[Federal Register Volume 79, Number 177 (Friday, September 12, 2014)]
[Proposed Rules]
[Pages 54848-54881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21114]
[[Page 54847]]
Vol. 79
Friday,
No. 177
September 12, 2014
Part III
Federal Housing Finance Agency
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12 CFR Part 1263
Members of Federal Home Loan Banks; Proposed Rule
Federal Register / Vol. 79 , No. 177 / Friday, September 12, 2014 /
Proposed Rules
[[Page 54848]]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1263
RIN 2590-AA39
Members of Federal Home Loan Banks
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of Proposed Rulemaking; request for comments.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to
revise its regulations governing Federal Home Loan Bank (Bank)
membership primarily to require each applicant and member institution
to hold one percent of its assets in ``home mortgage loans'' in order
to satisfy the statutory requirement that an institution make long-term
home mortgage loans; require each member to comply on an ongoing basis,
rather than on a one-time basis as at present, with the foregoing
requirement and, where applicable, with the requirement that it have at
least 10 percent of its assets in ``residential mortgage loans;''
define the term ``insurance company'' to exclude from Bank membership
captive insurers, but permit existing captive members to remain members
for five years with certain restrictions on their ability to obtain
advances; require a Bank to obtain and review an insurance company's
audited financial statements when considering it for membership; and
clarify the standards by which an insurance company's ``principal place
of business'' is to be identified in determining the appropriate Bank
district for membership.
DATES: Written comments must be received on or before November 12,
2014.
ADDRESSES: You may submit your comments, identified by Regulatory
Information Number (RIN) 2590-AA39, by any of the following methods:
Agency Web site: www.fhfa.gov/open-for-comment-or-input.
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 the agency.
Please include Comments/RIN 2590-AA39 in the subject line of the
message.
Courier/Hand Delivery: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA39,
Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20024. Deliver the package to the Seventh Street
entrance Guard Desk, First Floor, on business days between 9 a.m. to 5
p.m.
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/RIN 2590-AA39, Federal Housing
Finance Agency, 400 Seventh Street SW., Eighth Floor, Washington, DC
20024.
FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Assistant General
Counsel, Office of General Counsel, [email protected], (202)
649-3084; or Julie Paller, Senior Financial Analyst, Office of Program
Support, Division of Bank Regulation, [email protected], (202) 649-
3201 (not toll-free numbers), Federal Housing Finance Agency, 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. Comments
FHFA invites comments on all aspects of the proposed rule and will
take all comments into consideration before issuing a final rule. All
comments received will be posted without change on the FHFA Web site at
http://www.fhfa.gov, and will include any personal information
provided, such as name, address (mailing and email), and telephone
numbers. In addition, copies of all comments received will be available
without change for public inspection on business days between the hours
of l0:00 a.m. and 3:00 p.m., at the Federal Housing Finance Agency, 400
Seventh Street SW., Washington, DC 20024. To make an appointment to
inspect comments, please call the Office of General Counsel at (202)
649-3804.
II. Background
A. Overview of Bank Membership Requirements
1. Statutory Requirements
The twelve Federal Home Loan Banks were organized under the Federal
Home Loan Bank Act (Bank Act) in 1932 to provide a reserve banking
system for thrift institutions to support their residential mortgage
lending activities.\1\ Each Bank is structured as a cooperative,
membership in which allows eligible financial institutions to obtain
access to secured loans, known as advances, for the purpose of funding
residential housing finance and, in some cases, for funding small
business and community development activities.\2\ Bank membership is
limited to the types of financial institutions listed in section
4(a)(1) of the Bank Act, which are: building and loan associations,
savings and loan associations, cooperative banks, homestead
associations, insurance companies, savings banks, community development
financial institutions (CDFIs), and insured depository institutions.\3\
Because nearly all state-chartered depository institutions are now
federally insured, there are essentially three categories of
institutions that are eligible for Bank membership: (1) FDIC- or NCUA-
insured depository institutions; (2) insurance companies; and (3)
CDFIs.
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\1\ See 12 U.S.C. 1423, 1432(a). The Bank Act also allowed
insurance companies to become members because they also supported
the residential mortgage lending market.
\2\ See 12 U.S.C. 1430(a)(2).
\3\ The Bank Act defines ``insured depository institution'' to
include any bank or savings association the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC), as well
as any credit union the member accounts of which are insured by the
National Credit Union Administration (NCUA). 12 U.S.C. 1422(9).
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In order for any such institution to become a member of a Bank, it
must comply with the three requirements set forth in section 4(a)(1) of
the Bank Act, which require that the institution: (A) Be duly organized
under the laws of any state or the United States; (B) be subject to
inspection and regulation under banking, or similar, laws of a state or
the United States; \4\ and (C) ``makes such home mortgage loans as, in
the judgment of the Director [of FHFA], are long-term loans.'' \5\ An
applicant that fails to satisfy any one of those requirements may not
become a member of a Bank. (Hereinafter, those requirements will be
referred to as the ``duly organized,'' ``subject to inspection and
regulation,'' and ``makes long-term home mortgage loans'' eligibility
requirements).
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\4\ In lieu of being subject to inspection and regulation by a
state or federal regulator, a CDFI applicant must be certified as a
CDFI by the United States Department of the Treasury.
\5\ 12 U.S.C. 1424(a)(1).
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Section 4(a)(2) of the Bank Act imposes four additional eligibility
requirements on insured depository institutions that were not members
of a Bank as of January 1, 1989, requiring that any such institution:
(A) Have at least 10 percent of its total assets in ``residential
mortgage loans''; (B) be in a financial condition such that advances
may be safely made to it; and (C) show that the character of its
management and its home-financing policy are consistent with sound and
economical home
[[Page 54849]]
financing.\6\ (Hereinafter, those requirements will be referred to as
the ``10 percent,'' ``financial condition,'' ``character of
management,'' and ``home financing policy'' eligibility requirements).
The statute exempts from the ``10 percent'' requirement any ``community
financial institution'' (CFI),\7\ which are FDIC-insured depository
institutions with less than $1 billion in average total assets
(adjusted annually for inflation) over the preceding three years.\8\
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\6\ 12 U.S.C. 1424(a)(2). Although the statute groups these
requirements into three paragraphs, FHFA and its predecessors
historically have treated paragraph (a)(2)(C) as containing two
separate eligibility requirements--that is, the ``character of
management'' and ``home financing policy'' requirements.
\7\ See 12 U.S.C. 1424(a)(2)(A), (a)(4).
\8\ 12 U.S.C. 1422(10)(A). By statute, FHFA must annually adjust
the $1 billion CFI asset limit for inflation. 12 U.S.C. 1422(10)(B).
The inflation-adjusted CFI limit for 2014 is $1.108 billion. See 79
FR 1862 (Jan. 10, 2014).
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2. FHFA's Existing Bank Membership Regulation
FHFA's regulation on Bank membership, located at 12 CFR part 1263,
specifies how and when an institution must demonstrate compliance with
each of the statutory membership eligibility requirements, and
otherwise implements those requirements. The regulation also
establishes requirements relating to the membership application
process, determination of the appropriate Bank district for membership,
members' purchase and redemption of Bank capital stock, and voluntary
or involuntary termination and reacquisition of membership.
The regulation requires all insured depository institutions,
insurance companies, and CDFIs to meet six eligibility requirements:
The ``duly organized,'' ``subject to inspection and regulation,'' \9\
and ``makes long-term home mortgage loans'' requirements, which by
statute apply to all types of institutions; and the ``financial
condition,'' ``character of management,'' and ``home financing policy''
requirements, which FHFA and its predecessor agency, the Federal
Housing Finance Board (Finance Board) have applied by regulation to all
institutions as a matter of safety and soundness. Paralleling the
statute, the membership regulation requires that non-CFI depository
institutions also meet the ``10 percent'' requirement in order to be
eligible for membership, but does not extend that requirement to other
types of institutions. However, the regulation does require
institutions that are not insured depository institutions (i.e.,
insurance companies and CDFIs) to have ``mortgage-related assets'' that
``reflect a commitment to housing finance'' in order to be eligible for
membership.\10\ For each of the six general eligibility requirements
and for the ``10 percent'' requirement, the regulation includes at
least one separate section specifying how a Bank is to determine
whether an institution satisfies the requirement.
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\9\ An institution certified as a CDFI by the Treasury
Department's CDFI Fund is deemed to have met the ``subject to
inspection and regulation'' requirement by virtue of that
certification. See 12 CFR 1263.6(a)(2), 1263.8.
\10\ 12 CFR 1263.6. The regulation does not define the term
``mortgage-related assets.''
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The membership regulation also supplements the Bank Act by defining
the terms ``long-term,'' ``home mortgage loan,'' and ``residential
mortgage loan.'' The Bank Act defines the term ``home mortgage loan''
to mean ``a loan made by a member upon the security of a home
mortgage.'' \11\ In turn, the statute defines the term ``home
mortgage'' to mean a first mortgage, or its equivalent, upon real
estate on which one or more homes or dwelling units are located.\12\
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\11\ 12 U.S.C. 1422(4).
\12\ 12 U.S.C. 1422(5).
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The regulation supplements the statutory definition of ``home
mortgage loan'' by defining the term generally to include any loan or
interest in a loan that is secured by a first lien mortgage or any
mortgage pass-through security that represents an undivided ownership
interest in such loans or in another security that represents an
undivided ownership interest in such loans.\13\ The regulation defines
the term ``long-term,'' which the statute does not define, to mean ``a
term to maturity of five years or greater.''\14\
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\13\ 12 CFR 1263.1.
\14\ 12 CFR 1263.1.
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The regulation defines the term ``residential mortgage loan,''
which relates to the Bank Act's ``10 percent'' requirement, and which
the statute does not define, more broadly than the term ``home mortgage
loan.'' It defines ``residential mortgage loan'' to include generally
all assets that qualify as home mortgage loans (regardless of whether
the underlying loans are ``long-term'' or not), plus loans secured by
junior liens on one-to-four family property or multifamily property,
loans secured by manufactured housing, funded residential construction
loans, and mortgage pass-through securities representing an ownership
interest in, or mortgage debt securities secured by, any of those types
of assets.\15\
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\15\ 12 CFR 1263.1.
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Unlike the ``10 percent'' requirement, the Bank Act does not
establish quantifiable standards for determining compliance with the
``makes long-term home mortgage loans'' requirement. Neither does the
existing membership regulation establish any quantifiable standards.
The regulation implements the ``makes long-term home mortgage loans''
requirement through a ``presumptive compliance'' approach, which deems
an institution to have satisfied the statutory requirement if, at the
time of its application for Bank membership, its most recently filed
regulatory financial report demonstrates that it originates or
purchases long-term home mortgage loans.\16\ However, the regulation
does not specify the level of activity that is needed to meet the
requirement.
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\16\ 12 CFR 1263.9.
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In addition, the existing membership regulation does not require a
Bank to assess compliance with the ``makes long-term home mortgage
loans'' requirement for any institution once it has become a member of
the Bank. In other words, the regulation does not require that a Bank
member continue to originate, purchase, or hold long-term home mortgage
loans after it has become a member. The absence of an ongoing
requirement means that it is possible that an institution could reduce
or eliminate its investment in long-term home mortgage loans after
becoming a member without affecting its eligibility to continue as a
Bank member.
The existing regulation also employs a ``presumptive compliance''
approach to the ``10 percent'' requirement, deeming an applicant
subject to that statutory requirement to be in compliance if its most
recent regulatory financial report shows that it has at least 10
percent of its total assets in residential mortgage loans.\17\ As with
the ``makes long-term home mortgage loans'' requirement, the regulation
does not require an institution that is subject to the ``10 percent''
requirement to continue to hold 10 percent of its total assets in
residential mortgage loans after it becomes a Bank member. The absence
of an ongoing requirement means that a member may reduce, or even
eliminate, its residential mortgage loan holdings without affecting its
eligibility to continue as a Bank member.
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\17\ 12 CFR 1263.10.
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B. Advance Notice of Proposed Rulemaking
In creating the Banks, Congress vested in them a number of market
advantages designed to enable them to raise funds in the capital
markets at interest rates slightly higher than those on comparable
Treasury instruments.
[[Page 54850]]
Those advantages were designed to enable the Banks to provide low cost
wholesale funding to their member institutions so that, in turn, those
members could provide long-term home mortgage loans to consumers at a
reasonable cost. The text of the Bank Act and its legislative history
indicate that Congress intended to reserve the benefits of Bank
membership, including access to low cost funding and the receipt of
dividends on Bank stock, for institutions that are likely to use those
benefits to fulfill the primary purposes of the Bank Act. In 2010, FHFA
began a review of its membership regulation to determine whether it
effectively implements the statutory requirements and advances the
purposes that underlie those requirements. One aspect of that review
has been to assess whether the existing regulatory membership
eligibility requirements, as they are currently applied, could permit
the Banks to admit as a member an institution that has such a tenuous
connection to home mortgage lending that it should not be allowed to
access the benefits of Bank membership.
On December 27, 2010, FHFA published in the Federal Register an
Advance Notice of Proposed Rulemaking (ANPR), in which the agency
discussed, and requested comment on, a number of ways it could revise
its membership regulation to ensure that the benefits of Bank
membership are being used to further the statutory mission of the
Federal Home Loan Bank System (Bank System).\18\ Among other things,
the ANPR reviewed both the ``makes long-term home mortgage loans'' and
``10 percent'' requirements and discussed whether the regulatory
provisions implementing those requirements could be revised to
strengthen the ties between Bank membership and the support of housing
finance by Bank members. The ANPR examined whether it would be
appropriate to amend either or both of those requirements to apply on a
continuing basis, rather than only at the time of admission to
membership. In addition, the ANPR discussed whether it would be
appropriate to establish more objective and quantifiable standards for
the ``makes long-term home mortgage loans'' requirement. With respect
to each of those issues, FHFA requested comments on how well the
existing regulations implement the underlying statutory requirements,
whether there is a need to revise the regulations to reinforce the
connection between membership and the Banks' housing finance mission,
and the appropriateness of the alternatives being considered by the
FHFA. Separately, the ANPR also discussed both safety and soundness-
and mission-related concerns about the acceptance of so-called
``captive'' insurers as Bank members and queried whether, to address
these concerns, FHFA should amend the membership regulation to require
that insurance companies be actively engaged in underwriting insurance
for third parties and be actively examined and supervised by their
appropriate state insurance regulator in order to be eligible for
membership.
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\18\ See 75 FR 81145 (Dec. 27, 2010).
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FHFA received 137 comment letters in response to the ANPR, almost
all of which opposed revising the membership regulation in any of the
ways discussed in the notice, and very few of which actually responded
to the specific questions raised in the ANPR. With respect to the
``makes long-term home mortgage loans'' and ``10 percent''
requirements, the comments appearing most frequently in the letters
were that: The ANPR did not explain the purposes to be served by
revising the requirements; requiring ongoing compliance would make
membership less attractive by reducing access to liquidity, adding
costs and paperwork requirements, and creating uncertainty about an
institution's ability to remain eligible for membership from period to
period; such regulatory changes would constrict the availability of
funds for housing finance and community development; and the housing
finance nexus that ongoing eligibility requirements would be intended
to preserve is already provided by the existing collateral
requirements, which require advances to be secured by assets that may
include mortgage loans on improved residential property.
A comparatively small number of the comment letters provided
substantive responses to some or all of the ANPR questions. With
respect to whether FHFA should make the ``10 percent'' requirement
ongoing and the manner in which such a requirement might be
implemented, a number of credit unions provided substantive comments.
These included suggestions that: FHFA give Banks flexibility in
applying the requirement, such as by adjusting the percentage downward
during any housing finance downturns; FHFA base the measurement of
compliance with an ongoing requirement either on an average over a
specific time period (which would help to avoid skewed data resulting
from seasonal changes in lending and similar factors), or on the
highest amount of qualifying assets held at any point in time during a
specified time period; and FHFA require members to report noncompliance
to their Banks only if they have been out of compliance with the
requirement for at least 90 days.
FHFA received minimal response to its request for comment on
whether it should require members to comply with the ``makes long-term
home mortgage loans'' requirement on an ongoing basis. However, some
credit union and insurance company commenters did not object to an
ongoing ``makes long-term home mortgage loans'' requirement, so long as
it did not also impose quantitative standards.
In response to FHFA's query as to whether it should impose one or
more quantitative standards for determining compliance with the ``makes
long-term home mortgage loans'' requirement, two CDFIs supported
establishing a quantitative standard, so long as FHFA develops
appropriate standards for each class of institution that may become a
member (although neither opined as to what those standards should be).
Another CDFI opposed quantifiable standards, stating that such a
requirement would effectively reduce the ability of CDFIs to provide
other forms of credit and investments that they typically provide to
low- and moderate- income communities. One credit union that supported
an ongoing requirement stated that compliance should not be based on a
specific percentage or quantity of mortgage loans (especially if based
on loan originations), as that would be unfair to smaller lenders and
to institutions operating in lower-cost real estate markets that have
relatively low average loan sizes. No commenters identified particular
levels of home mortgage loans that could be deemed to satisfy this
requirement.
FHFA received several comments that were responsive to its query as
to how a member's noncompliance with any new ongoing membership
requirements should be addressed, and whether termination of membership
or some lesser sanctions would be most appropriate for addressing such
noncompliance. In their joint comment letter, the Banks contended that
noncompliance should not lead to automatic termination of membership,
nor should it require the Bank to terminate an institution's
membership. The Banks urged FHFA to provide them with the flexibility
to cure instances of temporary noncompliance with any new and ongoing
membership requirements. One CDFI recommended a one year grace period
for members that fall out of compliance and also advocated a reasonable
transition period for
[[Page 54851]]
members that are not in compliance at the time the rule is finalized.
Another CDFI was more supportive of a strict compliance regime, stating
that, if a member is found to be out of compliance, its membership
should be terminated after an appropriate grace period, during which
the member should be barred from further access to new Bank services.
Several credit unions stated that members (specifically, credit unions)
should be permitted a period of perhaps one year to cure any non-
compliance, based on a good faith representation that the member will
attempt to comply.
FHFA also received several comment letters addressing the agency's
stated concerns about captive insurers and responding to the related
query regarding the possibility of permitting only insurance companies
that are actively engaged in underwriting insurance for nonaffiliated
parties and that are actively examined and supervised by their state
insurance regulator to be Bank members. Those commenters, which
included three state insurance regulators, all opposed amending the
regulation in the manner suggested, arguing that captive insurers are
generally subject to the same state laws, regulations, and oversight as
are other insurance companies. None of the commenters addressed FHFA's
mission-related concern that captive members may be acting as conduits
to provide advances to affiliated companies that are themselves
ineligible for Bank membership.
C. Development of the Proposed Rule
1. Summary of Proposed Rule's Principal Provisions
After considering the comments received in response to the ANPR and
further studying the issues addressed in that notice, FHFA has decided
to publish this proposed rule, which would revise the membership
regulation to implement more effectively the statutory eligibility
requirements. The proposed rule would establish a quantitative standard
for determining compliance with the ``makes long-term home mortgage
loans'' requirement, specifying that an institution must have at least
one percent of its total assets in home mortgage loans in order to meet
that requirement. The proposed rule also would require each Bank member
to maintain the one percent ratio on an ongoing basis in order to
remain eligible for Bank membership. Similarly, the rule would require
each Bank member that is subject to the ``10 percent'' requirement to
maintain 10 percent of its assets in residential mortgage loans on an
ongoing basis in order to remain eligible for Bank membership. It would
require each Bank to determine member compliance with those ongoing
requirements annually, using data from members' regulatory financial
reports where possible, and auditor certifications where necessary, to
calculate the relevant ratios based on a three-year rolling average.
Members found to be out of compliance with either requirement would be
given one year to return to compliance. A Bank would be required to
terminate the membership of any institution that remains out of
compliance for two consecutive years.
In conjunction with its proposal to require an applicant or member
to maintain a specified percentage of its total assets in home mortgage
loans, FHFA is also proposing to expand the list of assets that qualify
as ``home mortgage loans'' to include all types of mortgage-backed
securities (MBS) that are fully backed by first mortgage loans on
single- or multi-family property or by other securities that are fully
backed by such loans. Under the existing regulation, only pass-through
securities representing an undivided ownership in qualifying loans or
securities may be counted as ``home mortgage loans.'' The rule would
not substantively change the definition of the term ``residential
mortgage loan'' or subject any institution to the ``10 percent''
requirement that is not currently subject to that requirement.
The proposed rule would also make a number of other revisions
relating specifically to insurance companies. First, it would limit the
types of insurance companies that are eligible for membership by
defining the term ``insurance company'' to include only those companies
whose primary business is the underwriting of insurance for
nonaffiliated persons or entities. Second, it would require that, in
determining whether an insurance company applicant meets the
``financial condition'' requirement, a Bank examine the applicant's
most recent audited financial statements, in addition to its most
recent regulatory report, which is the sole required source of
information under the existing regulation. Finally, the rule would add
a new provision addressing how the Banks should determine the
``principal place of business'' for insurance companies (as well as for
CDFIs).
In addition to these primary revisions, the proposed rule would
make a number of conforming changes necessary to integrate the new
requirements into the regulation and make some non-substantive
revisions to better state various provisions of the regulations.
2. Policy and Legal Considerations Behind Proposed Substantive
Revisions
a. Changes to the ``Makes Long-Term Home Mortgage Loans'' and ``10
Percent'' Requirements
As the agency charged by Congress with administering the Bank Act,
FHFA has broad authority to interpret the statute regarding issues on
which it is silent or ambiguous. The Bank Act does not address whether
an institution must engage in any particular minimum level of home
mortgage lending in order to be considered to ``make[ ] such home
mortgage loans . . . as are long-term loans'' as required under section
4(a). The statute also does not address whether a Bank member that
ceases to comply with any of the eligibility requirements of section
4(a) may or must be permitted to continue as a member of a Bank.
