[Federal Register Volume 78, Number 217 (Friday, November 8, 2013)]
[Rules and Regulations]
[Pages 67004-67009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26775]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1267, 1269, and 1270

RIN 2590-AA40


Removal of References to Credit Ratings in Certain Regulations 
Governing the Federal Home Loan Banks

AGENCIES: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) requires Federal agencies to review 
regulations that require the use of an assessment of the credit-
worthiness of a security or money market instrument and any references 
to, or requirements in, such regulations regarding credit ratings 
issued by credit rating organizations registered with the Securities 
and Exchange Commission (SEC) as nationally recognized statistical 
rating organizations (NRSROs), and to remove such references or 
requirements. To implement this provision, the Federal Housing Finance 
Agency (FHFA) proposed on May 23, 2013, to amend certain of its rules 
and remove a number of references and requirements in certain safety 
and soundness regulations affecting the Federal Home Loan Banks 
(Banks). To replace the provisions that referenced NRSRO ratings, FHFA 
proposed to add requirements that the Banks apply internal analytic 
standards and criteria to determine the credit quality of a security or 
obligation, subject to FHFA oversight and review through the 
examination and supervisory process. FHFA also proposed to delete 
certain provisions from its regulations that contained references to 
NRSRO credit ratings because they appeared

[[Page 67005]]

duplicative of other requirements or because they applied only to Banks 
that had not converted to the capital structure required by the Gramm-
Leach-Bliley Act (GLB Act) and no longer applied to any Bank. After 
considering the comments received on its notice of proposed rulemaking 
(Proposed Rule), FHFA has determined to adopt as final these proposed 
rule amendments without change.

DATES: The rule is effective May 7, 2014.

FOR FURTHER INFORMATION CONTACT: Julie Paller, Senior Financial 
Analyst, [email protected], 202-649-3201, Amy Bogdon, Associate 
Director for Regulatory Policy and Programs, [email protected], 202-
649-3320, Division of Federal Home Loan Bank Regulation, Federal 
Housing Finance Agency; or Thomas E. Joseph, Associate General Counsel, 
[email protected], 202-649-3076 (these are not toll-free numbers), 
Office of General Counsel (OGC), Federal Housing Finance Agency, 
Constitution Center, Eighth Floor, 400 Seventh Street SW., Washington, 
DC 20024. The telephone number for the Telecommunications Device for 
the Hearing Impaired is 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Dodd-Frank Act Provisions

    Section 939A of the Dodd-Frank Act requires federal agencies to: 
(i) Review regulations that require the use of an assessment of the 
creditworthiness of a security or money market instrument; and (ii) to 
the extent those regulations contain any references to, or requirements 
regarding credit ratings, remove such references or requirements. See 
section 939A, Public Law 111-203, 124 Stat. 1887 (July 21, 2010). In 
place of such credit-rating based requirements, agencies are instructed 
to substitute appropriate standards for determining creditworthiness. 
The new law further provides that, to the extent feasible, an agency 
should adopt a uniform standard of creditworthiness for use in its 
regulations, taking into account the entities regulated by it and the 
purposes for which such regulated entities would rely on the 
creditworthiness standard.

B. The Bank System

    The twelve Banks are wholesale financial institutions organized 
under the Federal Home Loan Bank Act (Bank Act).\1\ 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 a Bank.\2\ 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.\3\ 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.\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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    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 
Bank System's Office of Finance (OF) issues all COs on behalf of the 
twelve Banks. Although each Bank is primarily liable for the portion of 
COs 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.\5\
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    \5\ See 12 U.S.C. 1431(c); 12 CFR 1270.10.
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C. Considerations of Differences Between the Banks and the Enterprises

