies exposes the Banks to a number of 
risks that are not associated with advances to their insured depository 
institution members. In large part, these risks arise from the fact 
that, unlike the Banks' commercial bank, thrift and credit union 
members, insurance companies are regulated at the state level. In 
dealing with its insurance company members, each Bank must understand 
multiple statutory and regulatory regimes and must assess how its 
interests may be affected by the variations between those regimes. This 
is made more difficult by the fact that there is little precedent to 
indicate how the insurance commissioner in any given state would deal 
with repayment of the member's outstanding advances or with the Bank's 
security interest in advances collateral in the event of a failure of 
an insurance company member. In some states a Bank might be required to 
liquidate collateral in order to obtain repayment of its advances to a 
failed insurance company, which introduces additional uncertainties 
about its ability to be made whole.
    In addition, the financial statements of insurance companies are 
based upon statutory accounting principles that are specific to 
insurance companies, as opposed to the generally accepted accounting 
principles in the United States on which the financials of most other 
domestic companies and all federally insured depository institutions 
are based. While the statutory accounting principles adopted by each 
state are similar, required reporting practices and reporting 
frequencies, as well as data definitions and data formats may be quite 
different from state to state.
    Over the last several years, lending to insurance company members 
has come to represent an increasingly larger portion of the Banks' 
overall business, and several Banks are actively targeting this member 
segment. Although insurance companies comprise only about 3.3 percent 
of total Bank system membership, 12.6 percent of total outstanding 
advances were to insurance companies as of December 31, 2011--up from 
8.7 percent of total advances as of December 31, 2009. This growth, 
combined with the unique risks to which the Banks are exposed in 
lending to insurance companies, has led FHFA to focus more intently 
upon the effective supervision of Banks' credit transactions with their 
insurance company members.
    The attached Advisory Bulletin sets forth a series of 
considerations that FHFA proposes to use in monitoring these 
transactions. It focuses upon principles that would be used by agency 
supervisory staff to assess each Bank's ability to evaluate the 
financial health of its insurance company members and the quality of 
their eligible collateral, as well as the extent to which the Bank has 
a first-priority security interest in that collateral. The risks 
inherent in lending to insurance companies, which are summarized above, 
are addressed more thoroughly in the Advisory Bulletin. FHFA seeks 
comments on all aspects of the Advisory Bulletin, but is especially 
interested in receiving comments about the most appropriate method for 
Banks to obtain ``control'' of securities collateral and to otherwise 
obtain a first-priority perfected security interest under the Uniform 
Commercial Code in any types of collateral pledged by its insurance 
company members. FHFA is also interested in receiving comments on the 
use of funding agreements as a means of documenting advances and 
whether the Banks have confirmed under state law that a Bank would be 
recognized as a secured creditor with a property interest in the 
collateral that is pledged to the Bank under a funding agreement. In 
addition, FHFA welcomes comments on whether it should consider 
establishing specific and uniform standards for making advances to 
insurance companies.

[[Page 60990]]

IV. Consideration of Differences Between the Banks and the Enterprises

    Section 1201 of the Housing and Economic Recovery Act of 2008 
amended the Safety and Soundness Act to add a new section 1313(f), 
which requires the Director of FHFA, when promulgating regulations or 
taking any other formal or informal action of general applicability and 
future effect relating to the Banks, to consider the differences 
between the Banks and the Enterprises (Fannie Mae and Freddie Mac) as 
they relate to: The Banks' cooperative ownership structure; the mission 
of providing liquidity to members; the affordable housing and community 
development mission; their capital structure; and their joint and 
several liability on consolidated obligations.\9\ The Director also may 
consider any other differences that are deemed appropriate. In 
preparing the appended Advisory Bulletin, FHFA considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors, and determined that the guidance set forth therein is 
appropriate.
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    \9\ See 12 U.S.C. 4513(f).

    Dated: October 1, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
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[FR Doc. 2012-24639 Filed 10-4-12; 8:45 am]
BILLING CODE 8070-01-C