Accordingly, FHFA has the authority to resolve those questions in a way
that renders the eligibility requirements meaningful and effective and
that advances the overall purposes of the Bank Act. Specifically, FHFA
may adopt a quantitative standard for determining whether an
institution complies with the ``makes long-term home mortgage loans''
requirement and may require that Bank members continue to comply with
both the ``makes long-term home mortgage loans'' and ``10 percent''
requirements as a condition of retaining their Bank membership.
Section 4(a) of the Bank Act specifies that an institution may be
eligible for Bank membership only if it ``makes such home mortgage
loans as, in the judgment of the Director, are long-term loans.'' The
Bank Act, however, does not address the amount of home mortgage loans
an institution must originate or purchase, or the period of time over
which an institution must have been engaged in that activity, in order
to demonstrate that it makes long-term home mortgage loans. Likewise,
the legislative history of the Bank Act sheds little light on how
Congress intended the ``makes long-term home mortgage loans''
requirement to be applied. Much of the discussion of the issue in the
legislative record centers around the requirement that the mortgage
loans made must be ``long-term'' and the relationship of that
requirement to the Bank Act's primary purpose of providing funds to
lending institutions to make long-term fully amortizing home mortgage
loans. The lack of discussion in the legislative history about how the
``makes long-term
[[Page 54852]]
home mortgage loans'' requirement is to be applied is not surprising,
given that all of the depository institutions that were eligible for
Bank membership in 1932 were state-chartered home mortgage lenders that
had little, if any, ability to engage in any other types of lending.
The statute and its legislative history are also silent on whether
an institution must comply with the membership eligibility requirements
of section 4 only when it first becomes a Bank member or also must
continue to comply with them in order to remain a member. Both sections
4(a) and 4(b) of the Bank Act refer to their respective eligibility
provisions as requirements that must be met in order to ``become'' a
Bank member. That Congress used the word ``become,'' however, does not
mean that it intended that the statutory eligibility requirements would
apply only when an institution first sought to be admitted to
membership, but not thereafter. It appears clear that Congress intended
to prohibit any applicant that could not demonstrate compliance with
the eligibility requirements of section 4 from being admitted to
membership. Given the apparent congressional intent to condition
admission to membership on an institution's demonstrated support of
residential mortgage lending, as shown by compliance with the
eligibility requirements, it would be illogical to conclude that
Congress would have also intended to allow institutions to abandon
their commitment to the residential mortgage markets after having been
admitted to membership in a cooperative, the purpose of which was to
promote residential mortgage lending. The legislative histories of the
original Bank Act and its many amendments support that view, in that
they make clear that Congress contemplated that Bank membership would
comprise institutions that meet the eligibility requirements specified
in section 4 of the Bank Act.
One indication of congressional intent can be found in section
4(a)(3) of the Bank Act, which permits a newly chartered insured
depository institution to become a Bank member without meeting the ``10
percent'' requirement, so long as it subsequently demonstrates that it
has satisfied that requirement within one year after commencing its
business operations.\19\ For such institutions, compliance with this
eligibility requirement occurs after the institution ``becomes'' a
member, which is consistent with construing the eligibility
requirements to apply on an ongoing basis. FHFA believes that to
construe section 4 of the Bank Act as precluding it from applying the
``makes long-term home mortgage loans'' and ``10 percent'' requirements
on an ongoing basis would not be reasonable and would effectively
undermine the intent of Congress that the benefits of Bank membership
be used to advance the housing finance mission of the Bank System.
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\19\ 12 U.S.C. 1424(a)(3).
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In cases where Congress has not addressed the precise question at
issue, an agency has the authority to adopt a ``permissible
construction'' of a statute it administers.\20\ In Texas Savings and
Community Bankers Ass'n v. Federal Housing Finance Board, the United
States Court of Appeals for the Fifth Circuit concluded that the
Finance Board's interpretation of the ``incidental powers'' clause of
section 11(a) of the Bank Act as permitting a Bank to fund mortgage
loans directly through its member institutions (a power that is not
expressly granted by the statute) was permissible because it was
``consistent with the structure and purpose'' of the Bank Act.\21\
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\20\ See Chevron v. Natural Resources Defense Council, 467 U.S.
837, 843 (1984); see also Texas Savings and Community Bankers Ass'n
v. Federal Housing Finance Board, 201 F.3d 551, 554 (5th Cir. 2000)
(court's review of former Federal Housing Finance Board's
construction of Bank Act was guided by Chevron principles).
\21\ Texas Savings, 201 F.3d at 556; see also Independent
Insurance Agents of America, Inc. v. Hawke, 211 F.3d 638, 643 (D.C.
Cir 2000) (stating that ``[c]ourts generally will defer to an
agency's interpretation of its statute if it is `reasonable and
consistent with the statute's purpose.' '').
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In the Housing and Economic Recovery Act of 2008,\22\ Congress
amended the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (Safety and Soundness Act) to establish FHFA as supervisor
and regulator of the Banks, as well as Fannie Mae and Freddie Mac (each
a ``regulated entity''), and vested in its Director general regulatory
authority over those regulated entities.\23\ Congress also mandated
that the Director exercise that regulatory authority so as to ensure
that the purposes of the Safety and Soundness Act and the Bank Act are
carried out.\24\ Section 1313 of the Safety and Soundness Act further
charges the Director with several specific duties, including the duties
to ensure that: ``The operations and activities of each regulated
entity foster liquid, efficient, competitive, and resilient national
housing finance markets''; ``each regulated entity complies with [the
Safety and Soundness Act] and the rules, regulations, guidelines, and
orders issued'' under the Safety and Soundness Act and the Bank Act;
and ``the activities of each regulated entity and the manner in which
such regulated entity is operated are consistent with the public
interest.'' \25\ Finally, section 1326 of the Safety and Soundness Act
authorizes and requires the Director to ``issue any regulations,
guidelines, or orders necessary to carry out the duties of the Director
under [the Safety and Soundness Act or the Bank Act], and to ensure
that the purposes of [those statutes] are accomplished.''\26\
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\22\ Public Law 110-289, Div. A, 122 Stat. 2654 (2008).
\23\ 12 U.S.C. 4511(b).
\24\ 12 U.S.C. 4511(b)(2).
\25\ 12 U.S.C. 4513(a)(1).
\26\ 12 U.S.C. 4526(a).
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The primary purpose of the Bank Act, since its initial adoption in
1932, has been to support the nation's housing markets by establishing
a system of Banks to provide wholesale funds to their member
institutions for the purpose of financing those members' residential
mortgage lending activities. The ``makes long-term home mortgage
loans'' and ``10 percent'' requirements reflect that purpose, as do
several other provisions of the statute. For example, the Bank Act
states that a Bank may make long-term advances to members only for the
purposes of providing funds for residential housing finance.\27\
Similarly, the Bank Act limits the types of collateral that a Bank may
accept from its members to five categories, among which are whole first
mortgage loans on improved residential property and securities
representing an interest in such mortgage loans, as well as residential
MBS issued by Fannie Mae, Freddie Mac, and Ginnie Mae.\28\ Other
statutory provisions promote that purpose by requiring each Bank to
establish and fund an Affordable Housing Program (AHP) to provide
subsidies to members engaged in lending for long-term, low- and
moderate-income, owner-occupied and affordable rental housing.\29\
Congress's decision to include such ``housing finance'' requirements in
the Bank Act, touching on several aspects of Bank-member interactions,
reflects an intent that the benefits of Bank membership--such as the
ability to obtain advances--accrue to institutions that are engaged in
residential mortgage lending.
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\27\ See 12 U.S.C. 1430(a)(2). This provision also allows Banks
to make long-term advances to its ``community financial
institution'' members for the purpose of providing funding for their
small business, small farm, small agri-business, and community
development lending activities.
\28\ See 12 U.S.C. 1430(a)(3)(A)-(B).
\29\ See 12 U.S.C. 1430(j).
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Because the current membership regulation does not require an
applicant
[[Page 54853]]
to have any specific amount of home mortgage loans, it is possible to
satisfy the ``makes long-term home mortgage loans'' requirement by
acquiring a minimal amount of home mortgage loans shortly before
applying for membership. Because the regulation does not require that
an institution continue to meet either the ``makes long-term home
mortgage loans'' requirement or the ``10 percent'' requirement on an
ongoing basis once it becomes Bank member, it also is possible for an
institution to reduce or eliminate its mortgage loan holdings after
becoming a member without losing its eligibility to continue as a Bank
member. Thus, it is currently possible for an institution to become a
member without having either a history of supporting residential
housing finance through the origination or purchase of home mortgage
loans or a demonstrated intent to significantly support the residential
housing finance market after becoming a member.
In recent years, there have been instances in which institutions
having only minimal home mortgage loan assets and no plans to originate
or purchase any significant amounts of such assets have been permitted
to become Bank members. Although FHFA has found no evidence that this
problem is widespread, it believes that, to the extent the current
regulation allows for the possibility that institutions having no
significant past or future involvement in home mortgage lending may
become and remain Bank members, it does not advance the purposes of the
Bank Act. Accordingly, the agency has determined that it is necessary
to revise its Bank membership regulation to establish a minimum
quantitative standard that must be met to satisfy the ``makes long-term
home mortgage loans'' requirement, and to require ongoing compliance
with both that requirement and the ``10 percent'' requirement. With
those revisions, the membership regulation would better ensure that the
benefits of membership, such as favorably priced funding through
advances, accrue only to institutions that demonstrate a meaningful
commitment to supporting residential housing finance and, therefore,
would better ensure that the Banks fulfill their housing finance
mission. Accordingly, FHFA believes that these new regulatory
requirements implement the Bank Act in a way that is ``consistent with
the purposes and structure'' of that Act and that is within the
authority granted to the agency by both the Bank Act and the Safety and
Soundness Act.
As reflected in the existing membership regulation, FHFA's
predecessor agencies interpreted section 4 of the Bank Act as allowing
compliance with the ``makes long-term home mortgage loans'' and ``10
percent'' requirements to be measured only at the time an institution
applies for Bank membership. Those predecessor agencies also concluded
that section 4(a) does not require an institution to originate or
purchase any minimum level of long-term home mortgage loans in order to
be eligible for Bank membership. Those prior interpretations, however,
do not preclude FHFA from now adopting a different--but permissible--
policy that it believes better serves the purposes of the Bank Act, so
long as that change in policy is explained and justified.
Although none of FHFA's predecessor agencies adopted a regulation
applying a quantitative standard to the ``makes long-term home mortgage
loans'' requirement or applied that requirement on an ongoing basis, as
a matter of practice the former Federal Home Loan Bank Board (FHLBB)
required an institution to provide evidence that it had a continuing
policy of mortgage loan purchases or originations and that it intended
to continue to pursue that policy. In internal memoranda, FHLBB staff
concluded that isolated or sporadic home mortgage loan originations or
purchases were not sufficient to demonstrate compliance with the
``makes long-term home mortgage loans'' requirement.\30\ Often, the
application of that requirement was considered in conjunction with the
``home financing policy'' requirement, which for many years was
considered to require that an institution demonstrate through its
actions that it had an active and ongoing policy to finance home
mortgage loans.
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\30\ See, e.g., FHLBB Office of General Counsel Memorandum from
Deputy General Counsel Julie L. Williams (Jan. 25, 1988) at 3
(citing earlier memoranda and opining that an institution may
satisfy the ``makes long-term home mortgage loans'' requirement by
purchasing home mortgage loans, so long as the purchases ``evidence
a continuing policy of purchase activity rather than being `mere
isolated instances . . . .' '').
---------------------------------------------------------------------------
b. Addition of Definition of ``Insurance Company''
Although both section 4(a)(1) of the Bank Act and Sec. 1263.6(a)
of the existing regulation list an ``insurance company'' among the
types of institutions that are eligible for Bank membership, neither
provision defines that term. As was discussed in the preceding section,
where the statute does not define a term FHFA has the authority to
define it by regulation, as necessary to give effect to the purpose and
intent of the statute. Thus, the proposed rule would define the term
``insurance company'' to mean ``a company whose primary business is the
underwriting of insurance for nonaffiliated persons or entities.'' The
principal effect of this provision would be to prohibit captive
insurers from becoming Bank members.\31\ In a related provision, the
proposed rule would permit any captive that had been admitted to
membership prior to the publication date of this proposed rule to
remain a member of its current Bank for five years following the
effective date of the final rule, but would cap the amount of advances
that a Bank could have outstanding to such a member at 40 percent of
the member's total assets and prohibit a Bank from making a new
advance, or renewing an existing advance, with a maturity date beyond
the five year grace period to such a member. These provisions would not
affect the eligibility of other traditional insurance companies to
become members, to remain as members, or to obtain advances.
---------------------------------------------------------------------------
\31\ Captive insurers are typically formed by a company as a
means of self-insuring certain risks associated with the business of
the parent company or an affiliate.
---------------------------------------------------------------------------
FHFA is taking these actions to address supervisory concerns about
certain institutions that are ineligible for Bank membership, but that
are using captives as vehicles through which they can obtain Bank
advances to fund their business operations. These supervisory concerns
are particularly acute when the amounts of advances sought in the name
of the captive insurance subsidiary are larger by far than the amount
of its insurance liabilities or are comparable to the total assets of
the captive. Such circumstances confirm that the advances are not being
used by the captive member, but for the business needs of its parent
company or an affiliate, which may be barred by law from obtaining Bank
advances in its own name. Defining the term in this manner also
reflects the likely intent of Congress. When Congress authorized
insurance companies to become Bank members in 1932, the concept of
captive insurers was essentially unknown in the United States.\32\ At
that time, insurance companies, particularly life insurance companies,
frequently made or purchased mortgage loans which, as longer-term
investments, better matched
[[Page 54854]]
the liabilities that the insurance companies had to their
policyholders.
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\32\ The first captive insurer in the U.S. is generally thought
to have been a subsidiary of the Youngstown Sheet and Tube Company
that was chartered in Ohio in the 1950s. See Peter J. Strauss, The
Definitive Guide to Captive Insurance Companies 18-20 (2011).
---------------------------------------------------------------------------
In recent years, a small but growing number of captives have become
Bank members. FHFA has scrutinized those institutions and believes that
in some cases the primary, or sole, motivation for those captives being
created has been to become members in order to serve as a funding
conduit through which a parent or affiliate of the captive, which is
not itself eligible for Bank membership, may gain access to Bank
advances. Those captives have been able to become members because the
existing regulation does not prohibit it and does not otherwise
distinguish between insurance companies that become members to support
their own operations and those that become members with the intention
of obtaining advances to finance the business operations of a parent or
affiliate.
Recently, several real estate investment trusts (REITs), which are
not eligible to become members, have established captive subsidiaries
that then became Bank members. A number of those captives then obtained
advances in dollar amounts so large that they appear to have no
relationship to the operations of the captive and appear to flow to the
REITs. The facts that many of those REITs guarantee repayment of the
advances made to their captive subsidiaries and provide the collateral
for those advances further support the conclusion that the real
business and economic purpose of these arrangements is to allow the
non-member REITs to obtain Bank advances.\33\ Although mortgage REITs
are involved in the residential housing finance markets, they are not
among the types of institutions that Congress has authorized to become
Bank members or to borrow from the Banks, and through the use of
captives they have been able to borrow indirectly from the Banks--
something the statute precludes them from doing directly. The proposed
rule is intended to prevent these arrangements, which FHFA views as
circumventing the intent of Congress that the benefits of membership
are to be available only to the types of eligible institutions
enumerated in the Bank Act.
---------------------------------------------------------------------------
\33\ This also raises safety and soundness concerns because, in
the case of REITs, the Banks do not currently have access to the
kind of detailed financial and supervisory information that is
readily available to them in the case of institutions that are
eligible for Bank membership.
---------------------------------------------------------------------------
FHFA understands that it is possible for other types of
institutions, including depository institutions owned by a bank holding
company, to pass along the economic benefits of membership to their
holding company parent or other affiliates, which may not themselves be
eligible for membership. In those cases, however, it is unlikely that a
federally insured depository institution would have been created for
the sole or primary purpose of serving as a funding vehicle for its
parent or affiliates. The requirements under state and federal law for
organizing and capitalizing a commercial bank or savings association,
as well as the requirements associated with obtaining federal deposit
insurance, effectively ensure that such institutions will be
principally engaged in the business of banking. It is also unlikely
that a federally insured depository institution or a traditional
insurance company could be established to function solely or primarily
as a conduit funding vehicle for Bank advances, and it is even less
likely that such an institution would be allowed, as certain captives
have done, to obtain advances in amounts comparable to the amount of
its total assets. For those reasons, FHFA believes that any future
instances in which a depository institution or other insurance company
may function to an inappropriate degree as a conduit for its parent or
affiliates could be addressed through FHFA's oversight and examination
functions.
In addition, captives present a number of safety and soundness
concerns for the Banks beyond those presented by insured depository
institutions and traditional insurance companies. Among these are the
potential that the captive's financial condition could worsen without
the Bank's knowledge due to the relative unavailability of objective
financial information and ratings as compared to other insurers and
depository institutions; the financial condition of the captive, which
operates to serve the parent, rather than in its own financial self-
interest, may deteriorate rapidly due to the actions of the parent; the
parent might decline to provide financial support, or to provide
additional collateral, in cases of financial distress; and that the
captive's balance sheet may reflect non-diversified risk if its
underwriting activities are narrowly prescribed by the parent.
c. Expansion of Definition of ``Home Mortgage Loan''
FHFA is also proposing to expand the definition of ``home mortgage
loan'' to include all types of MBS backed by qualifying whole loans and
securities. Currently, the definition includes only whole loans secured
by a first lien mortgage on residential property and mortgage pass-
through securities representing an undivided ownership interest in such
loans or in another security that represents an undivided ownership
interest in such loans.\34\ In effect, the current regulation
distinguishes between MBS that provides the holder with a pro rata
ownership interest in each of the loans in the underlying pool of
mortgage loans, and MBS that gives the holder only a right to a
specified portion of the cash flows generated by the underlying pool of
mortgage loans. Early in the history of the Bank System, the FHLBB
determined that an institution's purchase of mortgage loans was the
equivalent of ``making'' such loans for purposes of complying with the
``makes long-term home mortgage loans'' requirement. In 1988, the FHLBB
first permitted an applicant for Bank membership to use mortgage pass-
through securities to meet the ``makes long-term home mortgage loans''
requirement, provided that those securities represented an undivided
ownership interest in qualifying whole loans and that the frequency of
the institution's purchases evidenced an ongoing policy.\35\ When the
Finance Board adopted its 1993 membership regulation, it adopted the
FHLBB's policy on the use of pass-through securities to satisfy the
``makes long-term home mortgage loans'' requirement, but declined to
permit the use of collateralized mortgage obligations (CMOs), real
estate mortgage investment conduits (REMICs), and other non-pass-
through MBS for that purpose.\36\ The Finance Board did not assert that
the Bank Act prohibited it from including non-pass-through MBS backed
by qualifying loans within the definition of ``home mortgage loan''
and, in fact, noted that it had counted CMOs in assessing applicants'
compliance with the ``makes long-term home mortgage loans'' requirement
prior to adopting its membership regulation in 1993.
---------------------------------------------------------------------------
\34\ 12 CFR 1263.1.
\35\ See FHLBB Office of General Counsel Memorandum from Deputy
General Counsel Julie L. Williams (Jan. 25, 1988).
\36\ See 58 FR 43522, 43526 (Aug. 17, 1993).
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Thus, the current distinction between MBS that give the holder an
ownership interest in the underlying loans and those that give the
holder a right to certain cash flows from the loans represents a policy
determination by the Finance Board about the types of securities that
could constitute ``home mortgage loans.'' Accordingly, FHFA is not
prohibited from expanding the definition of ``home mortgage loan'' to
include MBS that are not pass-through
[[Page 54855]]
securities, so long as that MBS is backed by whole loans that qualify
as ``home mortgage loans'' or securities representing an interest in
such loans. In the current financial markets, investors recognize that
all types of MBS essentially represent a right to some portion of the
cash flows from the underlying mortgage loans. Whether, for example,
the holder of the security has an undivided ownership interest in the
underlying pool of mortgage loans, or has a beneficial ownership
interest in the trust holding the mortgages, or has a contractual right
to a specified portion of the cash flows generated by the underlying
mortgages will vary depending upon the type of payment, risk, and
maturity characteristics the issuer is attempting to achieve. The
economic interest of all such instruments is much the same, and the
forms of the respective instruments are more of a legal technicality
that is neither decisive as to the nature of the economic interest that
the owner holds nor the level of support for the mortgage market that
the securities provide. Indeed, the availability of the many types of
MBS with different characteristics that have evolved to meet investors'
needs over the past several decades has made the secondary mortgage
market much more liquid. In recognition of this, FHFA believes that it
is appropriate to expand the definition of ``home mortgage loan'' to
include all types of MBS backed by qualifying assets and eliminate the
current distinction that the rules draw between pass-through securities
and other types of MBS.
III. The Proposed Rule
A. Definitions--Sec. 1263.1
The proposed rule would revise the definitions of several terms set
forth in Sec. 1263.1 and would also add several new definitions. The
only substantive changes to the definitions under the proposed rule
would be an expansion of the definition of ``home mortgage loan'' to
include all types of MBS backed by qualifying loans and securities and
the addition of definitions for the terms ``insurance company'' and
``captive.'' As discussed above, proposed Sec. 1263.1 would define
``insurance company'' to mean ``a company whose primary business is the
underwriting of insurance for nonaffiliated persons or entities.'' In
connection with this, the rule would define ``captive'' to mean ``a
company that is authorized under state law to conduct an insurance
business, but that does not meet the definition of `insurance company'
. . . or fall within any other category of institution eligible for
membership.''