    When promulgating regulations relating to the Banks, section 
1313(f) of the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (Safety and Soundness Act) requires the Director 
of FHFA (Director) to consider the differences between the Banks and 
the Enterprises 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.\6\ The Director also may consider any other 
differences that are deemed appropriate.
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    \6\ See 12 U.S.C. 4513 (as amended by section 1201 Pub. L. 110-
289, 122 Stat. 2782-83).
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    The amendments adopted in this rulemaking apply exclusively to the 
Banks. FHFA considered the differences between the Banks and the 
Enterprises as required by section 1313(f) of the Safety and Soundness 
Act in developing this final rule. As part of its proposed rulemaking, 
FHFA also specifically requested comments from the public about whether 
differences related to these factors should result in any revisions to 
the proposal, but received no specific comments in response to that 
request.\7\
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    \7\ See Proposed Rule, Removal of References to Credit Ratings 
in Certain Regulations Governing the Federal Home Loan Banks, 78 FR 
30784, 30786-87 (May 23, 2013) (hereinafter Proposed Rule).
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II. Final Amendments to Parts 1267, 1269, and 1270 of the FHFA 
Regulations

A. Proposed Rule

    On May 23, 2013, FHFA published in the Federal Register proposed 
amendments to rules governing Bank investments, standby letters of 
credit, and liabilities that would remove specific references to NRSRO 
ratings from these rules and provide alternative credit requirements 
for the Banks to apply.\8\ These rules are found respectively in parts 
1267, 1269, and 1270 of the FHFA regulations.
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    \8\ See Proposed Rule, 78 FR 30784 (proposing amendments to 12 
CFR part 1267, part 1269, and part 1270).
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    In developing the proposed amendments, FHFA considered comments 
received on an earlier advance notice of proposed rulemaking (ANPR) 
that had solicited comments from the public on potential alternatives 
to the use of NRSRO credit ratings in its regulations applicable to the 
Banks, as well as in its regulations applicable to the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac) (collectively, the Enterprises).\9\ FHFA also 
considered comments received on a notice of proposed rulemaking 
addressing Bank liabilities and COs, in which it solicited comments on 
implementing section 939A of the Dodd-Frank Act with regard to certain 
provisions addressed in that rulemaking.\10\ Finally, FHFA reviewed

[[Page 67006]]

and considered actions taken by other regulators to implement this 
Dodd-Frank Act provision.\11\
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    \9\ See Advance Notice of Proposed Rulemaking, Alternatives to 
Use of Credit Ratings in Regulations Governing the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation, 
and the Federal Home Loan Banks, 76 FR 5292 (Jan. 31, 2011).
    \10\ See Proposed Rule, Federal Home Loan Bank Liabilities, 75 
FR 68534, 68536-38 (Nov. 8, 2010) (Bank Liabilities Rule). FHFA 
ultimately decided to adopt the part 1270 Bank Liabilities Rule 
without amending those provisions that referenced credit ratings, 
but noted that it would propose changes to those provisions in a 
future rulemaking and stated that it would consider relevant 
comments made on the part 1270 rules as part of that rulemaking. See 
Final Rule: Federal Home Loan Bank Liabilities, 76 FR 18366, 18368 
(Apr. 4, 2011) (adopting 12 CFR part 1270).
    \11\ See Proposed Rule, 78 FR 30785-86.
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    To remove specific references to NRSRO ratings from the investment 
requirements in Sec. Sec.  1267.3(a)(3)(ii) and 1267.3(a)(4)(iii), FHFA 
proposed to add a new defined term, ``investment quality,'' to part 
1267.\12\ FHFA proposed to define ``investment quality'' as a 
determination made by a Bank based on documented analysis that there is 
adequate financial backing for any security or obligation so that full 
and timely payment of principal and interest is expected, and there is 
only minimal risk that such timely payment would not occur because of 
adverse changes in financial or economic conditions over the life of 
the instrument. Under the proposed amendments to Sec. Sec.  
1267.3(a)(3)(ii) and 1267.3(a)(4)(iii), a Bank would need to determine 
that a particular covered investment qualified as ``investment 
quality'' under the proposed definition rather than demonstrate that 
the instrument had a particular NRSRO credit rating at the time of 
purchase. The Bank determination would be subject to FHFA oversight and 
review through the examination and supervisory process.
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    \12\ See id. at 30787-88 (discussing amendments to 12 CFR 
1267.3(a)(3)(ii) and 1267.3(a)(4)(iii)). The first investment 
provision at issue prohibits the Banks from investing in any debt 
instrument that is rated below investment grade by an NRSRO at the 
time the investment is made. The second provision establishes an 
exception to a general prohibition on a Bank's investment in 
mortgages or other whole loans, if the investment involves 
marketable direct obligations of state, local, or tribal government 
units or agencies having at least the second highest credit rating 
from an NRSRO, and the purchase would generate customized terms, 
necessary liquidity, or favorable pricing for the issuer's funding 
of housing or community lending. Id.
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    In explaining this approach, FHFA stated that the proposed 
definition would allow Banks to build upon their current internal 
credit risk assessment and management practices and provide flexibility 
to consider differences in credit quality of different investments--
considerations that were supported by many commenters to the ANPR. FHFA 
also emphasized that under the proposed definition, a Bank had to 
document its analysis as to the credit quality determination so FHFA 
could review these decisions as part of its supervisory and examination 
process and thereby could help ensure consistency and rigor in the 
analysis across all Banks.
    FHFA identified a non-exclusive list of factors that a Bank could 
consider in its credit analysis: Internal or external credit risk 
assessments, including scenario analysis; security or asset-class 
related research; credit analysis of cash flow and debt service 
projections; credit spreads for like financial instruments; loss 
distributions, default rates, and other statistics; relevant market 
data, for example, bid-ask spreads, most recent sales price, and 
historical price volatility, trading volume, implied market rating, and 
size, depth and concentration level of the market for the investment; 
local and regional economic conditions; legal or other contractual 
implications to credit and repayment risk; underwriting, performance 
measures and triggers; and other financial instrument covenants and 
considerations. FHFA also noted that although mandating use or reliance 
on NRSRO credit ratings in the investment regulation would be 
inconsistent with the Dodd-Frank Act provisions, the proposed 
definition of ``investment quality'' would not prevent a Bank from 
using NRSRO ratings or other third party analytics in its credit 
determination so long as the Bank did not rely principally on such 
rating or third party analysis. FHFA underscored that a Bank's 
determination of credit quality needed to be driven primarily by the 
Bank's own internal analysis based on market and financial data, and 
other relevant factors including the size and complexity of the 
financial instrument and the Bank's own risk appetite and risk 
assessment framework.
    Under the proposed standard, a Bank would have to make its 
determination concerning the credit quality of a particular instrument 
prior to entering into a transaction, and if the Bank determined that 
the instrument did not meet the proposed definition of ``investment 
quality,'' it could not purchase the instrument. FHFA also noted its 
expectation that as part of a Bank's risk management and monitoring 
process, a Bank needed to update periodically its ``investment 
quality'' analysis and to consider whether the instrument continued to 
meet safety, soundness, and business objectives. FHFA stated that the 
Banks would be expected to develop appropriate strategies to respond to 
a decline in the credit quality of its investments, consistent with 
then-current market and financial conditions and considerations, even 
though the investment regulations, as FHFA proposed to amend them, did 
not require a Bank to sell a debt instrument if subsequent analysis 
indicated the instrument became less than ``investment quality'' after 
the initial purchase.\13\
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    \13\ Current investment regulations, while prohibiting a Bank 
from buying debt instruments that are rated less than investment 
grade by an NRSRO at the time of purchase, do not require a Bank to 
sell any such instruments if they are downgraded to below investment 
grade after acquisition. Thus, not requiring a Bank to sell an 
instrument that became less than investment quality after purchase 
is consistent with long-standing regulations. See id. at 30788.
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    FHFA proposed a somewhat different approach for the amendments to 
Sec.  1269.2(c)(2) of FHFA regulations, a provision addressing certain 
collateral requirements for standby letters of credit issued or 
confirmed by a Bank on behalf of a member.\14\ In this case, FHFA 
proposed to eliminate the reference to an NRSRO investment grade rating 
by replacing it with a requirement that the collateral at issue needed 
to have a readily ascertainable value, could be reliably discounted to 
account for liquidation and other risks, and could be liquidated in due 
course. FHFA proposed this approach because it believed that it would 
have been unrealistic and unnecessarily onerous for a Bank to perform 
the same type of in-depth credit analysis, as discussed for the 
investment provisions, for a security that will be accepted as 
collateral. Instead, FHFA proposed a standard that was more appropriate 
for collateral and similar to one already applied in other FHFA 
collateral regulations.\15\ FHFA also noted that the proposed standard 
was consistent with the original intent of the investment grade 
requirement in the standby letter of credit regulation, given that the 
rating was meant to serve as a proxy for securities that had ``an 
established secondary market . . . [so that] they can be easily valued 
and, if necessary, liquidated by a [Bank].'' \16\
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    \14\ See id. at 30788 (discussing amendments to 12 CFR 
1269.2(c)(2)). Specifically, the current provision states that a 
standby letter of credit issued or confirmed by a Bank on behalf of 
a member to assist the member in facilitating residential housing 
finance or community lending may be collateralized by obligations of 
a state or local government unit or agency, if the obligation is 
rated investment grade by an NRSRO. Id.
    \15\ See 12 CFR 1266.7(a)(4).
    \16\ See Proposed Rule, 78 FR 30788 (citing Proposed Rule, 
Federal Home Loan Bank Standby Letters of Credit, 63 FR 25726, 25729 
(May 8, 1998)).
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    FHFA explained that the proposed amendments to Sec.  1269.2(c)(2) 
would require a Bank to incorporate criteria into its collateral 
policies to assure that the collateral covered by the rule would meet 
the proposed criteria. FHFA emphasized that a Bank needed to meet other 
general requirements applicable to collateral, including having 
policies and procedures in place to ensure that the