Existing Sec. 1263.1 defines ``home mortgage loan'' as: (1) A loan
or interest in a loan that is secured by a first lien mortgage on one-
to-four- or multi-family property; or (2) a mortgage pass-through
security that represents an undivided ownership interest in such loans
or in another security that represents an undivided ownership interest
in such loans. The proposed rule would replace the specific reference
to a pass-through security in paragraph (2) of the definition with a
more general reference to a security representing either: (i) A right
to receive a portion of the cash flows from a pool of qualifying loans;
or (ii) an interest in other securities representing such a right. The
reference to a right to receive a portion of the cash flows is intended
to encompass the rights of a holder of a mortgage pass-through security
to an undivided ownership interest in the underlying loans and their
principal and interest payments, as well as the rights of a holder
``debt-type'' instruments that grant the holder the right to a
specified portion of the cash flows from the pooled mortgage loans.
Thus, the proposed revision is intended to bring within the definition
of ``home mortgage loan'' all types of MBS--including pass-throughs,
CMOs, REMICs, and principal-only and interest-only strips--that are
fully backed by whole loans that meet the definition of ``home mortgage
loan'' or by other MBS that are fully backed by such loans. The revised
definition is not intended to include a bond or other debt security
that is a general obligation of the issuer, even if it is
collateralized by qualifying mortgage loans.
Each of the remaining revisions to Sec. 1263.1 is intended only to
shorten or otherwise clarify either the definition itself or the
regulatory text in which the defined term appears; none of the
remaining revisions is intended to alter the meaning of any defined
term or substantive provision. The proposed rule would revise the
definitions of the terms ``appropriate regulator'' and ``CRA'' in Sec.
1263.1 to substitute, for terms that are defined in 12 CFR 1201.1, the
nomenclature specified in that section. FHFA recently added part 1201
to contain definitions of terms that are used frequently throughout its
regulations so as to eliminate the need to provide definitions for many
common terms in multiple CFR parts.\37\
---------------------------------------------------------------------------
\37\ See 78 FR 2322 (Jan. 11, 2013).
---------------------------------------------------------------------------
Section 1263.1 of the existing regulation defines the word
``consolidation,'' which is used in various provisions of part 1263 to
refer generically to any type of business combination of two or more
institutions, to include ``a consolidation, a merger, or a purchase of
all of the assets and assumption of all of the liabilities of an entity
by another entity.'' The proposed rule would revise that definition by
substituting the phrase ``substantially all'' for the word ``all'' to
reflect the fact that purchase and assumption transactions do not
always involve or require the transfer of ``all'' assets and
liabilities of the disappearing institution to the successor
institution.
The rule would revise the definition of the term ``regulatory
financial report'' to: Remove reference to the ``thrift financial
report,'' which is no longer prepared; substitute the word
``institution'' for the word ``applicant''; substitute the short form
``NAIC'' (to be defined separately) for the term ``National Association
of Insurance Commissioners''; change the reference to the insurance
company regulatory ``report'' to the term ``statement,'' which has a
recognized meaning in the field of insurance regulation; and change the
term ``computer on-line database'' to the more currently used term
``electronic database.''
The existing regulation defines the term ``long-term,'' which is
used in the regulation as a modifier in the term ``long-term home
mortgage loan,'' to mean ``a term to maturity of five years or
greater.'' The proposed rule would revise that definition to make clear
that ``term to maturity'' refers to the term established at the time of
origination, and not to the remaining term to maturity at the time an
institution acquires the loan or at any subsequent point.
The rule would also revise the definition of ``residential mortgage
loan'' by replacing paragraph (5) (referring to ``mortgage pass-through
securities'') and paragraph (6) (referring to ``mortgage debt
securities'') with a new paragraph (5) intended to refer to both types
of securities. The new provision would be similar to paragraph (2) of
the proposed definition of ``home mortgage loan,'' referring generally
to a security representing either: (i) A right to receive a portion of
the cash flows from a pool of loans meeting the requirements of one of
paragraphs (1) through (4) of the definition of ``residential mortgage
loan''; or (ii) an interest in other securities representing such a
right. This revision is not intended to effect any substantive change,
but merely to streamline the definition in light of the fact that the
proposed changes to the definition of ``home mortgage loan'' would make
it
[[Page 54856]]
unnecessary to distinguish between pass-through securities and other
types of MBS in the definition of ``residential mortgage loan.'' The
rule would also redesignate paragraphs (7) and (8) of the definition as
paragraphs (6) and (7), respectively, and would replace references to
the various types of qualifying assets that are currently stated in the
plural with the singular, as is the case in both the existing and
proposed versions of the definition of ``home mortgage loan.''
Finally, the proposed rule would revise the definition of the term
``total assets'' to replace the term ``CDFI applicant'' with the term
``CDFI,'' which is necessary because the key provisions of the proposed
rule would apply to CDFI members on an ongoing basis, not just to CDFI
applicants. This is consistent with the replacement of the word
``applicant'' with the word ``institution'' in the definition of
``regulatory financial report'' that is noted above. These changes are
intended to reflect the fact that, under the proposed rule, a Bank
would be required to determine an institution's total assets from its
regulatory financial report or audited financial statement not only at
the time of application, but also on an ongoing basis after the
institution becomes a Bank member.
The proposed rule would also add definitions for the terms ``CRA
performance evaluation,'' ``De novo insured depository institution,''
and ``NAIC.'' Defining these terms will allow FHFA to remove lengthy
and frequently repeated qualifiers currently used in conjunction with
those terms from the substantive sections in which they appear. Thus,
under the proposed rule, the term ``CRA performance evaluation'' is
defined to refer to a formal evaluation if one is available for a
particular institution and time period, and to an informal or
preliminary evaluation when a final evaluation is not available. The
term ``de novo insured depository institution'' is defined to refer to
an insured depository institution that was chartered less than three
years prior to applying for Bank membership. The acronym ``NAIC''
refers to the National Association of Insurance Commissioners.
B. Amendment of Substantive Provisions
1. Overview
The primary substantive revisions that the proposed rule would make
to part 1263 are discussed above. In addition, the rule's revisions to
the ``makes long-term home mortgage loans'' and ``10 percent''
requirements would require several conforming revisions to the
regulatory text. Those revisions would: (1) Establish the manner in
which the Banks are to determine compliance with the ongoing
eligibility requirements; (2) establish the manner in which, and the
time within which, de novo insured depository institutions must comply
with those requirements; (3) require the Banks to assess the financial
condition of their insurance company members, based on their most
recent audited financial statements; (4) establish a cure process,
under which a member that fails to comply with the ongoing eligibility
requirements would have one year to come into compliance; and (5)
require the Banks to terminate the membership of any institution that
has failed to comply with the ongoing requirements for a second
consecutive year. Each of those provisions is discussed in more detail
below.
2. Membership Application Process--Sec. Sec. 1263.2-1263.5
The proposed rule would make several minor revisions to subpart B
of part 1263, which governs the membership application process.
In order to make the revised provisions addressing the ongoing
membership eligibility requirements under this proposed rule read more
cleanly, FHFA is proposing to consolidate within subpart B those
requirements that apply only to the membership application stage.
Accordingly, the proposed rule would move from Sec. 1263.6(a) (located
in subpart C, which contains the provisions addressing the membership
eligibility requirements) to the introductory clause of Sec.
1263.2(a), the language that an institution may not become a member
until it has submitted an application for membership that complies with
the requirements of part 1263. In the existing regulation, Sec.
1263.2(a) requires that an applicant for Bank membership submit to the
Bank an application for membership that complies with the requirements
of part 1263, but does not state explicitly that an institution may not
become a member of a Bank unless it has done so.
Existing Sec. 1263.2(c)(2) governs the documents that a Bank must
include in each applicant's application file and membership digest. It
requires that ``[a]ll documents required by Sec. Sec. 1263.6 to
1263.18'' (i.e., the materials required to document the applicant's
eligibility for membership) be described in and attached to the
application digest that a Bank is required to maintain under Sec.
1263.2(b). Under the proposed rule, both applicants for membership and
existing members may be required to provide the Bank with certain
documents pursuant to Sec. Sec. 1263.6 to 1263.19 (as the eligibility
provisions would be redesignated). In order to clarify that Sec.
1263.2(c)(2) requires that only those documents pertaining to an
application for membership be attached to and described in the
application digest, FHFA is proposing to revise that paragraph to refer
to ``[a]ll documents required to be filed by an applicant under
Sec. Sec. 1263.6 to 1263.19.''
Section 1263.3(c) of the existing regulation addresses the timing
and notice requirements applicable to a Bank's decision on an
institution's application for membership. The proposed rule would make
a number of non-substantive revisions to that provision so that the
requirements as to the timing of the Bank's decision read more
precisely. No change in meaning is intended.
Section 1263.4 of the existing regulation addresses the
circumstances under which an institution may be admitted to membership
in a Bank ``automatically''--that is, without the need to submit the
type of full application that would otherwise be required. The proposed
rule would make two minor wording changes to Sec. 1263.4(a), which
governs automatic membership for certain charter conversions, to make
the provision read more clearly. No change in meaning is intended.
The proposed rule also would make certain clarifying changes to
Sec. 1263.4(b), which currently provides that any member whose
membership is transferred pursuant to Sec. 1263.18(d) shall
automatically become a member of the Bank to which it transfers.
Existing Sec. 1263.18(d) (which the proposed rule would redesignate as
Sec. 1263.19(d)) provides that the transfer of membership from one
Bank to another Bank may not take effect until the Banks involved agree
on a method of orderly transfer or until FHFA determines the manner in
which the transfer will occur in cases where the Banks involved fail to
agree. Because neither Sec. 1263.4(b) nor Sec. 1263.18(d) specifies
the types of events that constitute a ``transfer'' of membership, FHFA
has occasionally received questions about how Sec. 1263.4(b) is to be
applied.
Under the proposed rule, Sec. 1263.4(b) would no longer refer to a
``transfer,'' but would instead state more specifically that if a
member of one Bank relocates or redesignates its ``principal place of
business'' to another Bank's district, it shall automatically become a
member of the Bank whose district includes the state in which the
[[Page 54857]]
member's new principal place of business is located. This is consistent
with the existing regulation, which appears to allow for automatic
membership if a member ``redesignates'' its principal place of business
pursuant to Sec. 1263.18(c) (which would appear as Sec. 1263.19(c) in
the proposed rule).
What is not clear from the current regulation is whether a member
that ``relocates'' its home office, which is the default principal
place of business for membership purposes, to another Bank district,
such as through a merger or corporate reorganization, may also become a
member of the new Bank automatically. Because the location of an
institution's principal place of business determines where it may be a
member, FHFA believes that any corporate transactions that result in a
member's principal place of business being moved to another Bank
district should allow for that member to become a member of the Bank
where the new principal place of business is located. FHFA also has
added qualifying language that the automatic membership at the new Bank
commences upon the purchase of the minimum amount of stock needed under
the new Bank's capital structure plan (hereinafter ``capital plan'').
Section 1263.5 of the existing regulation governs appeals to FHFA
of a Bank's decision to deny membership to an applicant. The proposed
rule would revise Sec. 1263.5(a)(2) to show the new mailing address
for FHFA. FHFA is not proposing any other revisions to this section,
but requests comments on whether it should continue to permit
applicants that have been denied membership by a Bank to appeal such
denials to FHFA. The concept of an appeals process may have been
appropriate after the Finance Board first delegated to the Banks the
responsibility for approving or denying membership applications in
1996,\38\ but is probably less necessary today, given the years of
experience that the Banks have had in processing membership
applications and the fact that FHFA is not aware of any instance in
which an institution has exercised this right of appeal. FHFA also
questions whether an institution that had been denied membership would
be able to present facts sufficient to convince the agency to overturn
the Bank's decision, particularly if the denial had been based on an
assessment of the applicant's financial condition, which the Bank may
be better suited to address. Although an applicant might contend that a
Bank had misinterpreted a particular provision of the membership
regulation, FHFA has a separate process under which a Bank may request
regulatory interpretations, and that process could serve as the means
for resolving questions regarding the proper interpretation and
application of the membership regulation in a particular case. FHFA
also has an Office of the Ombudsman, which may hear complaints or
appeals from any person that has a business relationship with a Bank
(i.e., any existing or potential interaction between an applicant and a
Bank), and which could provide an alternative means for addressing
complaints about a Bank's decision to deny a membership
application.\39\
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\38\ See 61 FR 42543 (Aug. 16, 1996).
\39\ See 12 CFR part 1213.
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3. Membership Eligibility Requirements--Sec. Sec. 1263.6-1263.19
Subpart C of the existing regulation, which includes Sec. Sec.
1263.6 through 1263.18, addresses the requirements that an institution
must meet in order to be eligible for Bank membership. Section 1263.6
of the existing regulation sets forth the eligibility requirements for
Bank membership. The remaining sections of subpart C address more
specifically the manner in which a Bank is to determine an
institution's compliance with the eligibility requirements that are set
forth in Sec. 1263.6.
a. General Eligibility Requirements--Sec. 1263.6
Section 1263.6 of the existing membership regulation sets forth the
general membership eligibility requirements. The proposed rule would
amend Sec. 1263.6(a), as well as Sec. 1263.6(b), to make clear that
each of the membership eligibility requirements addressed in those
provisions is ongoing and that institutions are expected to comply with
them at not only the time they apply for membership, but also after
attaining Bank membership. Existing Sec. 1263.6(a) currently provides
that an applicant must meet the general eligibility requirements set
forth therein in order to ``become'' a member of a Bank. Similarly,
existing Sec. 1263.6(b) provides that an applicant to which the ``10
percent'' requirement applies must meet that requirement in order to
``become'' a Bank member. The proposed rule would revise both of those
provisions to state that an ``institution'' (as opposed to an
``applicant'') must meet the requirements addressed in each in order to
``be'' (as opposed to ``become'') a Bank member. Although FHFA
considers all of the membership eligibility requirements to be ongoing
in nature, the proposed rule would require a Bank to terminate
membership only when a member has failed to comply with the ``makes
long-term home mortgage loans'' or ``10 percent'' requirements, and
then only after the member has been given an opportunity to cure its
non-compliance. At this time, the agency believes that there are
sufficient enforcement mechanisms in place--short of the ultimate
sanction of termination--to ensure continuing compliance with the
remaining eligibility requirements.\40\
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\40\ For example, under the existing membership regulation, an
applicant for Bank membership must in most cases satisfy the ``home
financing policy'' requirement by demonstrating that it has achieved
a rating of ``Satisfactory'' or better on its most recent CRA
evaluation. While the regulations do not require a member to
maintain a ``Satisfactory'' or better CRA rating in order to retain
its Bank membership, they do mandate restrictions on access to
advances for failure to maintain such a rating. Under FHFA's
Community Support regulation, each Bank member is subject to a
biennial ``community support review,'' under which the members
selected for review for a particular time period are required to
submit to FHFA a ``community support statement'' that reflects its
most recent CRA rating and summarizes the activities it has
undertaken in support of first-time home buyers. See 12 CFR 1290.2.
Under that regulation, Bank members subject to CRA are expected to
maintain a CRA rating of ``Satisfactory'' or better. A member that
receives a CRA rating of ``Substantial Non-Compliance'' will (with
some exceptions) have its access to long-term advances restricted by
FHFA until that member again achieves a ``Satisfactory'' CRA rating.
A member that receives a ``Needs to Improve'' rating will be given
one CRA evaluation cycle to return to a rating of ``Satisfactory''
or better and, if it fails to do so at that time, will have its
access to long-term advances restricted until it again achieves a
``Satisfactory'' CRA rating.
In addition, the ``financial condition'' eligibility requirement
requires that an institution's financial condition be such that
advances may be safely made to it. Section 9 of the Bank Act and
FHFA's advances regulation permit a Bank to limit a member's access
to advances if its credit underwriting indicates that it is
advisable to do so. 12 U.S.C. 1429 (a Bank may deny or conditionally
approve requests for advances); 12 CFR 1266.4(a). The advances
regulation also requires a Bank to limit or restrict access to
advances in the case of a member that lacks positive tangible
capital, but that has not yet reached the point of insolvency. 12
CFR 1266.4(b). The ``duly organized'' and ``subject to inspection
and regulation'' eligibility requirements are essentially self-
enforcing in that any member that fell out of compliance with either
of those requirements could not continue to operate as a financial
institution.
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Because the proposed revisions would make clear that the ``10
percent'' requirement is ongoing, the proposed rule would also revise
Sec. 1263.6(b) to state explicitly that, as provided by statute, the
``10 percent'' requirement applies only to those non-CFI depository
institutions that were not Bank members on January 1, 1989. The
existing provision does not include such a reference because, since its
promulgation in 1993, the requirement
[[Page 54858]]
has been enforced only at the time of application and, therefore,
applicants to which it has been applied would necessarily not have been
Bank members on January 1, 1989.
The proposed rule would delete existing Sec. 1263.6(c), which
requires that an applicant that is not an insured depository
institution--i.e., an insurance company or non-depository CDFI--have
``mortgage-related assets'' (a term that is not defined in the
regulation) that reflect a commitment to housing finance, as determined
by the Bank in its discretion. Among other things, the proposed new
quantitative and ongoing ``makes long-term home mortgage loans''
requirement would provide a more specific and meaningful standard for
measuring a non-depository institution's commitment to housing finance
than the non-specific standard set forth in existing Sec. 1263.6(c).
Because of this, Sec. 1263.6(c) would be rendered moot and thus could
be repealed.
Existing Sec. 1263.6(d) states that ``[e]xcept as otherwise
provided in this part, if an applicant does not satisfy the
requirements of this part, the applicant is ineligible for
membership.'' The proposed rule would redesignate the substance of this
provision as Sec. 1263.6(c)(1) and revise the wording to emphasize the
need for continuing compliance with the ongoing eligibility
requirements. The proposal also would remove the qualifier ``except as
otherwise provided in this part'' as redundant (because the phrase
``does not meet the requirements of this part'' is intended to take
into account the exceptions to the primary requirements), while adding
the qualifier ``except as provided in paragraph (c)(2).''
Proposed Sec. 1263.6(c)(2) contains a new provision addressing the
consequences to existing captive members of the new definition of
``insurance company,'' which would make clear that captive insurers are
ineligible for Bank membership. Paragraph (c)(2)(i) would permit any
captive that had become a member prior to the publication date of this
proposed rule to remain a member of its current Bank for five years
following the effective date of the final rule. Because of the
supervisory concerns, described above, associated with ineligible
institutions using captives as funding vehicles for their own business
operations, the proposed rule would bar a Bank from making or renewing
any advance to such a captive if after doing so the total advances to
the captive would exceed forty percent of its assets. It would further
bar a Bank from making or renewing any advance with a maturity date
after the end of the five year membership grace period to such a
captive. The proposed rule would not prohibit a Bank from allowing
outstanding advances to captives that were made or renewed prior to the
effective date of the final rule from running to maturity, even if the
maturity date falls after the end of the five year grace period.
Paragraph (c)(2)(i) is intended to mitigate to a reasonable extent
the burden on any captive insurer that became a Bank member in good
faith reliance on the existing membership regulation prior to the time
FHFA provided notice, by means of this proposed rule, of its intention
to limit Bank membership to insurance companies that primarily
underwrite risks to nonaffiliated parties. The limitations on the terms
to maturity of new and renewed advances and on the level of outstanding
advances is intended to permit a grandfathered captive that chooses to
remain a member during the grace period to continue to transact a
reasonable amount of business with its district Bank, while limiting
its ability to act as a conduit to funnel advance proceeds to
affiliates that are themselves ineligible for Bank membership.
Paragraph (c)(2)(ii) would require a Bank to terminate any such
grandfathered captive members effective on the last day of the five
year membership grace period, in the manner provided under Sec.
1263.27.
If any captive insurer were to become a member of a Bank after the
date of publication of this proposed rule, that entity would be
ineligible to continue as a member of the Bank as of the effective date
of the final rule, if adopted as proposed. In that case, FHFA would
interpret the regulatory regime that would be in place on that date to
require the immediate termination of that captive's Bank membership and
prompt liquidation of any outstanding advances to that captive. In the
event that any Bank approves a captive insurer for membership during
the period between the publication of this proposed rule and the
effective date of the final rule, FHFA will consider whether to make
those requirements explicit in the final rule.
b. ``Makes Long-Term Home Mortgage Loans'' Requirement--Sec. 1263.9
Section 1263.9 of the existing regulation implements the ``makes
long-term home mortgage loans'' requirement by stating that an
applicant shall be deemed to make long-term home mortgage loans if,
based on its most recent regulatory financial report, it originates or
purchases long-term home mortgage loans.\41\ The proposed rule would
revise this section in two fundamental respects. First, it would
establish a quantitative standard that each institution must meet in
order to be deemed to make long-term home mortgage loans. Second, it
would require that each member remain in compliance with the new
quantitative standard on an ongoing basis in order to remain a member.
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\41\ In the case of a CDFI applicant that does not file
regulatory financial reports, existing Sec. 1263.9 permits the
institution to establish its compliance by providing other
appropriate documentation to the Bank.
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Specifically, Sec. 1263.9(a) would provide that an institution
shall be deemed to make long-term home mortgage loans, as required by
the Bank Act and Sec. 1263.6(a)(3), if it maintains at least one
percent of its total assets in long-term home mortgage loans. Proposed
Sec. 1263.9(a) would also state explicitly that each Bank member must
remain in compliance with this standard on a continuous basis.