[[Page 67007]]

Bank accurately valued the collateral and applied realistic haircuts 
given the market for the instrument and existing economic conditions.
    FHFA also proposed to replace current provisions in Sec. Sec.  
1270.5(b) and (c) of its regulations that require Banks collectively to 
maintain the highest NRSRO rating for COs and each Bank individually to 
maintain a rating of at least the second highest from an NRSRO, with a 
general requirement that the Banks individually and collectively 
operate in such manner and take any actions necessary to ensure that 
COs maintain the highest level of acceptance by financial markets and 
are generally perceived by investors as presenting a very low level of 
credit risk.\17\ FHFA believed that the new proposed provision captured 
the intent of the current rules and helped protect holders of COs while 
upholding the intent of the Dodd-Frank Act.\18\ FHFA stated, however, 
that nothing in the language as proposed prohibited the Banks 
collectively from seeking NRSRO ratings for COs or an individual Bank 
from maintaining an individual NRSRO rating if such ratings were found 
desirable or helpful for either business or other reasons.
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    \17\ See Proposed Rule, 78 FR 30789 (discussing amendments to 12 
CFR 1270.5(b) and (c)).
    \18\ In comments to the ANPR, the Banks stated that because the 
individual Bank rating requirement in Sec.  1270.5(c) did not 
involve the rating of a security or a money market instrument, it 
was outside the scope of section 939A of the Dodd-Frank Act. In 
proposing to amend this provision, however, FHFA disagreed with this 
statement and noted that FHFA believed that requiring the Banks to 
maintain a specific credit rating from an NRSRO would have violated 
of the spirit of the Dodd-Frank provision by requiring the Banks to 
rely on NRSROs to review and essentially opine on Bank actions. See 
id.
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    FHFA also proposed to delete certain provisions from its 
regulations that contained references to NRSRO credit ratings, either 
because they appear duplicative of other requirements \19\ or because 
they apply only to Banks that have not converted to the capital 
structure required by the GLB Act \20\ and no longer apply to any Bank 
because all Banks have now converted to the GLB Act capital stock 
structure.\21\ FHFA also stated that it intended to undertake separate 
rulemakings to remove references to and requirements based on NRSRO 
credit ratings in the acquired member asset (AMA) programs regulations 
as well as to revise and remove NRSRO rating related references and 
requirements in the Bank capital and related rules.\22\ Finally, FHFA 
noted that it did not intend to amend part 1273 of its regulations to 
remove references to NRSROs found in Sec.  1273.6(d) of its rules, 
given that the provision was outside the scope of the requirements in 
section 939A of the Dodd-Frank Act and need not be changed.\23\
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    \19\ See id. at 30788-89 (discussing removal of 12 CFR 
1270.4(b)(6)).
    \20\ Public Law 106-102, 133 Stat. 1338 (1999).
    \21\ See Proposed Rule, 78 FR 30788, 30789 (discussing removal 
of 12 CFR 1267.5 and 12 CFR 1270.5(a) respectively).
    \22\ See id. at 30786 (discussing 12 CFR part 955 (AMA rules) 
and 12 CFR part 932 (Bank capital and related rules)).
    \23\ See id. at 30786 (discussing 12 CFR 1273.6(d)). Section 
1273.6(d) assigns to OF the responsibility to manage the Bank 
System's relationship with NRSROs, if NRSRO ratings are considered 
necessary or desirable in connection with the issuance and sale of 
COs. FHFA noted that it had stated in the ANPR that this provision 
appeared to be outside the scope of section 939A of the Dodd-Frank 
Act and that no commenters on the ANPR disagreed with this 
statement. Id. Similarly, no commenters on the proposed rule 
specifically addressed FHFA's stated intent not to amend Sec.  
1273.6(d).
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B. Comments on the Proposed Rule