Proposed Sec. 1263.9(b) would address the method by which a Bank
must assess each institution's compliance with the one percent asset
ratio standard set forth in paragraph (a). Section 1263.9(b)(1) would
specify that a Bank must calculate each member's and applicant's home
mortgage loans-to-total assets ratio using three-year averages for both
the numerator and the denominator, with all numbers being as of the end
of the preceding three calendar years.
In cases where an institution has substantial mortgage banking
operations--i.e., it originates loans for resale rather than for
portfolio--its year-end balance sheet for any given year may not fully
reflect its support for housing finance if it originated a substantial
amount of home mortgage loans during the year that were then sold prior
to year-end. FHFA believes that, given that the required HML-to-total
asset ratio is only one percent and that the ratio is calculated based
on average holdings over three year-ends, it is probably not necessary
for the rule to require a Bank to take into account such ``flow''
business in determining whether an institution complies with the
``makes long-term home mortgage loans'' requirement. In addition, it is
likely that most Bank members' regulatory financial reports will not
contain the data necessary to determine the amount of the institution's
flow business. Nonetheless, the agency requests comment on whether the
final rule should include such a provision and, if
[[Page 54859]]
so, how a Bank should be required to obtain the necessary data.
Proposed Sec. 1263.9(b)(2) explains that the sources of the data
for this calculation, and its required frequency and timing, are
addressed in Sec. 1263.11, which is a new provision that would be
added as part of this proposed rule. As discussed below, proposed Sec.
1263.11 would require a Bank to perform the calculation annually for
each of its members, as well as at the time an institution applies for
membership. It would further require the Bank to base its initial
calculation on data obtained from an institution's regulatory financial
report, but would permit the institution to provide data from certain
alternative sources if it does not file a regulatory financial report
or if the initial calculations failed to show that the institution was
in compliance with the one percent standard. These requirements are
addressed in a separate section because they are common to the
calculation of both the home mortgage loans-to-total assets ratio and
the residential mortgage loans-to-total assets ratio that would need to
be calculated to determine compliance with the ``10 percent'' test
under proposed Sec. 1263.10.
One of FHFA's objectives in this proposed rulemaking is to identify
a minimum amount of home mortgage loans at which an institution could
be deemed to satisfy the ``makes long-term home mortgage loans''
requirement, i.e., a level at which an institution's mortgage loan
holdings or originations can be considered to demonstrate the type of
bona fide commitment to home mortgage lending that Congress intended
when it adopted the ``makes long-term home mortgage loans''
requirement. FHFA considered a range of home mortgage loan-to-total
assets ratios to be used as the minimum standard under this proposed
rule, but several factors have driven the agency to propose a one
percent ratio. First, FHFA believes that the one percent standard
represents the lower bound for any range of percentages that could be
used to assess an institution's commitment to home mortgage lending.
Any institution that has less than one percent of its total assets in
home mortgage loans clearly would not have the requisite commitment to
home mortgage lending that Congress sought to support through the
benefits of Bank membership.
Second, FHFA believes that the minimum level of home mortgage loans
should not be so high as to require a significant number of members to
materially alter their business and investment practices in order to
retain their Bank membership. Finally, FHFA believes that whatever home
mortgage loans-to-total assets ratio it adopts to implement the ``makes
long-term home mortgage loans'' requirement must complement, but not
conflict with, duplicate, or supplant, the ``10 percent'' residential
mortgage loans-to-total assets ratio requirement. Because the range of
assets that qualify as home mortgage loans is considerably more narrow
than the range of assets that qualify as residential mortgage loans,
any minimum asset ratio chosen for the ``makes long-term home mortgage
loans'' requirement should be less than (and perhaps considerably less
than) 10 percent of total assets. Otherwise, the minimum ratio for the
``makes long-term home mortgage loans'' requirement could effectively
subsume the ``10 percent'' requirement. For example, requiring each
member to hold 10 percent of its assets in home mortgage loans (which
are a subset of residential mortgage loans) would effectively require
all members to hold 10 percent or more of their assets in residential
mortgage loans. That would conflict with the Bank Act, which requires
that only non-CFI depository institution members must maintain 10
percent of their assets in residential mortgage loans.
Although FHFA is proposing to use one percent of total assets as
the standard for compliance with the ``makes long-term home mortgage
loans'' requirement, it also believes that it could establish a higher
percentage without either supplanting the ``10 percent'' requirement or
unduly burdening a significant number of existing members. The agency
will continue to consider whether to establish the standard at some
higher percentage, such as two percent, or possibly as high as five
percent, as part of this rulemaking. To aid it in deciding this issue,
FHFA requests public comments on whether setting the minimum required
home mortgage loans-to-total assets ratio at a percentage greater than
one percent of a member's total assets would be more consistent with
the statutory intent and, if so, what the appropriate percentage should
be in the final rule.
In attempting to determine an appropriate level at which to set the
proposed quantitative standard, FHFA considered the possible
consequences of requiring each member to maintain a minimum home
mortgage loans-to-total assets ratio set at various levels between one
and five percent. Based on information obtained from the December 31,
2013 regulatory financial reports of the Banks' insured depository
institution members, FHFA determined that the vast majority of those
members would have been in compliance even with an asset ratio
requirement set as high as five percent, with most of those
institutions holding home mortgage loans in amounts far in excess of
that threshold.
More specifically, data obtained from the Federal Financial
Institutions Examination Council 031 and 041 call reports (FFIEC call
reports) filed by the 5,976 commercial banks and savings associations
that were Bank members and for which information was available as of
December 31, 2013 indicates that only 47 of those members, or 0.8
percent, would have failed to comply with a home mortgage loans-to-
total assets ratio requirement of one percent, even based on that
limited data. The same data indicated that 86 of those Bank members (or
1.4 percent) would have failed to comply with a quantitative standard
set at two percent, while 299 (or 5.0 percent) would have failed to
comply with a standard set at five percent. Data obtained from the
December 31, 2013 NCUA 5300 call reports (NCUA call reports) filed by
the 1,204 credit unions that were Bank members and for which
information was available as of that date showed that only 14 credit
union members (or 1.2 percent) would have failed to comply with a
quantitative standard set at one percent, 29 (or 2.4 percent) would
have failed to comply with a standard set at two percent, and 67 (or
5.6 percent) would have failed to comply with a standard set at five
percent.
Although, relatively speaking, a much lower proportion of insurance
company members would have been in compliance with a quantitative
requirement set at any point between one and five percent, a majority
of existing insurance company members would have been in compliance
even with a five percent requirement, based on the 2013 year-end data.
Data from the December 31, 2013 NAIC annual statements filed by 253
insurance company members with their state regulators indicated that 42
(or 16.6 percent) would have failed to comply with a quantitative
standard set at one percent, 59 (or 23.3 percent) would have failed to
comply with a standard set at two percent, and 105 (or 41.5 percent)
would have failed to comply with a standard set at five percent.\42\
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\42\ FHFA was able to obtain annual statement data for only 253
of the 284 insurance companies that were Bank members as of December
31, 2013. Fourteen of the 29 insurance company members for which no
data was available are captives. All three sets of data reflect the
expanded definition of ``home mortgage loan'' that FHFA is proposing
as part of this rule. If the existing definition is retained (i.e.,
if only pass-through securities are counted instead of all types of
MBS backed by qualifying loans), the percentage of member
institutions that would appear to be out of compliance based solely
on data available from the regulatory financial reports would be
somewhat higher.
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[[Page 54860]]
The agency currently lacks access to the data necessary to
determine how many CDFI members could comply with an ongoing
quantitative ``makes long-term home mortgage loans'' requirement.
Because those figures are based only on the portion of home
mortgage loan assets that can be measured with accuracy from the
members' respective call reports and annual statements, it is likely
that a significant number of the institutions that appeared to fall
short of the one, two, and five percent ratios based on that data alone
would actually exceed those ratios once the assets that cannot be
measured accurately from the call reports and annual statements are
taken into account.\43\ For example, while the NAIC annual statement
provides data on loans secured by mortgages on one-to-four family or
multi-family property held by an insurance company, it does not
distinguish between those secured by first mortgages (which qualify as
``home mortgage loans'') and those secured by junior mortgages (which
do not qualify). If even half of those whole loans were to be counted
as home mortgage loans, the number of insurance company members
appearing to be out of compliance would be much lower: 18 (or 7.1
percent) would have failed to comply with a quantitative standard set
at one percent; 30 (or 11.9 percent) would have failed to comply with a
standard set at two percent; and 79 (or 31.2 percent) would have failed
to comply with a standard set at five percent. Thus, the latter figures
may be more representative of the actual number of insurance company
members that would have been out of compliance with a quantitative
``makes long-term home mortgage loans'' requirement than the figures
listed above.
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\43\ As explained in the discussion of proposed Sec. 1263.11
below, it is not possible to determine from either the FFIEC call
report, the NCUA call report, or the NAIC annual statement the
precise amount of assets qualifying as ``home mortgage loans'' held
by the reporting institution. However, it is possible in all cases
to measure accurately the institution's holdings of certain types of
home mortgage loan assets. Loans secured by first mortgages on one-
to-four family residential properties and securities backed by
mortgages on one-to-four family properties that are issued or
guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac can be measured
accurately from the FFIEC call report. Loans secured by first
mortgages on one-to-four family residential properties and a portion
of loans secured by first mortgages on multifamily properties can be
measured accurately from the NCUA call report. Securities backed by
mortgages on one-to-four and multi-family properties that are issued
or guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac can be
measured accurately from the NAIC annual statement.
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In addition, while the figures above are based upon the amount of
home mortgage loans held by those members at one point in time,
compliance with the quantitative standard would be based on the average
amount of home mortgage loans held at the three preceding year-ends
under the proposed rule. It is possible that the number of members
failing to meet those hypothetical ratios might be lower still if
average data from the preceding three year-ends had been used. In a
similar fashion, of those institutions that would fail to meet the
above quantitative requirements, some are only slightly below the
particular threshold, which suggests that they could readily comply
with an ongoing quantitative requirement by modestly adjusting their
balance sheets.
c. ``10 Percent'' Requirement--Sec. 1263.10
Section 1263.10 of the existing membership regulation implements
the statutory ``10 percent'' requirement. That provision states that an
insured depository institution applicant to which the ``10 percent''
requirement applies shall be deemed to comply with that requirement if,
based on its most recently filed regulatory financial report, the
applicant has at least 10 percent of its total assets in residential
mortgage loans. For purposes of determining compliance with the ``10
percent'' requirement, the existing regulation excludes from the asset
ratio calculation assets held by the institution that would otherwise
qualify as residential mortgage loans, but that have been pledged to
secure mortgage debt securities. The proposed rule would replace nearly
all of the text of existing Sec. 1263.10.
Proposed Sec. 1263.10(a) would provide that an institution shall
be deemed to comply with the statutory and regulatory ``10 percent''
eligibility requirement if it maintains at least ten percent of its
total assets in residential mortgage loans.
Proposed Sec. 1263.10(b) addresses the method by which a Bank
would determine whether an applicant or member maintains at least ten
percent of its total assets in residential mortgage loans, as would be
required under Sec. 1263.10(a). The requirements of Sec. 1263.10(b)
would parallel those that would apply to determining compliance with
the ``makes long-term home mortgage loans'' requirement, which are set
forth in proposed Sec. 1263.9(b).
Proposed Sec. 1263.10(b)(1) specifies that, in determining whether
an applicant or member to which the ``10 percent'' requirement applies
maintains at least ten percent of its total assets in residential
mortgage loans, a Bank must calculate the institution's residential
mortgage loans-to-total assets ratio using three-year averages for both
the numerator and the denominator, with all numbers being as of the end
of the preceding three calendar years. Like the existing regulation,
proposed Sec. 1263.10(b)(1) would also provide that loans or
securities used to secure mortgage debt securities are not to be
included in the amount of residential mortgage loans held for purposes
of the ``10 percent'' requirement calculation. Proposed Sec.
1263.10(b)(2) explains that the sources of the data for the ``10
percent'' requirement calculation, and the required frequency and
timing of the calculations, are addressed in proposed Sec. 1263.11.
FHFA examined December 31, 2013 call report data for 1,719 Bank
members (515 banks and savings associations and 1,204 credit unions)
that the agency estimates would have been subject to the proposed
ongoing ``10 percent'' requirement as of that date in an attempt to
estimate the number of such institutions that would have been out of
compliance with an ongoing requirement. As is the case with measuring
the amount of an institution's home mortgage loans from call report
data, and as is discussed in more detail below, it is not possible to
determine from either the FFIEC or NCUA call report the precise amount
of assets qualifying as residential mortgage loans that are held by the
reporting institution.
FHFA's analysis indicated that only a relatively few members would
have been out of compliance with an ongoing ``10 percent'' requirement
based on the call report data alone. That data indicated that all but
52 members (or 3.0 percent of those to which the requirement would
apply) would have complied with the ``10 percent'' requirement if it
had been applied to them as of that date. Of those institutions, 16
were commercial banks and savings associations (or 3.1 percent of the
FDIC-insured institutions) and 36 were credit unions (or 3.0 percent of
credit unions). Moreover, 15 of those 52 members had more than nine
percent of their total assets in residential mortgage loans, while
another 18 had between seven and nine percent of their total assets in
residential mortgage loans. Thus, it is possible that the majority of
members that appeared to be out of compliance based solely on the call
report data might be still be able to comply with an ongoing
requirement if
[[Page 54861]]
given an opportunity to adjust their balance sheets or to identify
additional residential mortgage loan assets that are not readily
apparent from the call reports. It is also possible that the number of
insured depository institutions failing to meet the 10 percent ratio
might be lower still if data from the preceding three year-ends--as
opposed to one point in time--had been used, as would be required in
making the compliance determination under the proposed rule.
d. Timing of and Standards for Asset Ratio Calculations--Sec. 1263.11
The proposed rule would add to part 1263 a new Sec. 1263.11, which
would specify the required frequency and sources of data for the
calculations to determine whether an institution maintains at least one
percent of its total assets in home mortgage loans or, if applicable,
maintains at least 10 percent of its assets in residential mortgage
loans that are required under Sec. Sec. 1263.9(b) and 1263.10(b),
respectively. Proposed Sec. 1263.11(a)(1) would provide that a Bank
must determine whether an applicant maintains those minimum asset
ratios at the time it considers that institution's application for Bank
membership. In addition, proposed Sec. 1263.11(a)(2) would require
that a Bank determine whether each of its members is continuing to
maintain those minimum asset ratios by performing the calculations
required under Sec. Sec. 1263.9(b) and 1263.10(b) once annually, as
soon as practicable after the member's final regulatory financial
report or audited financial statements for the preceding year become
available.
Proposed Sec. 1263.11(b) specifies the required sources of data
for both the ``makes long-term home mortgage loans'' and ``10 percent''
asset ratio calculations. For insured depository institutions and
insurance companies, proposed Sec. 1263.11(b)(1) would require a Bank
to obtain the data in the first instance from each institution's three
most recently filed year-end regulatory financial reports. In cases
where that data does not show the institution to be in compliance, a
Bank would be permitted to accept a written certification from the
institution's external auditor stating the actual amount of the
relevant assets held by the institution on the appropriate dates and to
use those figures as the basis for its calculation.
Proposed Sec. 1263.11(b)(2) addresses the sources of data for
asset ratio calculations relating to CDFIs that are not credit unions
and that, therefore, do not file a regulatory financial report. It
would require that, in performing those calculations for such a CDFI, a
Bank obtain the relevant data from the CDFI's annual audited financial
statements. If the data contained in the financial statements does not
demonstrate compliance, then the proposed rule would permit the Bank to
accept a written certification from the CDFI's external auditor stating
the actual amount of the relevant assets held by the CDFI on the
appropriate dates and to use those figures as the basis for its
calculation. For any non-credit union CDFI with average total assets of
less than $100 million over the three preceding year-ends, a Bank would
be permitted to use a written certification prepared by an executive
officer of the CDFI, in lieu of a certification from the external
auditor.
Proposed Sec. 1263.11(c) provides that, in determining the amount
of an institution's long-term home mortgage loans or residential
mortgage loans for purposes of the required asset ratio calculations, a
Bank shall follow guidance issued by FHFA regarding the derivation of
data from particular types of regulatory financial reports, including
the extent to which particular schedules or line items may be used to
determine the amount of an institution's home mortgage loans or
residential mortgage loans. Because regulatory financial reports are
subject to change by the financial institution regulators, FHFA expects
that it will need to issue guidance periodically to address any
questions about how the Banks are to extract the relevant data from
those reports.
FHFA's primary intent in requiring a Bank to use regulatory
financial reports for the calculations required under proposed
Sec. Sec. 1263.9(b) and 1263.10(b) is to minimize, and in most cases
to eliminate, the need for Bank members to take any action to prove
their compliance with the proposed ongoing asset ratio requirements.
This approach should also minimize the administrative burden on the
Banks associated with performing one or both of those calculations. The
regulatory financial reports are readily available to the Banks, who
should be able to confirm compliance with the asset ratio requirements
through that report data for the vast majority of their members. Most,
and possibly all, of the Banks already rely on data drawn from the
FFIEC and NCUA call reports to ascertain the level of ``residential
housing finance assets'' held by their insured depository institution
members in determining whether those members are in compliance with the
``proxy test'' requirement imposed by Sec. 1266.3(b) of FHFA's
advances regulation.\44\ Although initially it will likely require some
time and investment for each Bank to develop systems to extract the
appropriate data and to run the required calculations, once that has
been accomplished, the Banks should be able to conduct the annual
calculations without undue burden.
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\44\ The advances regulation provides that a Bank may make long-
term advances (i.e., those with an original term to maturity greater
than five years) only for the purpose of enabling a member to
purchase or fund ``residential housing finance assets'' (a term that
is defined in Sec. 1266.1 of the advances regulation). See 12 CFR
1266.3(a). To implement that requirement, the regulation further
requires that, prior to approving an application for a long-term
advance to a member, a Bank determine that the principal amount of
all long-term advances currently held by that member does not exceed
the total book value of residential housing finance assets held by
such member. See 12 CFR 1266.3(b). That calculation, which is
commonly referred to as the ``proxy test,'' is intended to provide a
rational means of measuring compliance with the regulation, while
recognizing the fungible nature of money.
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One drawback of relying upon data drawn from members' regulatory
financial reports is that none of the types of reports filed by Bank
members--i.e., the FFIEC call report filed by FDIC-insured commercial
banks and savings associations, the NCUA call report filed by credit
unions, or the NAIC annual statement filed by insurance companies with
their state regulators--provides sufficient information for a Bank to
determine accurately the full amount of home mortgage loans or
residential mortgage loans held by the reporting institution. Each of
those three reports contains one or more schedules comprising numerous
line items that break down the reporting institution's balance sheet
assets with varying degrees of specificity. In each of the reports,
certain assets that qualify as either a home mortgage loan or as a
residential mortgage loan are reported on line items that may include
other assets that do not qualify. In those cases, it is not possible to
determine the portion of the total dollar amount reported for the line
item that represents the amount of qualifying assets held by the
reporting institution. However, each of the three reports contains one
or more line items that includes only assets that qualify as either a
home mortgage loan or a residential mortgage loan and, therefore,
permits a reliable measurement of at least a portion of the qualifying
assets held by the reporting institution. If a Bank can determine from
those line items alone that a particular member holds at least the
required ratio of home mortgage loans or residential mortgage loans to
total assets, then it need not
[[Page 54862]]
inquire any further, i.e., it need not determine the full amount of the
member's qualifying assets, to comply with the regulation.
Two types of assets that are likely to represent a significant
amount of most commercial banks' and savings associations' home
mortgage loan holdings can be measured accurately from the FFIEC call
report: (1) Loans secured by first mortgages on one-to-four family
residential properties; and (2) securities issued or guaranteed by
Ginnie Mae, Fannie Mae, or Freddie Mac representing an interest in
first mortgage loans on one-to-four family properties. The line item
categories reflected in the NCUA call reports differ from those in the
FFIEC call reports and are broken down in such a way that makes it more
difficult to measure accurately the level of home mortgage loans held
by a credit union. However, loans secured by first mortgages on one-to-
four family residential properties and a portion of loans secured by
first mortgages on multifamily properties can be measured accurately
from the NCUA call report.
It is easier to measure accurately from call report data the amount
of residential mortgage loans held by a reporting institution, because
the specific assets that fall within the regulatory definition of that
term are broader and more numerous than those that fall within the
definition of home mortgage loan and, therefore, more line items on
both the FFIEC and NCUA call reports include assets qualifying as
residential mortgage loans without also including assets that do not
qualify. For example, with the exception of MBS backed by mortgage
loans on multi-family properties, a Bank could accurately measure from
the FFIEC call report all of the major categories of residential
mortgage loan assets that are likely to be held by most commercial
banks and savings associations. While the NCUA call report does not
contain as many different categories as the FFIEC call report, it is
possible to measure accurately a majority of the primary categories of
residential mortgage loan assets from that report.
As discussed above, FHFA drew data from recently filed call reports
of existing insured depository institution members and annual
statements of existing insurance company members to measure, to the
extent possible, the amount of home mortgage loans and, for those
institutions that would be subject to an ongoing ``10 percent''
requirement, the amount of residential mortgage loans held by such
members. The purpose of that exercise was not only to estimate the
number of existing members that would not meet the proposed ongoing
asset ratio requirements, but to determine whether the FFIEC and NCUA
call reports and the NAIC annual statements could be used as a reliable
source for monitoring members' compliance with the ongoing
requirements. The fact that FHFA could determine from the call report
data that all but a small percentage of insured depository institution
members would comply with both of the proposed ongoing asset ratio
requirements indicates that the FFIEC and NCUA call reports can be used
to confirm compliance with those requirements for the vast majority of
the Banks' insured depository institution members.