    FHFA received three comments in response to the Proposed Rule. One 
comment letter was from a private citizen, one was a joint letter from 
eight of the twelve Banks, and one was from a public interest group 
that focuses on financial market issues. The first two letters were 
generally supportive of the Proposed Rule. The letter from the public 
interest group argued that the rule amendments should incorporate 
specific criteria that a Bank must apply in reaching a credit 
determination rather than allowing each Bank so much flexibility to 
develop its own analytic approach.
    In generally supporting the proposed rule amendments, the first 
commenter noted that the list of factors cited by FHFA that a Bank may 
consider in assessing credit-worthiness for purposes of Sec. Sec.  
1267.3(a)(3)(ii) and 1267.3(a)(4)(iii) was fairly complete and would 
allow the Banks ``to provide a robust and auditable level of 
assessment.'' The commenter noted, however, that it would be preferable 
for a Bank to rely on ``hard'' factors such as credit spreads, default 
statistics, legal and contractual considerations, market data, and 
other relevant asset-specific factors, rather than factors such as 
external credit risk assessments and security or asset-class related 
research. Similarly, the Banks generally agreed with the FHFA's 
proposed approach.\24\ The Banks suggested, however, that FHFA adopt 
the approach taken by the Office of the Comptroller of the Currency 
(OCC) in its final guidance for its Section 939A rule amendments and 
confirm that the rules would not require the Banks to conduct specific 
credit analysis under the ``investment quality'' criteria for United 
States government and agency obligations (including mortgage-backed 
securities).\25\
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    \24\ The Banks, in the joint comment letter, also specifically 
agreed that 12 CFR 1270.4(b)(6) could be removed as proposed. The 
joint comment letter did not specifically address the other 
provisions that FHFA proposed to delete. Nor did the other two 
comment letters specifically address any of the regulations that 
FHFA proposed to delete.
    \25\ The OCC guidance states in relevant part that:
    Under OCC rules, Treasury and agency obligations do not require 
individual credit analysis, but bank management should consider how 
those securities fit into the overall purpose, plans, and risk and 
concentration limitations of the investment policies established by 
the board of directors.
    Guidance on Due Diligence Requirements in Determining Whether 
Securities Are Eligible Investments, 77 FR 35259, 35260 (June 13, 
2012).
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    The remaining comment letter noted that FHFA, in discussing the 
proposed rule changes, identified a number of appropriate factors that 
a Bank could consider in its credit assessment, but argued that the 
factors should be included in the rule text and that a Bank should be 
required to consider all the listed factors in its analysis. The 
commenter also argued that it would be inconsistent with the Dodd-Frank 
Act provisions to allow a Bank to rely on NRSRO credit ratings to even 
a limited degree, and that the Banks should be required to justify a 
credit decision based on a standard without regard to credit ratings. 
Thus, the commenter urged that the Banks be required to document the 
extent to which any NRSRO credit ratings were considered in a 
particular decision.