Although data drawn from the NAIC annual statements indicated that
a higher percentage of insurance company members than insured
depository institution members would have been out of compliance with
the one percent home mortgage loans-to-total assets requirement, this
appears to be due to the fact that those insurance companies are
actually holding fewer home mortgage loans and not because it is any
more difficult to measure those holdings from the NAIC annual
statements than it is from the FFIEC and NCUA call reports. A Bank
would be able to use the annual statement to measure an insurance
company's holdings of MBS issued or guaranteed by Ginnie Mae, Fannie
Mae, or Freddie Mac and backed by first mortgage loans on one-to-four
family or multifamily properties. Those types of agency securities
appear to make up the predominant portion of home mortgage loan assets
held by most insurance companies. Consequently, FHFA believes that the
NAIC annual statement would serve as a reliable source for a Bank to
confirm compliance with the proposed ongoing quantitative ``makes long-
term home mortgage loans'' requirement for the majority of its
insurance company members. Because insurance company members are not
subject to the ``10 percent'' requirement, there is no need to
determine the amount of their residential mortgage loans.
CDFI members, other than those that are credit unions, do not have
a prudential federal or state regulator, nor do they file periodic
regulatory financial reports that provide information about their
holdings of home mortgage loans. For that reason, the proposed rule
would require a Bank to look first to a CDFI member's audited financial
statements to assess its compliance with the quantitative ``makes long-
term home mortgage loans'' requirement. If the audited financial
statements do not provide sufficient information to determine
compliance, then Sec. 1263.11 of the proposed rule would allow a Bank
to accept a written certification from the CDFI's external auditor
attesting to the actual amounts of its total assets and home mortgage
loans. For CDFIs with assets less than $100 million, the proposed rule
would allow a Bank to accept a certification from an executive officer
in lieu of one from the external auditor.
Most, if not all, of the Banks already have systems and procedures
in place to obtain regular periodic certifications from members as to
the amounts of their residential housing finance assets for purposes of
complying with the ``proxy test'' for obtaining long-term advances. A
number of Banks require their insurance company and CDFI members to
self-certify as to their holdings of such assets, typically by
completing a form on which the member lists the value of its holdings
of each of the various categories of qualifying assets. The Banks could
modify these existing processes and procedures to include requests for
and receipt of the auditor or executive officer certifications that
would be required under the rule.
e. Treatment of De Novo Insured Depository Institutions--Sec. 1263.15
Section 1263.14 of the existing membership regulation addresses the
treatment of a ``de novo applicant,'' which it defines as an insured
depository institution chartered less than three years prior to the
date it applies for Bank membership. The existing regulation deems each
de novo applicant to be in compliance with the ``duly organized,''
``subject to inspection and regulation,'' ``financial condition,'' and
``character of management'' eligibility requirements, which reflects
the fact that the chartering entity and the federal deposit insurer
would have evaluated those areas in connection with granting the
charter and approving the de novo insured depository institution for
deposit insurance. The existing regulation also allows a de novo
applicant to satisfy the ``makes long-term home mortgage loans''
requirement by providing a written justification acceptable to the Bank
of how its home financing credit policy and lending practices will
include originating or purchasing long-term home mortgage loans.
As required by statute, existing Sec. 1263.14 also deems a de novo
applicant to which the ``10 percent'' requirement applies and that has
been in operation for less than one year to be in ``conditional
compliance'' with that requirement at the time of application, and
grants the institution ``conditional
[[Page 54863]]
membership'' until the institution reaches the one-year anniversary of
its commencement of operations. At that point, if the institution
provides evidence acceptable to the Bank that it holds at least 10
percent of its assets in residential mortgage loans, it is considered
to be in full compliance with the ``10 percent'' requirement and its
membership status ceases to be conditional. If the institution is
unable to provide such evidence, its conditional membership is
terminated and its membership stock is redeemed in accordance with the
procedures specified in that section.
Similarly, existing Sec. 1263.14 allows any de novo applicant that
has not yet received its first CRA performance evaluation to achieve
conditional compliance with the ``home financing policy'' requirement
by providing a written justification acceptable to the Bank of how and
why its home financing credit policy and lending practices will meet
the credit needs of its community. Again, the existing regulations
grant the institution ``conditional membership'' until the institution
receives its first CRA evaluation. If the institution receives a
``Satisfactory'' or better rating on its first CRA evaluation, it is
deemed to be in full compliance with the ``home financing policy''
requirement. If it fails to achieve a ``Satisfactory'' rating on that
evaluation, it is considered to be out of compliance (unless that
presumption is rebutted as specified in the regulation) and its
conditional membership is terminated.
The proposed rule would significantly revise several of the
provisions relating to de novo insured depository institutions and
would replace them with a new section, to be designated as Sec.
1263.15. To make clear that the time-limited exceptions for entities
formed within the preceding three years apply only to insured
depository institutions (as is the case in the existing regulation),
proposed Sec. 1263.15 would refer throughout to a ``de novo insured
depository institution,'' instead of shortening that term to ``de novo
applicant'' as existing Sec. 1263.14 does. As is the case with the
existing membership regulation, the proposed rule would not modify the
membership eligibility requirements in any way for recently formed
insurance company or CDFI applicants or members.
Proposed Sec. 1263.15(a) would retain the substance of the
existing regulation by deeming a de novo insured depository institution
applicant to be in compliance with the ``duly organized,'' ``subject to
inspection and regulation,'' ``financial condition,'' and ``character
of management'' requirements. Like the existing regulation, proposed
Sec. 1263.15(b)(1) would also deem such a de novo applicant to have
initially satisfied the ``makes long-term home mortgage loans''
requirement by providing a written justification acceptable to the Bank
of how its home financing credit policy and lending practices will
include originating or purchasing long-term home mortgage loans.
Because the proposed rule would separately require all members to
comply with the ``makes long-term home mortgage loans'' requirement on
an ongoing basis, however, the period of time during which a de novo
insured depository institution could rely on this presumed compliance
would be limited. Proposed Sec. 1263.15(b)(2) would allow a de novo
insured depository institution to rely on the presumptive compliance
provision only until it files with its regulator its first year-end
regulatory financial report following the one year anniversary of its
attaining membership. For example, if a de novo insured depository
institution were to become a member in November 2014, the period of
initial compliance would end when the regulatory financial report for
December 2015 became available to the Bank. For de novo insured
depository institutions becoming members earlier in 2014, the period of
initial compliance also would end when the regulatory financial report
for December 2015 became available. Although this period of initial
compliance may vary from institution to institution, depending on the
date of membership, it will be at least one year for all de novo
insured depository institutions.
Once the de novo insured depository institution files its first
year-end regulatory financial report following the one year anniversary
of the date it became a member, the rule would require a Bank to
determine the member's compliance with the ``makes long-term home
mortgage loans'' one percent asset ratio standard based on the amount
of home mortgage loans and total assets held by that member at the end
of the year covered by that call report. At that point, the Bank would
not determine the member's compliance with the asset ratio based on
three year averages as it would be required to do for other members,
even if the member actually had three or more years of financial data
available. In the following year, the Bank would determine compliance
for that member based on averages from the two preceding year-ends. In
subsequent years, the de novo provisions would cease to apply and the
member would be treated in the same manner as all other members--i.e.,
the Bank would assess its compliance based on rolling three year
averages as provided in proposed Sec. 1263.9(b). If a member that had
been deemed to be in compliance with the ``makes long-term home
mortgage loans'' requirement under the de novo provisions of Sec.
1263.15(b)(1) later fails to meet the requirements of Sec. 1263.9(b),
modified as described, it would become subject to the same sanctions
and procedures as any other member that fails to comply with the
``makes long-term home mortgage loans'' requirement.
With respect to the ``10 percent'' requirement, the proposed rule
would parallel the existing rule, which implements a statutory
provision allowing de novo insured depository institutions up to one
year from the date that they commence their business operations to
comply with that requirement. Thus, proposed Sec. 1263.15(c) would
deem a de novo insured depository institution to be in compliance with
the ``10 percent'' requirement at the time of application and
thereafter, until one year after the institution commenced its
operations. Subsequently, the rule would require that the Bank
determine compliance for that member as specified in Sec. 1263.10,
which addresses compliance for all other institutions to which the ``10
percent'' requirement applies. Similar to its treatment of de novo
insured depository institutions' compliance with the ``makes long-term
home mortgage loans'' requirement, the rule would permit the Bank to
determine compliance based on the actual number of year-end regulatory
financial reports filed by the member since commencing its operations,
for those cases in which a member had not yet filed three year-end
regulatory financial reports by the time that it became subject to
proposed Sec. 1263.10.
Although worded somewhat differently than existing Sec.
1263.14(d), proposed Sec. 1263.15(d) would treat the compliance of a
de novo insured depository institution with the ``home financing
policy'' requirement in the same manner as the existing regulation.
Thus, under both the existing regulation and the proposed rule a Bank
may conditionally approve a membership application from a de novo
insured depository institution based on the applicant's written
justification, but that approval will become null and void if the
member's first CRA performance evaluation is either ``Needs to
Improve'' or ``Substantial Non-Compliance.''
Proposed Sec. 1263.15(e) provides that a de novo insured
depository institution member that is deemed to have
[[Page 54864]]
complied with the eligibility requirements for membership as provided
under Sec. 1263.15 and that achieves membership on that basis, is
subject to all regulations applicable to members generally, including
those relating to stock purchase requirements and advances or
collateral, notwithstanding the possibility that its membership may be
conditional for some period of time. It further provides that if a de
novo insured depository institution's conditional membership is
terminated due to a failure to comply with the post-membership
eligibility requirements of proposed Sec. 1263.15, then the Bank must
liquidate any outstanding indebtedness and redeem or repurchase its
capital stock as it would for any other member in accordance with Sec.
1263.29. The substance of this provision is similar to provisions in
the existing regulation, which requires compliance with stock purchase
requirements, advances regulations, and redemptions or repurchases of
Bank capital stock.
f. Financial Condition of CDFIs and Insurance Companies--Sec. 1263.17
The proposed rule would redesignate Sec. 1263.16 of the existing
regulation, which governs the application of the ``financial
condition'' requirement of Sec. 1263.4(a)(4) to insurance company and
certain CDFI applicants, as Sec. 1263.17. As mentioned above, existing
Sec. 1263.6(a)(4) provides that, in order to be eligible for Bank
membership, an institution's financial condition must be ``such that
advances may be safely made to it.'' The Bank Act applies this
``financial condition'' requirement only to insured depository
institutions that were not Bank members on January 1, 1989.\45\
However, both FHFA and the Finance Board have applied this requirement
by regulation to all institutions, including insurance companies, as a
matter of safety and soundness.\46\ This approach would be carried over
in the proposed rule.
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\45\ See 12 U.S.C. 1424(a)(2)(B).
\46\ See 58 FR 43522, 43531-43534 (1993) (discussion in preamble
to Finance Board's first post-FIRREA final rule on Bank Membership
of the agency's decision to apply the requirements of Bank Act Sec.
4(a)(2)(B) to insurance companies, as well as insured depository
institutions).
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Under existing Sec. 1263.16(a), an insurance company applicant is
deemed to meet the ``financial condition'' requirement if the Bank
determines, based on the information contained in the applicant's most
recent regulatory financial report, that it meets all of its minimum
statutory and regulatory capital requirements and, in addition, meets
all applicable capital standards established by the NAIC, regardless of
whether those NAIC standards have been adopted by the state in which
the company is subject to regulation.\47\ The proposed rule would carry
forward those requirements, but would also require a Bank to review an
insurance company's most recent audited financial statements and to
determine that its financial condition is such that the Bank can safely
make advances to it before that applicant may be deemed to meet the
``financial condition'' requirement. Proposed Sec. 1263.17(a)(2) would
require that the Bank make the latter determination based upon audited
financial statements prepared in accordance with generally accepted
accounting principles (GAAP), if available. If no such financial
statements are available, the proposed rule would permit a Bank to use
financial statements prepared in accordance with statutory accounting
principles.
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\47\ As explained by the Finance Board when it first adopted
this provision in 1996, ``[w]hile not all states have yet adopted
the NAIC capital standards, the Finance Board believes these are a
useful measure of an insurance company's financial condition.'' See
61 FR 42531, 42540 (Aug. 16, 1996). For example, the NAIC adopted
the most recent version of its Risk-Based Capital (RBC) for Insurers
Model Act in 2011. As of January 2014, only 14 out of 56 states and
territories had adopted RBC requirements that were substantially
similar to those in the 2011 version of the RBC for Insurers Model
Act. Section 1263.16(a) requires a Bank to determine that an
insurance company applicant meet the standards set forth in the
Model Act, even if the applicant is subject to regulation in one of
the 42 jurisdictions that has not adopted those standards. In those
jurisdictions, the Bank is also required to determine that the
applicant meets the capital standards that have actually been
adopted.
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Under the existing regulation, the standards that an insured
depository institution must meet in order for a Bank to determine that
it complies with the ``financial condition'' requirement are more
robust than those that apply to insurance companies. For insured
depository institution applicants, a Bank must examine multiple sources
of information and, in the case of applicants that have not received a
regulatory examination rating of ``1'', to determine from those sources
whether the applicant has met particular financial metrics.\48\ FHFA is
considering adding additional components to the ``financial condition''
requirement for insurance companies that are analogous to those that
currently apply to insured depository institutions. The agency requests
comments on what type of metrics or other criteria would be appropriate
indicators that an insurance company is in a financial condition such
that advances may be safely made to it and how such metrics or
benchmarks should reflect the business models and risks insured by
different types of insurance companies.
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\48\ Existing Sec. 1263.11 enumerates the materials that a Bank
must review when considering whether an insured depository
institution or CDFI credit union meets the ``financial condition''
requirement and sets forth the financial benchmarks that such
applicants must meet in order to be deemed to meet that requirement.
For those types of applicants, the regulation generally requires a
Bank to review: (1) Regulatory financial reports for the last six
calendar quarters and three year-ends; (2) the most recent audited
financial statements, prepared in accordance with GAAP (if
available); (3) the most recent available regulatory examination
report; (4) a report prepared by the Bank or applicant on any
outstanding enforcement actions against the applicant; and (5) any
other relevant information concerning the applicant that comes to
the Bank's attention. See 12 CFR 1263.11(a). A depository
institution or CDFI credit union will be deemed to meet the
``financial condition'' requirement if it meets all of its minimum
statutory and regulatory capital requirements as reported in its
most recent quarter-end regulatory financial report and its most
recent composite regulatory examination rating (which must have been
received within the past two years) was ``1''. It may still be
deemed to comply with the ``financial condition'' requirement if its
examination rating was ``2'' or ``3'' so long as: (A) its adjusted
net income was positive in four of the six most recent calendar
quarters; (B) its nonperforming loans and leases plus other real
estate owned, did not exceed 10 percent of its total loans and
leases plus other real estate owned, in the most recent calendar
quarter; and (C) its ratio of allowance for loan and lease losses
plus the allocated transfer risk reserve to nonperforming loans and
leases was 60 percent or greater during four of the six most recent
calendar quarters. See 12 CFR 1263.11(b). Section 1263.11 would be
redesignated as Sec. 1263.12 under the proposed rule, but would
otherwise remain unchanged.
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Existing Sec. 1263.16(b), which sets forth the criteria for deemed
compliance with the ``financial condition'' requirement for CDFIs other
than CDFI credit unions, would be retained without change as Sec.
1263.17(b) under the proposed rule.
g. Determining Appropriate District for Bank Membership--Sec. 1263.19
The proposed rule would redesignate existing Sec. 1263.18, which
sets forth standards applicable to determining the appropriate Bank
district for membership, as Sec. 1263.19. Apart from the revisions
noted below, the substance of the proposed rule would be the same as
that of the existing regulation. Existing Sec. 1263.18(a)(1)
implements section 4(b) of the Bank Act by providing that an
institution may become a member only of the Bank of the district in
which the institution's ``principal place of business'' is located.\49\
The proposed rule would revise the existing provision slightly to state
that an institution ``may be a
[[Page 54865]]
member,'' rather than ``may become a member'' only of the Bank of the
district in which the institution's principal place of business is
located. FHFA and its predecessor agencies have consistently construed
section 4(b) as prohibiting a member of a particular Bank from
remaining a member of that Bank after it has relocated or redesignated
its principal place of business to another Bank district. The revised
provision, which appears as Sec. 1263.19(a)(1) in the proposed rule,
would more accurately reflect the manner in which section 4(b) has been
applied historically and continues to be applied.
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\49\ Section 1263.18(a)(2) of the existing rule implements an
alternative provided by section 4(b) of the Bank Act, which allows
an institution to become a member of the Bank of a district
adjoining the one in which the institution maintains its principal
place of business, but only if that is demanded by convenience and
approved by FHFA. See 12 U.S.C. 1424(b).
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Existing Sec. 1263.18(b) provides that, unless otherwise
designated in accordance with the regulation, the ``principal place of
business'' of an institution is the state in which it maintains its
home office, as so designated in accordance with the laws under which
it is organized. Proposed Sec. 1263.19(b) would retain that language
regarding the home office, but would add a second component requiring
that the institution conduct business operations from the home office
in order for that state to be considered as its principal place of
business. This proposed revision is intended as a conforming change
related to the addition of a new Sec. 1263.19(f) and is explained in
greater detail below in the context of the discussion of the latter
provision.
Existing Sec. 1263.18(d)(1) deals with transfers of membership
from one Bank to another Bank and provides that no such transfer shall
take effect until the Banks involved reach an agreement on a method of
orderly transfer. The proposed rule would revise this provision, which
would appear as Sec. 1263.19(d)(1), to clarify that it applies to
instances where a member of one Bank either redesignates or relocates
its principal place of business to a state located in another Bank
district. A ``redesignation'' of a principal place of business can
occur if a member satisfies a three-part test set out in Sec.
1263.18(c) of the current regulation, which would be carried over into
the proposed regulation without change as Sec. 1263.19(c). A
``relocation'' of a member's principal place of business would occur if
it were to relocate its home office, as identified in its charter, to
another state, such as in connection with a corporate reorganization,
merger, or acquisition. This change is intended to reflect the two
methods by which transfers of membership can occur and is related to
the revisions that would be made to Sec. 1263.4(b) of the proposed
rule, regarding ``automatic membership'' that can occur as a result of
such transfers of a member's principal place of business.
The proposed rule includes a new paragraph Sec. 1263.19(f) that
would address how the Banks are to determine the ``principal place of
business'' for insurance companies or CDFIs that cannot satisfy the
general requirements for determining an institution's principal place
of business. Accordingly, the Banks would use this provision only if an
institution does not have an actual ``home office'' established under
the laws of its chartering statute, or it has such a ``home office''
but does not conduct business operations from that location, or it
cannot satisfy the three-part test of proposed Sec. 1263.19(c) for
designating its principal place of business.
Section 1263.19(f) would provide that for an insurance company or
CDFI that cannot satisfy the general requirements for establishing its
principal place of business the Bank shall designate as the principal
place of business the geographic location from which the entity
actually conducts the predominant portion of its business activities.
Banks must make those determinations based on the totality of the
circumstances and an assessment of objective factors that indicate the
most likely location at which the institution conducts its business,
such as the location from which the institution's senior officers
direct, control, and coordinate its activities, or the locations from
which the institution conducts its business.
For cases in which an insurance company maintains no physical
offices of its own and has no employees of its own, which may occur if
the company contracts out the actual operation of the insurance
business to affiliated insurance companies or to third parties, or if
its senior officers are located at multiple locations in different
states, the proposed rule would require the Banks to designate the
state of domicile as the principal place of business. That provision is
intended to address only those narrow situations in which the factors
that a Bank might otherwise use to establish the insurance company's
principal place of business are absent, i.e., if the company's senior
officers are situated in different locations, or it has no physical
office buildings or employees of its own. In all such cases, a Bank
would have to demonstrate how it determined that the insurance company
had no other objective factors--i.e., offices, employees, or senior
officers--that would establish one geographic location as the place
from which the entity could be deemed to conduct the predominant part
of its business operations.
As mentioned above, in a related amendment, the proposed rule would
revise Sec. 1263.19(b), which provides that an institution's principal
place of business for membership purposes generally is deemed to be its
``home office,'' if designated as such by its charter or articles of
organization. The proposal would add to this provision language
requiring that an institution also actually conduct business operations
from its home office in order for it to be deemed to be its principal
place of business. The intent of that revision is to make clear that an
institution cannot have a ``principal place of business'' at a
particular location without actually conducting some business
operations from that location. A mere legal presence, such as a
statutory home office or a registered agent's office at which no
insurance business is conducted, is not sufficient by itself to
constitute a company's principal place of business for Bank membership
purposes. This revision should not affect insured depository
institution members because the home office that is designated in their
charters will typically also be a branch office from which some banking
business will be conducted, which would satisfy the revised regulation.
FHFA intends that these amendments to the principal place of business
regulation would apply prospectively, and thus would not affect any
existing Bank members.
FHFA is proposing these revisions to address questions that have
arisen about how to determine the principal place of business for
insurance companies and CDFIs that may not operate in the state under
whose laws they are organized or who do not have a statutorily
established home office. In 2012, FHFA issued a regulatory
interpretation addressing whether a non-depository institution could
establish its principal place of business for Bank membership purposes
based solely on its state of incorporation.\50\ FHFA opined that the
location of an institution's principal place of business is largely a
question of fact that Banks should resolve by identifying the
geographic location from which the institution actually conducts its
principal business operations. Recently, FHFA declined a request to
allow the Banks to look solely to the state of domicile to identify the
principal place of business for insurance company members.