C. Final Rule

    FHFA has considered the comments received on the proposed rule. As 
discussed above, the specific comments received mainly addressed the 
proposed rule changes to Sec. Sec.  1267.3(a)(3)(ii) and 
1267.3(a)(4)(iii). FHFA generally agrees with the one comment that the 
Banks should primarily rely on ``hard,'' asset-specific data in 
reaching a credit determination. In reviewing Bank determinations, FHFA 
will look at the required documentation to ascertain whether a Bank's 
decision is adequately supported by such information and will consider 
whether Banks are basing determinations on information sources that are 
independent of a specific issuer or counterparty and not relying on 
recommendations or other sources that may be biased. The point of the 
rule change is for the Banks to undertake their own, rigorous analysis 
prior to making an investment decision and not to defer to the analysis 
or opinions of third parties that may have conflicts or

[[Page 67008]]

interests that do not align with those of a Bank.
    However, FHFA does not agree with another commenter's suggestion 
that it prohibit the Banks from using NRSRO ratings or other third 
party information in their analysis. This information can be useful to 
a Bank and should be allowed as long as it is not the sole or principal 
factor underlying a decision. FHFA also does not believe that the 
proposed rule language needs to be changed to require the Banks to 
justify a particular decision without regard to NRSRO ratings as the 
commenter suggested. The proposed definition of ``investment quality'' 
specifically requires that a Bank's decision be based on ``documented 
analysis,'' and FHFA intends to review this documentation as part of 
its ongoing supervisory and examination activities. To be complete, 
documentation would need to demonstrate how a Bank reached a particular 
determination and be supportive of the final decision. Thus, failure to 
maintain sufficient documentation indicating that the Bank's decision 
was primarily based on information and analysis other than NRSRO 
ratings would be inconsistent with the rule.
    FHFA also does not intend to alter the proposed rule to incorporate 
into the definition of ``investment quality'' specific factors that a 
Bank must consider in reaching a determination. Instead, FHFA believes 
that its proposed approach provides the Banks needed flexibility to 
adjust their analysis to changing conditions and specific investments 
and to build on internal processes and procedures that are already in 
place. Moreover, it will allow the Banks' procedures and approaches to 
evolve over time in response to changes in thinking on ``best 
practices'' for credit risk management. FHFA will, however, provide 
more specific guidance on the Banks' credit analysis, including 
specific recommendations as to factors that need to be considered, if 
it finds that the Banks' practices are not rigorous or are otherwise 
deemed faulty.
    In response to the request for clarification with respect to the 
application of the rule to United States government and agency 
obligations, FHFA agrees that instruments backed by the full faith and 
credit of the United States government can be deemed to meet the 
``investment quality'' standard without specific analysis by a Bank. A 
Bank would still need to consider how such investment would conform to 
other investment and risk management policies of the Bank.
    With regard to obligations, including agency obligations, that are 
not backed or guaranteed explicitly by the United States, however, FHFA 
believes that a Bank should make a specific credit determination as to 
``investment quality.'' Such agency obligations include those issued by 
Fannie Mae, Freddie Mac, and Federal Farm Credit Banks, among others. 
These obligations carry no explicit federal government guarantee, and 
while the probability of default generally is considered to be low, it 
is not the same as a zero probability of default. Banks should not rely 
on the assumption of implicit government support but instead should 
look to the financial strength of an individual entity and its ability 
to meet its obligations. In making such a determination, a Bank could 
consider any explicit agreements that provide for federal support or 
other explicit guarantees that a particular counterparty or instrument 
may carry.\26\
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    \26\ For example, it would be appropriate for a Bank to consider 
the Senior Preferred Stock Purchase Agreements (PSPAs) between the 
Enterprises and the United States Department of the Treasury, which 
were entered into at the time the Enterprises entered 
conservatorship, and the capital support provided under those 
agreements.
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    With the exception of the Banks' comments on the effective date for 
the final rule amendments, which are addressed below, the comments were 
either generally supportive or did not specifically address the other 
amendments in the Proposed Rule. As a consequence, for the reasons 
discussed above and in the Supplementary Information section of the 
Proposed Rule, FHFA is adopting the amendments to parts 1267, 1269, and 
1270 of its regulations as proposed.