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\50\ FHFA Regulatory Interpretation 2012-RI-02 (April 3, 2012).
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The regulation and regulatory interpretation reflect a statutory
[[Page 54866]]
requirement that an institution may become a member only of the Bank
for the district in which the institution has its principal place of
business.\51\ Because the Bank Act does not define ``principal place of
business,'' FHFA may do so, provided that its definition is consistent
with the language and purposes of the Bank Act. In determining how
broadly it may construe the term ``principal place of business,'' FHFA
considered the recent opinion of the United States Supreme Court in
Hertz Corp. v. Friend,\52\ which construed that term for purposes of
another federal statute.\53\ In that case, the Court determined that a
corporation's principal place of business would be the location from
which its senior officers ``direct, control, and coordinate the
corporation's activities.'' Ordinarily, that would be the corporate
headquarters, provided that the headquarters actually were used as the
center of direction, control, and coordination. In parsing the
statutory language, the Court reasoned that the word ``place'' meant
that there had to be a single location, and that the word ``principal''
meant that courts should ``pick out the `main, prominent' or `leading'
place'' of a corporation's business.
---------------------------------------------------------------------------
\51\ 12 U.S.C. 1424(b). That provision also allows an
institution to become a member of a Bank whose district adjoins the
Bank district in which the institution's principal place of business
is located, but only if ``demanded by convenience'' and approved by
FHFA. FHFA is not aware of any institution ever being approved for
membership under this provision.
\52\ 559 U.S. 77 (2010).
\53\ In the Hertz case, the Court construed the term ``principal
place of business'' as it appears in the federal diversity
jurisdiction statute, which provides that a corporation is deemed to
be a citizen of the ``State by which it has been incorporated and of
the State where it has its principal place of business.'' See 28
U.S.C. 1332(c)(1).
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FHFA believes that it should construe the Bank Act's reference to a
member's ``principal place of business'' in a similar manner to the way
that the Supreme Court has construed that term. Thus, in order for an
insurance company or CDFI member or applicant for membership to have
its ``principal place of business'' at a particular location the
institution must actually conduct business at that location and the
activities conducted at that location should be greater in some respect
than at any of its other business locations. Requiring the Banks to
look to the geographic location from which an insurance company or CDFI
conducts the predominant portion of its business is consistent with the
plain language of the statute as well as with the Hertz Court's
reasoning.
By comparison, it does not appear that looking solely to an
insurance company's state of domicile or a CDFI's state of
incorporation would be consistent with that reasoning because it would
not ensure that the location so designated as the institution's
``principal place of business'' would in fact be the ``main or
prominent'' place from which it conducts its business. That is so
because some states' laws allow their insurance companies and other
business corporations (which would include CDFIs) to conduct all of
their business activities in other states. Because an approach that
looks solely to the state of domicile or the state of incorporation to
determine ``principal place of business'' would allow for the
possibility that an insurance company or CDFI could be deemed to have
its principal place of business at a location at which it actually has
no place of business, FHFA does not believe that it can construe the
statute that broadly.
h. Other Revisions to Eligibility Provisions in Subpart C
In addition to the major substantive revisions to subpart C that
are discussed above, the proposed rule would also make other more minor
revisions to a number of other sections dealing with various aspects of
the Bank membership eligibility requirements.
The proposed rule would revise both Sec. 1263.7, which implements
the ``duly organized'' requirement, and Sec. 1263.8, which implements
the ``subject to inspection and regulation'' requirement, to substitute
the word ``institution'' for the word ``applicant.'' Those revisions
would conform the text of those provisions to that of the provisions
implementing the ``makes long-term home mortgage loans'' and ``10
percent'' requirements, both of which refer to ``institutions'' rather
than ``applicants'' because they would be applied on an ongoing basis.
The proposed rule would redesignate existing Sec. 1263.11, which
implements the ``financial condition'' requirement for insured
depository institutions and CDFI credit unions, and existing Sec.
1263.12, which implements the ``character of management'' requirement,
as Sec. Sec. 1263.12 and 1263.13, respectively, but would otherwise
leave those sections unchanged. The proposed rule also would
redesignate existing Sec. 1263.13, which implements the ``home
financing policy'' requirement, as Sec. 1263.14. In addition, the rule
would revise that provision to substitute the word ``institution'' for
the word ``applicant'' and to substitute the newly defined term ``CRA
performance evaluation'' for the more cumbersome phrase ``formal, or if
unavailable, informal or preliminary, CRA performance evaluation.''
Under the proposed rule, those modifiers are included in the definition
of the term ``CRA performance evaluation'' and, therefore, need not be
repeated in the remainder of the rule text.
Section 1263.15 of the existing regulation specifies the manner in
which the Banks must apply the ``financial condition,'' ``home
financing policy,'' ``makes long-term home mortgage loans,'' and ``10
percent'' requirements to applicants that have recently merged with or
acquired another institution. The proposed rule would redesignate that
section as Sec. 1263.16 and would also make a number of non-
substantive revisions to provide greater clarity, with no change in
meaning intended. The existing regulation currently allows a recently
combined applicant that has not yet filed a consolidated regulatory
financial report to use the pro forma combined financial statements
filed with the regulator that approved the merger or acquisition, for
purposes of complying with the ``makes long-term home mortgage loans''
and ``10 percent'' requirements. In order to reflect the ongoing nature
of those two requirements, the proposed rule would add a sentence to
proposed Sec. 1263.16(c) that makes clear that subsequent compliance
with those eligibility requirements is to be determined based on the
post-merger regulatory financial reports filed by the combined entity.
The proposed rule would redesignate existing Sec. 1263.17, which
sets forth rebuttable presumptions to be applied in determining whether
an applicant for Bank membership complies with certain statutory and
regulatory eligibility requirements, as Sec. 1263.18. The rule would
also make certain non-substantive revisions to the text of that section
in order to improve clarity, but otherwise would leave it substantively
unchanged.
4. Bank Stock Requirements--Sec. Sec. 1263.20-1263.23
Subpart D of part 1263 currently sets forth certain requirements
regarding the purchase and disposition of Bank stock. The proposed rule
would repeal several provisions within this subpart that relate to the
capital structure of the Banks prior to the enactment of the Financial
Services Modernization Act of 1999 \54\ (hereinafter, the ``Gramm-
Leach-Bliley Act'' or ``GLB Act''), which, among other things, amended
the Bank
[[Page 54867]]
Act to require each Bank to establish and operate under a capital plan
meeting certain specified standards.\55\ Those regulatory provisions no
longer have any relevance or effect because all of the Banks are now
operating under GLB Act capital plans. The provisions to be repealed
are: (1) Sec. 1263.19, which requires Bank capital stock to be sold at
par unless the Director has fixed a higher price; (2) portions of Sec.
1263.20 relating to the pre-GLB Act subscription capital requirements;
(3) Sec. 1263.21, pertaining to the issuance and form of Bank stock,
primarily under the pre-GLB Act regime; and (4) portions of Sec.
1261.22 relating to the redemption of excess shares of pre-GLB Act
capital stock. The proposed rule would retain the substance of the
remaining provisions of existing subpart D, although those provisions
would be organized differently and would be revised to reflect the GLB
Act capital provisions more explicitly.
---------------------------------------------------------------------------
\54\ Public Law 106-102, 113 Stat. 1338 (Nov. 12, 1999).
\55\ See 12 U.S.C. 1426.
---------------------------------------------------------------------------
As proposed, Sec. 1263.20(a) would provide that an institution
approved for membership shall become a member upon the purchase of the
amount of membership stock required under the Bank's capital plan.
Paragraph (a) would further provide that any such institution must
purchase the required stock within 60 days of the date of the Bank's
approval, or that approval will become void. In such a case, the
institution would need to re-apply for membership if it still wished to
become a Bank member. This would carry over much of the substance of
existing provisions that now appear, respectively, in paragraphs (a)(2)
and (d) of existing Sec. 1263.20.
Proposed Sec. 1263.20(b) would provide that, after approving an
institution for membership and receiving payment in full for the par
value of the Bank stock, a Bank shall issue to that institution the
amount of capital stock required to be purchased under the Bank's
capital plan. A similar provision appears in Sec. 1263.21(a) of the
existing regulation. Proposed Sec. 1263.20(c) would carry over the
substance of existing Sec. 1263.20(e) by requiring that each Bank
report to FHFA information regarding the minimum investment in Bank
capital stock made by each new member under the regulation, in
accordance with the instructions provided in FHFA's Data Reporting
Manual.
Finally, the proposed rule would retain the substance of existing
Sec. 1263.22(b)(1), which requires each Bank to calculate annually
each member's required minimum holdings for purposes of determining the
number of votes that the member may cast in that year's election of
directors and sets forth the procedures and timing that each Bank must
follow with regard to that calculation. That material would be carried
over with some minor textual edits to provide greater clarity, as the
sole provision of proposed Sec. 1263.22. Existing Sec. 1263.23, which
governs excess Bank stock, would be retained without change.
5. Consolidations Involving Members--Sec. 1263.24
Existing Sec. 1263.24 governs the membership status of
institutions that are the result of a recent business combination
either of two or more Bank members or of a Bank member with a non-
member. The proposed rule would retain nearly all of the existing text
of that section without change, but would revise Sec. 1263.24(b)(5),
which addresses the approval of membership for a non-member institution
that has absorbed a member of the Bank, to eliminate references to
Banks that have not yet adopted a capital plan as required under the
GLB Act. As proposed, that provision would provide that, if the
application of such a consolidated institution is approved by a Bank,
the consolidated institution shall become a member of that Bank upon
the purchase of the amount of stock necessary, when combined with any
Bank stock acquired from the disappearing member, to satisfy the
minimum stock purchase requirements established by the Bank's capital
plan. The proposed rule would also delete Sec. 1263.24(d), which
addresses approval of stock transfers from a disappearing member to a
surviving member, because it implements a provision of the Bank Act
that was repealed by the GLB Act.
6. Withdrawal From Membership--Sec. Sec. 1263.26
Section 1263.26 of the existing regulation governs voluntary
withdrawal from Bank membership. Paragraph (d) of that section provides
that no member may withdraw from membership unless FHFA certifies that
the withdrawal will not cause the Bank system to fail to satisfy its
statutory responsibility to fund the interest payments owed on
obligations issued by the Resolution Funding Corporation (RefCorp).\56\
As of July 2011, the Banks satisfied their obligation to contribute to
the debt service on the RefCorp bonds, thereby rendering this provision
moot. The proposed rule would therefore delete paragraph (d), but would
leave the remainder of Sec. 1263.26 unchanged.
---------------------------------------------------------------------------
\56\ See 12 U.S.C. 1441b(f)(2)(C).
---------------------------------------------------------------------------
7. Termination of Membership--Sec. Sec. 1263.27-1263.28
Section 1263.27 of the existing regulation establishes the grounds
and procedures for the involuntary termination of an institution's Bank
membership, as well as the rights of an institution whose membership is
terminated. The proposed rule would retain that section without change.
The proposed rule would add a new Sec. 1263.28, which would
specify the consequences of a member's failure to comply with the new
ongoing membership eligibility requirements. Proposed Sec. 1263.28(a)
provides that any member that remains out of compliance with the
``makes long-term home mortgage loans'' requirement or, if applicable,
the ``10 percent'' requirement, for two consecutive calendar years is
ineligible to remain a member and must have its membership terminated.
Proposed Sec. 1263.28(b) would establish a process by which a Bank
must notify a member of its failure to comply with an eligibility
requirement and provide an opportunity for the member to cure its
noncompliance. If, when performing the annual calculations to determine
its members' compliance with the ``makes long-term home mortgage
loans'' and ``10 percent'' requirements, a Bank determines that a
member does not comply with either one of those requirements, paragraph
(b)(1) would require that the Bank notify the member in writing of that
noncompliance, identify the applicable eligibility requirement, and
provide the member with the data and calculations that demonstrate its
noncompliance. The rule would also require the written notice to
explain that the Bank will be required to terminate the institution's
membership if it fails to satisfy the particular eligibility
requirement for a second consecutive year and to inform the member of
the actions it must take to return to compliance by the end of the
then-current calendar year so as to prevent the termination of its
membership.
Paragraph (b)(2) would require that the Bank keep itself and its
non-compliant member abreast of the member's progress toward returning
to compliance with the eligibility requirement by calculating the
relevant asset ratio on a quarterly basis for the remainder of that
year and informing the member of the Bank's assessment of the member's
progress toward a return to compliance. Under these provisions, a
member would have nearly one year within which to cure its
noncompliance, i.e., the noncompliance
[[Page 54868]]
would be identified as part of the Bank's annual compliance assessments
and the member would have until the end of that calendar year to come
into compliance with the eligibility requirements. Because the proposed
rule would require the Banks to assess compliance only once per year,
it is possible that the period of noncompliance actually could extend
for nearly two years. For example, if the noncompliance is first
detected based on a review of the calendar year-end regulatory
financial report filed by a member, then it would be possible that the
actual noncompliance could have occurred at any point during that
calendar year.
Proposed Sec. 1263.28(c) would require a Bank to terminate the
membership of any member that had been notified of its failure to
comply with one of the ongoing eligibility requirements as of the end
of one year and that the Bank has determined remains out of compliance
with that requirement as of the end of a second consecutive year. The
rule would require the Bank to carry out the termination of membership
as provided under Sec. 1263.27, as it would be required to do for any
termination of membership for failure to comply with a statutory or
regulatory requirement, and to notify the member in writing that its
membership has been terminated. FHFA has the authority under section
6(d)(2)(A) of the Bank Act, which sets forth the grounds upon which an
institution's Bank membership may be involuntarily terminated, and as
regulator of the Banks and administrator of the Bank Act, to adopt a
regulation requiring a Bank to terminate the membership of an
institution that has demonstrated its ongoing noncompliance with the
statutory ``makes long-term home mortgage loans'' or ``10 percent''
eligibility requirements and the regulatory provisions implementing
those requirements.
Section 6(d)(2)(A) of the Bank Act provides that the board of
directors of a Bank ``may terminate'' the membership of any member
institution if, ``subject to the regulations of the Director'' of FHFA,
it determines that the member has either: (i) Failed to comply with any
provision of the Bank Act or FHFA regulations; or (ii) been determined
to be insolvent, or otherwise subject to the appointment of a
conservator, receiver, or other legal custodian, by a federal or state
authority with regulatory and supervisory responsibility for the
member.\57\ The use of the word ``may'' indicates that Congress
intended to permit a Bank a degree of discretion in deciding when it
must terminate an institution's membership, but it does not vest in a
Bank unlimited discretion to decide when to exercise that authority, as
is evidenced by the accompanying language that a Bank's termination
authority is ``subject to regulations of the Director.'' That
reservation of authority to the Director of FHFA, as well as accepted
rules of statutory construction,\58\ allow FHFA to adopt a regulation
that specifies the circumstances in which an ongoing violation of the
law requires a Bank to exercise its termination authority, which is
what the proposed regulation would do. This is appropriate where, as
here, the regulatory violation is not of just any provision of the Bank
Act or FHFA regulations, but of the very regulation that defines
eligibility for membership, the purpose of which would be defeated if
membership were allowed to continue.
---------------------------------------------------------------------------
\57\ 12 U.S.C. 1426(d)(2)(A).
\58\ As the Court of Appeals for the DC Circuit has explained,
```May' ordinarily connotes discretion, but neither in lay nor legal
understanding is the result inexorable. Rather, the conclusion to be
reached `depends on the context of the statute, and on whether it is
fairly to be presumed that it was the intention of the legislature
to confer a discretionary power or to impose an imperative duty.'''
Thompson v. Clifford, 408 F.2d 154, 158 (D.C. Cir. 1968) (citations
omitted); see also Halverson v. Slater, 129 F.3d 180, 188-189 (D.C.
Cir. 1997).
---------------------------------------------------------------------------
By allowing for a one-year period within which to cure a violation
of these eligibility requirements, the proposed rule recognizes that
Congress did not mandate an immediate termination of membership for any
violation of the Bank Act or FHFA regulations. The proposed rule
contemplates that during that cure period the Banks would work with any
noncompliant members to come back into compliance with those
requirements. By requiring the Banks to terminate the membership of any
institution that has failed, for over a year and after being notified
of its noncompliance, to come back into compliance with the eligibility
requirements, the proposed rule also recognizes the authority and
responsibility of FHFA to take whatever actions are necessary to ensure
that the purposes and provisions of the Bank Act are carried out. By
setting the boundaries of a Bank's discretion in this fashion, FHFA is
giving effect to and acting consistently with the specific provisions
of section 6(d)(2)(A) and its general supervisory authorities.
8. Remaining Provisions--Sec. Sec. 1263.29-1263.32
The proposed rule would retain the remaining provisions of the
existing membership regulation without change, with the exception that
the cross-reference to Sec. 1263.22(b)(1) found in Sec. 1263.31(d)
(which requires each member to provide its Bank annually with the data
necessary to calculate its minimum required holdings of Bank stock)
would be revised to reflect its redesignation under the proposed rule
as Sec. 1263.22.
IV. Consideration of Differences Between the Banks and the Enterprises
Section 1313(f) of the Safety and Soundness Act requires the
Director of FHFA, when promulgating regulations 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.\59\ The Director also may consider any other differences
that are deemed appropriate. In preparing this proposed rule, the
Director considered the differences between the Banks and the
Enterprises as they relate to the above factors, and determined that
the rule is appropriate. FHFA requests comments regarding whether
differences related to those factors should result in any revisions to
the proposed rule.
---------------------------------------------------------------------------
\59\ 12 U.S.C. 4513(f).
---------------------------------------------------------------------------
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) requires that FHFA
consider the impact of paperwork and other information collection
burdens imposed on the public.\60\ Under the PRA and the implementing
regulations of the Office of Management and Budget (OMB), an agency may
not collect or sponsor the collection of information, nor may it impose
an information collection requirement unless it displays a currently
valid control number assigned by OMB.\61\ FHFA's regulation ``Members
of the Federal Home Loan Banks,'' located at 12 CFR part 1263, contains
several collections of information that OMB has approved under control
number 2590-0003, which is due to expire on December 31, 2016. This
proposed rule would add a new information collection requirement, which
is described below. As required by the PRA, FHFA has submitted an
analysis of the proposed collection of
[[Page 54869]]
information contained in this proposed rule to OMB for review.\62\
---------------------------------------------------------------------------
\60\ See 44 U.S.C. 3507(a) and (d).
\61\ See 44 U.S.C. 3512(a); 5 CFR 1320.8(b)(3)(vi).
\62\ See 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
Summary: Existing part 1263 contains four different types of
submissions by Bank members or by institutions wishing to become a Bank
member: (I) Applications for membership and supporting materials; (II)
notices of appeal to FHFA by institutions that have been denied
membership by a Bank; (III) requests to withdraw from Bank membership;
and (IV) applications for transfer of membership to a different Bank
and supporting materials.
This proposed rule would add a fifth information collection
requirement to part 1263, but would not alter any of the four existing
requirements. As described in section III of the Supplementary
Information above, Sec. 1263.11(a)(2) of the proposed rule would
require each Bank to determine annually whether each of its members
maintains at least one percent of its total assets in home mortgage
loans, as would be required by proposed Sec. 1263.9(b). Proposed Sec.
1263.11(a)(2) would also require each Bank to determine annually
whether each of its members that is subject to the ``10 percent''
requirement maintains at least 10 percent of its assets in residential
mortgage loans, as would be required by proposed Sec. 1263.10(b).
Proposed Sec. 1263.11(a)(1) would provide that a Bank must determine
whether an applicant maintains those minimum asset ratios at the time
it considers that institution's application for Bank membership.
Under the proposed rule, the Banks would in most cases acquire the
data necessary to make those determinations from each institution's
year-end regulatory financial reports or audited financial statements.
In most cases where the data contained in an institution's regulatory
financial report or audited financial statements is insufficient to
demonstrate that it complies with the applicable asset ratio
requirements, proposed Sec. 1263.11(b)(1)(ii) would require the
institution (if it wished to become or remain a Bank member) to obtain
from its external auditor and provide to the Bank a written
certification stating the actual amount of the relevant assets held by
the institution on the appropriate dates. Where the institution in
question is a CDFI with less than $100 million in assets, proposed
Sec. 1263.11(b)(2)(iii) would permit it to provide a written
certification from an executive officer instead.
Use: Each Bank would use the information collected under proposed
part 1263 to: (a) Determine whether an institution satisfies the
statutory and regulatory requirements for Bank membership; (b) process
member withdrawals; and (c) process member transfers to a different
Bank district. When appropriate, FHFA may use the information
collection to determine whether an institution that has been denied
membership by a Bank should be permitted to become a member of that
Bank.
Respondents: Respondents would be institutions that are Bank
members or that are applying for Bank membership.
Annual Burden Estimates: FHFA has analyzed the cost and hour burden
for the five facets of the information collection: (1) Membership
application process; (2) appeal of membership denial; (3) membership
withdrawals; (4) transfer of membership to another Bank district; and
(5) certifications regarding compliance with asset ratio requirements.
The estimate for the total annual hour burden for all respondents is
3,335 hours. The estimate for the total annual cost burden is $244,548.
These estimates are based on the following calculations:
1. Membership Application
FHFA estimates the total annual average number of applicants at
157, with 1 response per applicant. The estimate for the average hours
per application is 11.7 hours. The estimate for the annual hour burden
for applicants is 1,837 hours (157 applicants x 1 response per
applicant x 11.7 hours per response). The estimate for the total annual
cost burden to applicants for the membership application process is
$135,365.
2. Appeal of Membership Denials
FHFA estimates the total annual average number of appellants at 1,
with 1 response per appellant. The estimate for the average hours per
application for appeal is 10 hours. The estimate for the annual hour
burden for appellants is 10 hours (10 appellants x 1 response per
appellant x 10 hours per response). The estimate for the total annual
cost burden to applicants for the appeal of membership denial process
is $950.
3. Withdrawals From Membership
FHFA estimates the total annual average number of membership
withdrawals at 275, with 1 response per applicant. The estimate for the
average hours per application is 1.5 hours. The estimate for the annual
hour burden for applicants is 413 hours (275 withdrawals x 1 response
per applicant x 1.5 hours per response). The estimate for the total
annual cost burden to members for withdrawals from membership is
$39,188.
4. Transfer of Membership
FHFA estimates the total annual average number of membership
transfer requests at 1, with 1 response per applicant. The estimate for
the average hours per application is 1.5 hours. The estimate for the
annual hour burden for applicants is 1.5 hours (1 transfer x 1 response
per applicant x 1.5 hours per response). The estimate for the total
annual cost burden to member respondents of the transfer of membership
process is $110.
5. Certifications Regarding Compliance With Asset Ratio Requirements
FHFA estimates the total annual hour burden for members and
applicants arising from the asset ratio requirements to be 1,073 hours
and the total annual cost burden to be $68,935, calculated as set forth
below.
FHFA estimates the total annual average number of Bank members and
applicants that would keep records to track the asset categories needed
to prepare the asset ratio certifications at 330. The estimate for the
average annual recordkeeping hours for each member or applicant,
including a one-time initial modification of the institution's
accounting information system, is 3 hours. The estimate for the annual
hour burden for all members and applicants arising from this
recordkeeping is 990 hours (330 members or applicants x 3 hours). The
estimate for the total annual cost burden to members and applicants of
this recordkeeping is $61,050.
FHFA estimates the total annual average number of Bank members and
applicants that would submit asset ratio certifications at 165, with 1
submission per institution. The estimate for the average hours per
submission is 0.5 hours. The estimate for the annual hour burden for
all members and applicants arising from this submission is 83 hours
(165 members or applicants x 0.5 hours). The estimate for the total
annual cost burden to members and applicants of this submission is
$7,885.
Comment Request: FHFA will accept written comments concerning the
accuracy of the burden estimates and suggestions for reducing the
burden at the address listed above. Comments may also be submitted to
the Office of Information and Regulatory Affairs, OMB, Attention: Desk
Officer for Federal Housing Finance Agency, Room 10102, New Executive
Office Building, 725 17th Street NW., Washington, DC 20503; Fax: (202)
395-6974; or Email: [email protected].
[[Page 54870]]
Written comments are requested on: (1) Whether the proposed
collection of information is necessary for the proper performance of
FHFA functions, including whether the information has practical
utility; (2) the accuracy of FHFA estimates of the burdens of the
collection of information; (3) ways to enhance the quality, utility,
and clarity of the information collected; and (4) ways to minimize the
burden of the proposed collection of information on respondents,
including through the use of automated collection techniques or other
forms of information technology.
Individuals and organizations may send comments on the proposed
information collection requirement by November 12, 2014.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act \63\ (RFA) requires that a
regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. Such an analysis need not be
undertaken if the agency has certified that the regulation will not
have a significant economic impact on a substantial number of small
entities.\64\ FHFA has considered the impact of the proposed rule under
the RFA. The General Counsel of FHFA certifies that the proposed rule,
if adopted as a final rule, is not likely to have a significant
economic impact on a substantial number of small entities because the
regulation applies only to the Banks, which are not small entities for
purposes of the RFA.
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\63\ 5 U.S.C. 601, et seq.
\64\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------
List of Subjects in 12 CFR Part 1263
Federal home loan banks, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons stated in the SUPPLEMENTARY INFORMATION, and under
the authority of 12 U.S.C. 4526, FHFA proposes to amend part 1263 of
subchapter D of chapter XII of title 12 of the Code of Federal
Regulations as follows:
0
1. Revise part 1263 to read as follows:
PART 1263--MEMBERS OF THE BANKS
Subpart A--Definitions
Sec.
1263.1 Definitions.
Subpart B--Membership Application Process
1263.2 Membership application requirements.
1263.3 Decision on application.
1263.4 Automatic membership.
1263.5 Appeals.
Subpart C--Eligibility Requirements
1263.6 General eligibility requirements.
1263.7 Duly organized requirement.
1263.8 Subject to inspection and regulation requirement.
1263.9 Makes long-term home mortgage loans requirement.
1263.10 Ten percent requirement for certain insured depository
institution applicants.
1263.11 Timing of and standards for calculations required under
Sec. Sec. 1263.9 and 1263.10.
1263.12 Financial condition requirement for depository institutions
and CDFI credit unions.
1263.13 Character of management requirement.
1263.14 Home financing policy requirement.
1263.15 De novo insured depository institutions.
1263.16 Recent merger or acquisition applicants.
1263.17 Financial condition requirement for insurance company and
certain CDFI applicants.
1263.18 Rebuttable presumptions applicable to applicants for Bank
membership.
1263.19 Determination of appropriate Bank district for membership.
Subpart D--Stock Requirements
1263.20 Stock purchase.
1263.21 [Reserved].
1263.22 Annual calculation of stock holdings.
1263.23 Excess stock.
Subpart E--Withdrawal, Termination and Readmission
1263.24 Consolidations involving members.
1263.25 [Reserved].
1263.26 Voluntary withdrawal from membership.
1263.27 Involuntary termination of membership.
1263.28 Loss of eligibility for continued membership; opportunity to
cure.
1263.29 Disposition of claims.
1263.30 Readmission to membership.
Subpart F--Other Membership Provisions
1263.31 Reports and examinations.
1263.32 Official membership insignia.
Authority: 12 U.S.C. 1422, 1423, 1424, 1426, 1430, 1442, 4511,
4513.
Subpart A--Definitions
Sec. 1263.1 Definitions.
For purposes of this part:
Adjusted net income means net income, excluding extraordinary items
such as income received from, or expense incurred in, sales of
securities or fixed assets, reported on a regulatory financial report.
Aggregate unpaid loan principal means the aggregate unpaid
principal of a subscriber's or member's home mortgage loans, home-
purchase contracts and similar obligations.
Allowance for loan and lease losses means a specified balance-sheet
account held to fund potential losses on loans or leases, which is
reported on a regulatory financial report.
Appropriate regulator means:
(1) In the case of an insured depository institution or a CDFI
credit union, an appropriate Federal banking agency or appropriate
State regulator, as applicable; or
(2) In the case of an insurance company, an appropriate State
regulator accredited by the NAIC.
Captive means a company that is authorized under state law to
conduct an insurance business, but that does not meet the definition of
``insurance company'' set forth in this section or fall within any
other category of institution eligible for membership.
CDFI credit union means a state-chartered credit union that has
been certified as a CDFI by the CDFI Fund and that does not have
federal share insurance.
CDFI Fund means the Community Development Financial Institutions
Fund established under section 104(a) of the Community Development
Banking and Financial Institutions Act of 1994 (12 U.S.C. 4703(a)).
CFI asset cap means $1 billion, as adjusted annually by FHFA,
beginning in 2009, to reflect any percentage increase in the preceding
year's Consumer Price Index (CPI) for all urban consumers, as published
by the U.S. Department of Labor.
Class A stock means capital stock issued by a Bank, including
subclasses, that has the characteristics specified in section
6(a)(4)(A)(i) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(i)) and
applicable FHFA regulations.
Class B stock means capital stock issued by a Bank, including
subclasses, that has the characteristics specified in section
6(a)(4)(A)(ii) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(ii)) and
applicable FHFA regulations.
Combination business or farm property means real property for which
the total appraised value is attributable to residential, and business
or farm uses.
Community development financial institution or CDFI means an
institution that is certified as a community development financial
institution by the CDFI Fund under the Community Development Banking
and Financial
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Institutions Act of 1994 (12 U.S.C. 4701 et seq.), other than a bank or
savings association insured under the Federal Deposit Insurance Act (12
U.S.C. 1811 et seq.), a holding company for such a bank or savings
association, or a credit union insured under the Federal Credit Union
Act (12 U.S.C. 1751 et seq.).
Community financial institution or CFI means an institution:
(1) The deposits of which are insured under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.); and
(2) The total assets of which, as of the date of a particular
transaction, are less than the CFI asset cap, with total assets being
calculated as an average of total assets over three years, with such
average being based on the institution's regulatory financial reports
filed with its appropriate regulator for the most recent calendar
quarter and the immediately preceding 11 calendar quarters.
Composite regulatory examination rating means a composite rating
assigned to an institution following the guidelines of the Uniform
Financial Institutions Rating System (issued by the Federal Financial
Institutions Examination Council), including a CAMELS rating or other
similar rating, contained in a written regulatory examination report.
Consolidation includes a consolidation, a merger, or a purchase of
substantially all of the assets and assumption of substantially all of
the liabilities of an entity by another entity.
CRA means the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et
seq.).
CRA performance evaluation means, unless otherwise specified, a
formal performance evaluation of an institution prepared by its
appropriate regulator as required by the CRA or, if such a formal
evaluation is unavailable for a particular institution, an informal or
preliminary evaluation.
De novo insured depository institution means an insured depository
institution the charter of which was approved by its appropriate
regulator within the three years prior to the date that the institution
applies for Bank membership.
Dwelling unit means a single room or a unified combination of rooms
designed for residential use.
Enforcement action means any written notice, directive, order, or
agreement initiated by an applicant for Bank membership or by its
appropriate regulator to address any operational, financial, managerial
or other deficiencies of the applicant identified by such regulator. An
``enforcement action'' does not include a board of directors'
resolution adopted by the applicant in response to examination
weaknesses identified by such regulator.
Funded residential construction loan means the portion of a loan
secured by real property made to finance the on-site construction of
dwelling units on one-to-four family property or multifamily property
disbursed to the borrower.
Gross revenues means, in the case of a CDFI applicant, total
revenues received from all sources, including grants and other donor
contributions and earnings from operations.
Home mortgage loan means:
(1) A loan, whether or not fully amortizing, or an interest in such
a loan, which is secured by a mortgage, deed of trust, or other
security agreement that creates a first lien on one of the following
interests in property:
(i) One-to-four family property or multifamily property, in fee
simple;
(ii) A leasehold on one-to-four family property or multifamily
property under a lease of not less than 99 years that is renewable, or
under a lease having a period of not less than 50 years to run from the
date the mortgage was executed; or
(iii) Combination business or farm property where at least 50
percent of the total appraised value of the combined property is
attributable to the residential portion of the property, or in the case
of any community financial institution, combination business or farm
property, on which is located a permanent structure actually used as a
residence (other than for temporary or seasonal housing), where the
residence constitutes an integral part of the property; or
(2) A security representing:
(i) A right to receive a portion of the cash flows from a pool of
long-term loans, provided that, at the time of issuance of the
security, all of the loans meet the requirements of paragraph (1) of
this definition; or
(ii) An interest in other securities, all of which meet the
requirements of paragraph (2)(i) of this definition.
Insurance company means a company whose primary business is the
underwriting of insurance for nonaffiliated persons or entities.
Insured depository institution means an insured depository
institution as defined in section 2(9) of the Bank Act, as amended (12
U.S.C. 1422(9)).
Long-term means a term to maturity of five years or greater at the
time of origination.
Manufactured housing means a manufactured home as defined in
section 603(6) of the National Manufactured Housing Construction and
Safety Standards Act of 1974, as amended (42 U.S.C. 5402(6)).
Multifamily property means:
(1) Real property that is solely residential and includes five or
more dwelling units;
(2) Real property that includes five or more dwelling units
combined with commercial units, provided that the property is primarily
residential; or
(3) Nursing homes, dormitories, or homes for the elderly.
NAIC means the National Association of Insurance Commissioners.
Nonperforming loans and leases means the sum of the following,
reported on a regulatory financial report:
(1) Loans and leases that have been past due for 90 days (60 days,
in the case of credit union applicants) or longer but are still
accruing;
(2) Loans and leases on a nonaccrual basis; and
(3) Restructured loans and leases (not already reported as
nonperforming).
Nonresidential real property means real property that is not used
for residential purposes, including business or industrial property,
hotels, motels, churches, hospitals, educational and charitable
institution buildings or facilities, clubs, lodges, association
buildings, golf courses, recreational facilities, farm property not
containing a dwelling unit, or similar types of property.
One-to-four family property means:
(1) Real property that is solely residential, including one-to-four
family dwelling units or more than four family dwelling units if each
dwelling unit is separated from the other dwelling units by dividing
walls that extend from ground to roof, such as row houses, townhouses
or similar types of property;
(2) Manufactured housing if applicable state law defines the
purchase or holding of manufactured housing as the purchase or holding
of real property;
(3) Individual condominium dwelling units or interests in
individual cooperative housing dwelling units that are part of a
condominium or cooperative building without regard to the number of
total dwelling units therein; or
(4) Real property which includes one-to-four family dwelling units
combined with commercial units, provided the property is primarily
residential.
Operating expenses means, in the case of a CDFI applicant, expenses
for business operations, including, but not limited to, staff salaries
and benefits, professional fees, interest, loan loss provision, and
depreciation, contained in the applicant's audited financial
statements.
Other real estate owned means all other real estate owned (i.e.,
foreclosed
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and repossessed real estate), reported on a regulatory financial
report, and does not include direct and indirect investments in real
estate ventures.
Regulatory examination report means a written report of examination
prepared by the applicant's appropriate regulator, containing, in the
case of insured depository institution applicants, a composite rating
assigned to the institution following the guidelines of the Uniform
Financial Institutions Rating System, including a CAMELS rating or
other similar rating.
Regulatory financial report means a financial report that an
institution is required to file with its appropriate regulator on a
specific periodic basis, including the quarterly call report for
commercial banks and savings associations, quarterly or semi-annual
call report for credit unions, NAIC's annual or quarterly statement for
insurance companies, or other similar report, including such report
maintained by the appropriate regulator in an electronic database.
Residential mortgage loan means any one of the following types of
loans, whether or not fully amortizing:
(1) A home mortgage loan;
(2) A funded residential construction loan;
(3) A loan secured by manufactured housing whether or not defined
by state law as secured by an interest in real property;
(4) A loan secured by a junior lien on one-to-four family property
or multifamily property;
(5) A security representing:
(i) A right to receive a portion of the cash flows from a pool of
loans, provided that, at the time of issuance of the security, all of
the loans meet the requirements of one of paragraphs (1) through (4) of
this definition; or
(ii) An interest in other securities, all of which meet the
requirements of paragraph (5)(i) of this definition;
(6) A home mortgage loan secured by a leasehold interest, as
defined in paragraph (1)(ii) of the definition of ``home mortgage
loan,'' except that the period of the lease term may be for any
duration; or
(7) A loan that finances one or more properties or activities that,
if made by a member, would satisfy the statutory requirements for the
Community Investment Program established under section 10(i) of the
Bank Act (12 U.S.C. 1430(i)), or the regulatory requirements
established for any Community Investment Cash Advance program.
Restricted assets means both permanently restricted assets and
temporarily restricted assets, as those terms are used in Financial
Accounting Standard No. 117, or any successor publication.
Total assets means the total assets reported on a regulatory
financial report or, in the case of a CDFI, the total assets contained
in the CDFI's audited financial statements.
Unrestricted cash and cash equivalents means, in the case of a CDFI
applicant, cash and highly liquid assets that can be easily converted
into cash that are not restricted in a manner that prevents their use
in paying expenses, as contained in the applicant's audited financial
statements.
Subpart B--Membership Application Process
Sec. 1263.2 Membership application requirements.
(a) Application. Except as otherwise specified in this part, no
institution may become a member of a Bank unless it has submitted to
that Bank an application that satisfies the requirements of this part.
The application shall include a written resolution or certification
duly adopted by the applicant's board of directors, or by an individual
with authority to act on behalf of the applicant's board of directors,
of the following:
(1) Applicant review. Applicant has reviewed the requirements of
this part and, as required by this part, has provided to the best of
applicant's knowledge the most recent, accurate, and complete
information available; and
(2) Duty to supplement. Applicant will promptly supplement the
application with any relevant information that comes to applicant's
attention prior to the Bank's decision on whether to approve or deny
the application, and if the Bank's decision is appealed pursuant to
Sec. 1263.5, prior to resolution of any appeal by FHFA.
(b) Digest. The Bank shall prepare a written digest for each
applicant stating whether or not the applicant meets each of the
requirements in Sec. Sec. 1263.6 to 1263.19, the Bank's findings, and
the reasons therefor.
(c) File. The Bank shall maintain a membership file for each
applicant for at least three years after the Bank decides whether to
approve or deny membership or, in the case of an appeal to FHFA, for
three years after the resolution of the appeal. The membership file
shall contain at a minimum:
(1) Digest. The digest required by paragraph (b) of this section.
(2) Required documents. All documents required to be filed by an
applicant under Sec. Sec. 1263.6 to 1263.19, including those documents
required to establish or rebut a presumption under this part, shall be
described in and attached to the digest. The Bank may retain in the
file only the relevant portions of the regulatory financial reports
required by this part. If an applicant's appropriate regulator requires
return or destruction of a regulatory examination report, the date that
the report is returned or destroyed shall be noted in the file.
(3) Additional documents. Any additional document submitted by the
applicant, or otherwise obtained or generated by the Bank, concerning
the applicant.
(4) Decision resolution. The decision resolution described in Sec.
1263.3(b).
Sec. 1263.3 Decision on application.
(a) Authority. FHFA hereby authorizes the Banks to approve or deny
all applications for membership, subject to the requirements of this
part. The authority to approve membership applications may be exercised
only by a committee of the Bank's board of directors, the Bank
president, or a senior officer who reports directly to the Bank
president, other than an officer with responsibility for business
development.
(b) Decision resolution. For each applicant, the Bank shall prepare
a written resolution duly adopted by the Bank's board of directors, by
a committee of the board of directors, or by an officer with delegated
authority to approve membership applications. The decision resolution
shall state:
(1) That the statements in the digest are accurate to the best of
the Bank's knowledge, and are based on a diligent and comprehensive
review of all available information identified in the digest; and
(2) The Bank's decision and the reasons therefor. Decisions to
approve an application should state specifically that:
(i) The applicant is authorized under the laws of the United States
and the laws of the appropriate state to become a member of, purchase
stock in, do business with, and maintain deposits in, the Bank to which
the applicant has applied; and
(ii) The applicant meets all of the membership eligibility criteria
of the Bank Act and this part.
(c) Action on applications. The Bank shall act on an application
within 60 calendar days of the date the Bank deems the application to
be complete. An application is ``complete'' when a Bank has obtained
all the information required by this part, and any other information
the Bank deems necessary, to process the application. If an application
that was deemed complete
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subsequently is deemed incomplete because the Bank determines during
the review process that additional information is necessary to process
the application, the Bank may suspend the 60-day processing period
until the Bank again deems the application to be complete, at which
time the processing period shall resume. The Bank shall notify an
applicant in writing when it deems the applicant's application to be
complete, and shall maintain a copy of the notice in the applicant's
membership file. The Bank shall notify an applicant whenever it
suspends or resumes the 60-day processing period and shall maintain a
written record of those notifications in the applicant's membership
file. Within three business days of a Bank's decision on an
application, the Bank shall provide the applicant and FHFA with a copy
of the Bank's decision resolution.
Sec. 1263.4 Automatic membership.
(a) Automatic membership for certain charter conversions. An
insured depository institution member that converts from one charter
type to another automatically shall become a member of the Bank of
which the converting institution was a member on the effective date of
the conversion, provided that the converted institution continues to be
an insured depository institution and the assets of the institution
immediately before and immediately after the conversion are not
materially different. In such case, all relationships existing between
the member and the Bank at the time of such conversion may continue.
(b) Automatic membership for transfers. Any member that relocates
its principal place of business to another Bank district or that
redesignates its principal place of business to another Bank district
pursuant to Sec. 1263.19(c) automatically shall become a member of the
Bank of that district upon the purchase of the minimum amount of Bank
stock required for membership in that Bank, as required by Sec.
1263.20.
(c) Automatic membership, in the Bank's discretion, for certain
consolidations.--(1) If a member institution (or institutions) and a
nonmember institution are consolidated, and the consolidated
institution has its principal place of business in a State in the same
Bank district as the disappearing institution (or institutions), and
the consolidated institution will operate under the charter of the
nonmember institution, on the effective date of the consolidation, the
consolidated institution may, in the discretion of the Bank of which
the disappearing institution (or institutions) was a member immediately
prior to the effective date of the consolidation, automatically become
a member of such Bank upon the purchase of the minimum amount of Bank
stock required for membership in that Bank, as required by Sec.
1263.20, provided that:
(i) 90 percent or more of the consolidated institution's total
assets are derived from the total assets of the disappearing member
institution (or institutions); and
(ii) The consolidated institution provides written notice to such
Bank, within 60 calendar days after the effective date of the
consolidation, that it desires to be a member of the Bank.
(2) The provisions of Sec. 1263.24(b)(4)(i) shall apply, and upon
approval of automatic membership by the Bank, the provisions of Sec.
1263.24(c) shall apply.
Sec. 1263.5 Appeals.
(a) Appeals by applicants.--(1) Filing procedure. Within 90
calendar days of the date of a Bank's decision to deny an application
for membership, the applicant may file a written appeal of the decision
with FHFA.