D. Effective Date of the Rule

    Finally, in notice of proposed rulemaking, FHFA noted that it would 
consider a delayed implementation date for any final rule amendments, 
and specifically requested comments on what time frame would be 
necessary for the Banks to implement these amendments.\27\ The Banks, 
in their joint comment letter, were the only commenters to address this 
issue, and requested a six-month phase-in period. In support of this 
request, the Banks noted that they needed to make changes to risk 
management, financial management, and credit policies and procedures, 
including obtaining necessary approvals from their boards of directors, 
and also would need sufficient time to conduct staff training, observe 
the effects of the new policies and procedures, and make further 
adjustments to the policies and procedures, as necessary. FHFA accepts 
as reasonable the Bank's request for a six-month period to prepare for 
implementation of the rule changes, and therefore has determined that 
the final rule amendments will become effective on May 7, 2014.
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    \27\ Proposed Rule, 78 FR 30789-30790.
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III. Paperwork Reduction Act

    The rule amendments do 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 rule amendments 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, FHFA certifies that this final rule 
will not have significant economic impact on a substantial number of 
small entities.

List of Subjects

12 CFR Parts 1267 and 1269

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

12 CFR Part 1270

    Accounting, Federal home loan banks, Government securities.

    Accordingly, for reasons stated in the SUPPLEMENTARY INFORMATION 
and under authority in 12 U.S.C. 4511, 4513, and 4526, FHFA is amending 
chapter XII of title 12 of the Code of Federal Regulations as follows:

PART 1267--FEDERAL HOME LOAN BANK INVESTMENTS

0
1. The authority citation for part 1267 continues to read as follows:

    Authority:  12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513, 
4526.


0
2. Amend Sec.  1267.1 by removing the definitions for ``Investment 
grade'' and ``NRSRO'' and adding in correct alphabetical order a 
definition for ``Investment quality'' to read as follows:


Sec.  1267.1  Definitions.

* * * * *
    Investment quality means a determination made by the Bank with 
respect to a security or obligation that, based on documented analysis, 
including consideration of the sources for repayment on the security or 
obligation:
    (1) There is adequate financial backing so that full and timely 
payment

[[Page 67009]]

of principal and interest on such security or obligation is expected; 
and
    (2) There is minimal risk that the timely payment of principal or 
interest would not occur because of adverse changes in economic and 
financial conditions during the projected life of the security or 
obligation.
* * * * *

0
3. Amend Sec.  1267.3 by revising paragraphs (a)(3) and (a)(4) to read 
as follows:


Sec.  1267.3  Prohibited investments and prudential rules.

    (a) * * *
    (3) Debt instruments that are not investment quality, except:
    (i) Investments described in Sec.  1265.3(e) of this chapter; and
    (ii) Debt instruments that a Bank determined became less than 
investment quality because of developments or events that occurred 
after acquisition of the instrument by the Bank;
    (4) Whole mortgages or other whole loans, or interests in mortgages 
or loans, except:
    (i) Acquired member assets;
    (ii) Investments described in Sec.  1265.3(e) of this chapter;
    (iii) Marketable direct obligations of state, local, or Tribal 
government units or agencies, that are investment quality, where the 
purchase of such obligations by the Bank provides to the issuer the 
customized terms, necessary liquidity, or favorable pricing required to 
generate needed funding for housing or community lending;
    (iv) Mortgage-backed securities, or asset-backed securities 
collateralized by manufactured housing loans or home equity loans, that 
meet the definition of the term ``securities'' under 15 U.S.C. 
77b(a)(1) and are not otherwise prohibited under paragraphs (a)(5) 
through (a)(7) of this section; and
    (v) Loans held or acquired pursuant to section 12(b) of the Bank 
Act (12 U.S.C. 1432(b)).
* * * * *


Sec.  1267.5  [Removed]

0
4. Remove Sec.  1267.5.

PART 1269--STANDBY LETTERS OF CREDIT

0
5. The authority citation for part 1269 continues to read as follows:

    Authority:  12 U.S.C. 1429, 1430, 1430b, 1431, 4511, 4513, 4526.


Sec.  1269.1  [Amended]

0
6. Amend Sec.  1269.1 by removing the definitions for ``Investment 
grade'' and ``NRSRO.''

0
7. Amend Sec.  1269.2 by revising paragraph (c)(2) to read as follows:


Sec.  1269.2  Standby letters of credit on behalf of members.

* * * * *
    (c) * * *
    (2) A standby letter of credit issued or confirmed on behalf of a 
member for a purpose described in paragraphs (a)(1) or (a)(2) of this 
section may, in addition to the collateral described in paragraph 
(c)(1) of this section, be secured by obligations of state or local 
government units or agencies, where such obligations have a readily 
ascertainable value, can be reliably discounted to account for 
liquidation and other risks, and can be liquidated in due course.

PART 1270--LIABILITIES

0
8. The authority citation for part 1270 continues to read as follows:

    Authority:  12 U.S.C. 1431, 1432, 1435, 4511, 4512, 4513, 4526.


Sec.  1270.1  Definitions.

0
9. Amend Sec.  1270.1 by removing the definition of ``NRSRO.''

0
10. Amend Sec.  1270.4 by revising paragraph (b) to read as follows:


Sec.  1270.4  Issuance of consolidated obligations.

* * * * *
    (b) Negative pledge requirement. Each Bank shall at all times 
maintain assets described in paragraphs (b)(1) through (b)(5) of this 
section free from any lien or pledge, in an amount at least equal to a 
pro rata share of the total amount of currently outstanding 
consolidated obligations and equal to such Bank's participation in all 
such consolidated obligations outstanding, provided that any assets 
that are subject to a lien or pledge for the benefit of the holders of 
any issue of consolidated obligations shall be treated as if they were 
assets free from any lien or pledge for purposes of compliance with 
this paragraph (b). Eligible assets are:
    (1) Cash;
    (2) Obligations of or fully guaranteed by the United States;
    (3) Secured advances;
    (4) Mortgages as to which one or more Banks have any guaranty or 
insurance, or commitment therefor, by the United States or any agency 
thereof; and
    (5) Investments described in section 16(a) of the Bank Act (12 
U.S.C. 1436(a)).

0
11. Revise Sec.  1270.5 to read as follows:


Sec.  1270.5  Bank operations.

    The Banks, individually and collectively, shall operate in such 
manner and take any actions necessary, including without limitation 
reducing leverage, to ensure that consolidated obligations maintain a 
high level of acceptance by financial markets and are generally 
perceived by investors as presenting a low level of credit risk.

    Dated: October 31, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-26775 Filed 11-7-13; 8:45 am]
BILLING CODE 8070-01-P