(2) Documents. The applicant's appeal shall be addressed to the
Deputy Director for Federal Home Loan Bank Regulation, Federal Housing
Finance Agency, 400 Seventh Street SW., Washington, DC 20024, with a
copy to the Bank, and shall include the following documents:
(i) Bank's decision resolution. A copy of the Bank's decision
resolution; and
(ii) Basis for appeal. An applicant must provide a statement of the
basis for the appeal with sufficient facts, information, analysis, and
explanation to rebut any applicable presumptions, or otherwise to
support the applicant's position.
(b) Record for appeal.--(1) Copy of membership file. Upon receiving
a copy of an appeal, the Bank whose action has been appealed (appellee
Bank) shall provide FHFA with a copy of the applicant's complete
membership file. Until FHFA resolves the appeal, the appellee Bank
shall supplement the materials provided to FHFA as any new materials
are received.
(2) Additional information. FHFA may request additional information
or further supporting arguments from the appellant, the appellee Bank,
or any other party that FHFA deems appropriate.
(c) Deciding appeals. FHFA shall consider the record for appeal
described in paragraph (b) of this section and shall resolve the appeal
based on the requirements of the Bank Act and this part within 90
calendar days of the date the appeal is filed with FHFA. In deciding
the appeal, FHFA shall apply the presumptions in this part, unless the
appellant or appellee Bank presents evidence to rebut a presumption as
provided in Sec. 1263.18.
Subpart C--Eligibility Requirements
Sec. 1263.6 General eligibility requirements.
(a) Requirements. Any building and loan association, savings and
loan association, cooperative bank, homestead association, insurance
company, savings bank, community development financial institution
(including a CDFI credit union), or insured depository institution
shall be eligible to be a member of a Bank if:
(1) It is duly organized under tribal law, or under the laws of any
State or of the United States;
(2) It is subject to inspection and regulation under the banking
laws, or under similar laws, of any State or of the United States or,
in the case of a CDFI, is certified by the CDFI Fund;
(3) It makes long-term home mortgage loans;
(4) Its financial condition is such that advances may be safely
made to it;
(5) The character of its management is consistent with sound and
economical home financing; and
(6) Its home financing policy is consistent with sound and
economical home financing.
(b) Additional eligibility requirement for certain insured
depository institutions. In order to be eligible to be a member of a
Bank, an insured depository institution that is not a community
financial institution and that was not a member of a Bank as of January
1, 1989 also must have at least 10 percent of its total assets in
residential mortgage loans.
(c) Ineligibility.--(1) General. Except as provided in paragraph
(c)(2) of this section, an institution that does not satisfy the
requirements of this part shall be ineligible to be a member of a Bank.
(2) Temporary exception for certain members.--(i) Any captive that
was admitted to Bank membership prior to September 12, 2014 may remain
a member of its Bank until [DATE FIVE (5) YEARS AFTER THE EFFECTIVE
DATE OF THE FINAL RULE] notwithstanding its failure to meet the
definition of ``insurance company'' in Sec. 1263.1, provided that a
Bank may not make or renew any advance to such a member:
(A) If after doing so the total outstanding advances to that member
would exceed forty (40) percent of the member's total assets; or
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(B) If the new or renewed advance has a maturity date later than
[DATE FIVE (5) YEARS AFTER THE EFFECTIVE DATE OF THE FINAL RULE];
(ii) A Bank shall terminate the membership of any captive that has
remained a Bank member pursuant to paragraph (c)(2)(i) of this section
as of [DATE FIVE (5) YEARS AFTER THE EFFECTIVE DATE OF THE FINAL RULE],
as provided under Sec. 1263.27.
Sec. 1263.7 Duly organized requirement.
An institution shall be deemed to be duly organized, as required by
section 4(a)(1)(A) of the Bank Act (12 U.S.C. 1424(a)(1)(A)) and Sec.
1263.6(a)(1), if it is chartered by a State or federal agency as a
building and loan association, savings and loan association,
cooperative bank, homestead association, insurance company, savings
bank, or insured depository institution or, in the case of a CDFI, is
incorporated under State or tribal law.
Sec. 1263.8 Subject to inspection and regulation requirement.
An institution shall be deemed to be subject to inspection and
regulation, as required by section 4(a)(1)(B) of the Bank Act (12
U.S.C. 1424 (a)(1)(B)) and Sec. 1263.6(a)(2) if, in the case of an
insured depository institution or insurance company, it is subject to
inspection and regulation by its appropriate regulator. A CDFI that is
certified by the CDFI Fund is not subject to this requirement.
Sec. 1263.9 Makes long-term home mortgage loans requirement.
(a) Continuous one percent requirement. An institution shall be
deemed to make long-term home mortgage loans, as required by section
4(a)(1)(C) of the Bank Act (12 U.S.C. 1424(a)(1)(C)) and Sec.
1263.6(a)(3), if it maintains at least one percent of its total assets
in long-term home mortgage loans. This requirement shall apply on a
continuous basis to all members.
(b) Determining compliance.--(1) In determining whether an
institution maintains at least one percent of its total assets in long-
term home mortgage loans as required under paragraph (a) of this
section, a Bank shall use three-year averages for both the numerator
(the amount of the institution's home mortgage loans) and the
denominator (the amount of the institution's total assets), with all
numbers being determined as of the end of each of the preceding three
calendar years.
(2) A Bank shall perform the calculation required under paragraph
(b)(1) of this section in conformity with the standards set forth in
Sec. 1263.11.
Sec. 1263.10 Ten percent requirement for certain insured depository
institution applicants.
(a) Continuous ten percent requirement. An insured depository
institution applicant that is subject to the 10 percent requirement of
section 4(a)(2)(A) of the Bank Act (12 U.S.C. 1424(a)(2)(A)) and Sec.
1263.6(b) shall be deemed to comply with that requirement if it
maintains at least 10 percent of its total assets in residential
mortgage loans. This requirement shall apply on a continuous basis to
all insured depository institution members that are not community
financial institutions and were not members of a Bank as of January 1,
1989.
(b) Determining compliance.--(1) In determining whether an
institution maintains at least 10 percent of its total assets in
residential mortgage loans as required under paragraph (a) of this
section, a Bank shall use three-year averages for both the numerator
(the amount of the institution's residential mortgage loans) and the
denominator (the amount of the institution's total assets), with all
numbers being determined as of the end of each of the preceding three
calendar years. For purposes of this calculation, any assets used to
secure mortgage-backed securities as described in paragraph (5) of the
definition of ``residential mortgage loan'' set forth in Sec. 1263.1
shall not be included in the amount of residential mortgage loans held.
(2) Each Bank shall perform the calculation required under
paragraph (b)(1) of this section in conformity with the standards set
forth in Sec. 1263.11.
Sec. 1263.11 Timing of and standards for calculations required under
Sec. Sec. 1263.9 and 1263.10.
(a) Timing of calculations.--(1) Applicants. For applicants, a Bank
shall perform the calculations required under Sec. 1263.9(b) and, if
applicable, Sec. 1263.10(b) at the time it is considering the
institution's application to become a member of the Bank.
(2) Members. For members, a Bank shall perform the calculations
required under Sec. 1263.9(b) and, if applicable, Sec. 1263.10(b)
annually, as soon as practicable after the member's regulatory
financial report or, where appropriate, audited financial statements
for the preceding year-end becomes available.
(b) Sources of Data.--(1) Insured depository institutions and
insurance companies. For insured depository institutions and insurance
companies:
(i) A Bank shall obtain the data necessary to perform the
calculations required under Sec. Sec. 1263.9(b) and 1263.10(b) from
the three most recently available year-end regulatory financial reports
filed by the institution with its appropriate regulator.
(ii) If the data obtained from the regulatory financial reports for
a particular institution do not demonstrate that it meets the one
percent requirement of Sec. 1263.9(a) or, if applicable, the 10
percent requirement of Sec. 1263.10(a), then a Bank may accept a
written certification from the institution's external auditor that
states the actual amount of home mortgage loans or residential mortgage
loans, as appropriate, held by the institution as of the end of any or
all of the three most recently completed calendar years and may use
that data in performing the required calculation for that institution.
(2) CDFIs. For CDFIs, other than CDFI credit unions:
(i) A Bank shall obtain the data necessary to perform the
calculation required under Sec. 1263.9 from the institution's annual
audited financial statements.
(ii) If the audited financial statements do not demonstrate that
the CDFI meets the one percent requirement of Sec. 1263.9(a), then a
Bank may accept a written certification from the CDFI's external
auditor that states the actual amount of total assets and home mortgage
loans held by the CDFI as of the end of each of the three most recently
completed calendar years, and may use that data in performing the
required calculation for that CDFI.
(iii) For any CDFI with average total assets of less than $100
million over the three preceding year-ends, a Bank may use a written
certification prepared by an executive officer of the CDFI, in lieu of
a certification from the external auditor.
(c) Agency guidance. In determining the amount of an institution's
home mortgage loans for purposes of the calculation required under
Sec. 1263.9, or the amount of an institution's residential mortgage
loans for purposes of the calculation required under Sec. 1263.10, a
Bank shall follow any guidance issued by FHFA regarding the derivation
of data from particular types of regulatory financial reports,
including the extent to which particular schedules or line items may be
used to determine the amount of an institution's home mortgage loans or
residential mortgage loans.
Sec. 1263.12 Financial condition requirement for depository
institutions and CDFI credit unions.
(a) Review requirement. In determining whether a building and loan
association, savings and loan
[[Page 54875]]
association, cooperative bank, homestead association, savings bank,
insured depository institution, or CDFI credit union has complied with
the financial condition requirements of section 4(a)(2)(B) of the Bank
Act (12 U.S.C. 1424(a)(2)(B)) and Sec. 1263.6(a)(4), the Bank shall
obtain as a part of the membership application and review each of the
following documents:
(1) Regulatory financial reports. The regulatory financial reports
filed by the applicant with its appropriate regulator for the last six
calendar quarters and three year-ends preceding the date the Bank
receives the application;
(2) Financial statement. In order of preference--
(i) The most recent independent audit of the applicant conducted in
accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the applicant;
(ii) The most recent independent audit of the applicant's parent
holding company conducted in accordance with generally accepted
auditing standards by a certified public accounting firm which submits
a report on the consolidated holding company but not on the applicant
separately;
(iii) The most recent directors' examination of the applicant
conducted in accordance with generally accepted auditing standards by a
certified public accounting firm;
(iv) The most recent directors' examination of the applicant
performed by other external auditors;
(v) The most recent review of the applicant's financial statements
by external auditors;
(vi) The most recent compilation of the applicant's financial
statements by external auditors; or
(vii) The most recent audit of other procedures of the applicant.
(3) Regulatory examination report. The applicant's most recent
available regulatory examination report prepared by its appropriate
regulator, a summary prepared by the Bank of the applicant's strengths
and weaknesses as cited in the regulatory examination report, and a
summary prepared by the Bank or applicant of actions taken by the
applicant to respond to examination weaknesses;
(4) Enforcement actions. A description prepared by the Bank or
applicant of any outstanding enforcement actions against the applicant,
responses by the applicant, reports as required by the enforcement
action, and verbal or written indications, if available, from the
appropriate regulator of how the applicant is complying with the terms
of the enforcement action; and
(5) Additional information. Any other relevant document or
information concerning the applicant that comes to the Bank's attention
in reviewing the applicant's financial condition.
(b) Standards. An applicant of the type described in paragraph (a)
of this section shall be deemed to be in compliance with the financial
condition requirement of section 4(a)(2)(B) of the Bank Act (12 U.S.C.
1424(a)(2)(B)) and Sec. 1263.6(a)(4), if:
(1) Recent composite regulatory examination rating. The applicant
has received a composite regulatory examination rating from its
appropriate regulator within two years preceding the date the Bank
receives the application;
(2) Capital requirement. The applicant meets all of its minimum
statutory and regulatory capital requirements as reported in its most
recent quarter-end regulatory financial report filed with its
appropriate regulator; and
(3) Minimum performance standard--(i) Except as provided in
paragraph (b)(3)(iii) of this section, the applicant's most recent
composite regulatory examination rating from its appropriate regulator
within the past two years was ``1'', or the most recent rating was
``2'' or ``3'' and, based on the applicant's most recent regulatory
financial report filed with its appropriate regulator, the applicant
satisfied all of the following performance trend criteria--
(A) Earnings. The applicant's adjusted net income was positive in
four of the six most recent calendar quarters;
(B) Nonperforming assets. The applicant's nonperforming loans and
leases plus other real estate owned, did not exceed 10 percent of its
total loans and leases plus other real estate owned, in the most recent
calendar quarter; and
(C) Allowance for loan and lease losses. The applicant's ratio of
its allowance for loan and lease losses plus the allocated transfer
risk reserve to nonperforming loans and leases was 60 percent or
greater during four of the six most recent calendar quarters.
(ii) For applicants that are not required to report financial data
to their appropriate regulator on a quarterly basis, the information
required in paragraph (b)(3)(i) of this section may be reported on a
semi-annual basis.
(iii) A CDFI credit union applicant must meet the performance trend
criteria in paragraph (b)(3)(i) of this section irrespective of its
composite regulatory examination rating.
(c) Eligible collateral not considered. The availability of
sufficient eligible collateral to secure advances to the applicant is
presumed and shall not be considered in determining whether an
applicant is in the financial condition required by section 4(a)(2)(B)
of the Bank Act (12 U.S.C. 1424(a)(2)(B)) and Sec. 1263.6(a)(4).
Sec. 1263.13 Character of management requirement.
(a) General. A building and loan association, savings and loan
association, cooperative bank, homestead association, savings bank,
insured depository institution, insurance company, and CDFI credit
union shall be deemed to be in compliance with the character of
management requirements of section 4(a)(2)(C) of the Bank Act (12
U.S.C. 1424(a)(2)(C)) and Sec. 1263.6(a)(5) if the applicant provides
to the Bank an unqualified written certification duly adopted by the
applicant's board of directors, or by an individual with authority to
act on behalf of the applicant's board of directors, that:
(1) Enforcement actions. Neither the applicant nor any of its
directors or senior officers is subject to, or operating under, any
enforcement action instituted by its appropriate regulator;
(2) Criminal, civil or administrative proceedings. Neither the
applicant nor any of its directors or senior officers has been the
subject of any criminal, civil or administrative proceedings reflecting
upon creditworthiness, business judgment, or moral turpitude since the
most recent regulatory examination report; and
(3) Criminal, civil or administrative monetary liabilities,
lawsuits or judgments. There are no known potential criminal, civil or
administrative monetary liabilities, material pending lawsuits, or
unsatisfied judgments against the applicant or any of its directors or
senior officers since the most recent regulatory examination report,
that are significant to the applicant's operations.
(b) CDFIs other than CDFI credit unions. A CDFI applicant, other
than a CDFI credit union, shall be deemed to be in compliance with the
character of management requirement of Sec. 1263.6(a)(5), if the
applicant provides an unqualified written certification duly adopted by
the applicant's board of directors, or by an individual with authority
to act on behalf of the applicant's board of directors, that:
(1) Criminal, civil or administrative proceedings. Neither the
applicant nor any of its directors or senior officers has been the
subject of any criminal, civil or administrative proceedings reflecting
upon creditworthiness, business judgment, or moral turpitude in the
past three years; and
[[Page 54876]]
(2) Criminal, civil or administrative monetary liabilities,
lawsuits or judgments. There are no known potential criminal, civil or
administrative monetary liabilities, material pending lawsuits, or
unsatisfied judgments against the applicant or any of its directors or
senior officers arising within the past three years that are
significant to the applicant's operations.
Sec. 1263.14 Home financing policy requirement.
(a) Standard. An institution shall be deemed to be in compliance
with the home financing policy requirements of section 4(a)(2)(C) of
the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec. 1263.6(a)(6), if the
institution has received a CRA rating of ``Satisfactory'' or better on
its most recent CRA performance evaluation.
(b) Written justification required. An applicant that is not
subject to the CRA shall file, as part of its application for
membership, a written justification acceptable to the Bank of how and
why the applicant's home financing policy is consistent with the Bank
System's housing finance mission.
Sec. 1263.15 De novo insured depository institutions.
(a) Presumptive compliance. A de novo insured depository
institution applicant shall be deemed to meet the duly organized,
subject to inspection and regulation, financial condition, and
character of management requirements of Sec. Sec. 1263.7, 1263.8,
1263.12, and 1263.13, respectively.
(b) Makes long-term home mortgage loans requirement.--(1) Initial
compliance. A de novo insured depository institution applicant shall be
deemed to make long-term home mortgage loans, as required by section
4(a)(1)(C) of the Bank Act (12 U.S.C. 1424(a)(1)(C)) and Sec.
1263.6(a)(3), if it has filed as part of its application for membership
a written justification acceptable to the Bank of how its home
financing credit policy and lending practices will include originating
or purchasing long-term home mortgage loans.
(2) Subsequent compliance. A de novo insured depository institution
member that has been deemed to comply with the makes long-term home
mortgage loans requirement under paragraph (b)(1) of this section shall
be deemed to remain in compliance on that basis until it submits to its
appropriate regulator its next year-end regulatory financial report
following the one year anniversary of the date it became a member. The
Bank shall then determine compliance for that member as specified in
Sec. 1263.9, except that the Bank shall base that determination on the
actual number of year-end regulatory financial reports the member has
filed since the one year anniversary of the date it became a member
until three such year-end reports are available.
(c) 10 percent requirement.--(1) Initial compliance. A de novo
insured depository institution applicant that is subject to the 10
percent requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C.
1424(a)(2)(A)) and Sec. 1263.6(b) shall be deemed to comply with that
requirement if it commenced business operations less than one year
before applying for Bank membership.
(2) Subsequent Compliance. A de novo insured depository institution
member that was deemed to comply with the 10 percent requirement under
paragraph (c)(1) of this section shall be deemed to remain in
compliance on that basis until one year after commencing its initial
business operations. Subsequently, the Bank shall determine compliance
for that member as specified in Sec. 1263.10, except that if the
member has not yet filed three year-end regulatory financial reports,
the Bank shall base that determination on the actual number of year-end
regulatory financial reports the member has filed since commencing its
initial business operations.
(d) Home financing policy requirement.--(1) Conditional approval. A
de novo insured depository institution applicant that has not received
its first CRA performance evaluation, shall be conditionally deemed to
comply with the home financing policy requirement of section 4(a)(2)(C)
of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec. 1263.6(a)(6) if the
applicant has filed, as part of its application for membership, a
written justification acceptable to the Bank of how and why its home
financing credit policy and lending practices will meet the credit
needs of its community.
(2) Final approval. A de novo insured depository institution member
that has been conditionally deemed to comply with the home financing
policy requirement under paragraph (d)(1) of this section shall be
deemed to remain in compliance on that basis until it receives its
first CRA performance evaluation. If the member receives a CRA rating
of ``Satisfactory'' or better on its first CRA performance evaluation
and provides written evidence of that rating to the Bank, it shall be
deemed to have complied with the home financing policy requirement and
its membership approval shall cease to be conditional. If the member
receives a rating of ``Needs to Improve'' or ``Substantial Non-
Compliance'' on its first CRA performance evaluation, and fails to
rebut the presumption of non-compliance with the home financing policy
requirement as provided under Sec. 1263.18(f), it shall be deemed to
have been out of compliance with the home financing policy requirement
and the Bank's conditional approval of the membership application shall
be deemed null and void.
(e) Other rules. A de novo insured depository institution member
that was deemed to have complied with the eligibility requirements for
membership by virtue of the alternative requirements of this section
shall be subject to all regulations applicable to members generally,
including those relating to stock purchase requirements and advances or
collateral, notwithstanding the possibility that its membership may be
conditional for some period of time. If a de novo insured depository
institution's conditional membership is terminated due to a loss of
eligibility for failure to comply with the requirements of this
section, then the Bank shall liquidate any outstanding indebtedness and
redeem or repurchase its capital stock in accordance with Sec.
1263.29.
Sec. 1263.16 Recent merger or acquisition applicants.
(a) Financial condition requirement.--(1) Regulatory financial
reports. For purposes of Sec. 1263.12(a)(1), an applicant that, as a
result of a recent merger or acquisition preceding the date it applies
for membership, has not yet filed regulatory financial reports in the
name of the combined institution for the last six calendar quarters and
the last three calendar year-ends preceding the date it applies for
membership, shall provide to the Bank any regulatory financial reports
that the applicant has filed in the name of the combined institution
with its appropriate regulator.
(2) Performance trend criteria. For purposes of Sec.
1263.12(b)(3)(i)(A) to (C), an applicant that, as a result of a recent
merger or acquisition preceding the date it applies for membership, has
not yet filed combined regulatory financial reports for the last six
calendar quarters preceding such date, shall provide pro forma combined
financial statements for those calendar quarters in which actual
combined regulatory financial reports are unavailable.
(b) Home financing policy requirement. For purposes of Sec.
1263.14, an applicant that, as a result of a recent merger or
acquisition preceding the date it applies for membership, has not
received its first CRA performance evaluation for the combined
institution,
[[Page 54877]]
shall file as part of its application, a written justification
acceptable to the Bank of how and why the applicant's home financing
credit policy and lending practices will meet the credit needs of its
community.
(c) Makes long-term home mortgage loans requirement; 10 percent
requirement. For purposes of determining initial compliance with
Sec. Sec. 1263.9 and 1263.10, a Bank may, in its discretion, permit an
applicant that, as a result of a recent merger or acquisition preceding
the date it applies for membership, has not yet filed a consolidated
regulatory financial report as a combined entity, to provide the
combined pro forma financial statement for the combined entity that the
institutions filed with the regulator that approved the merger or
acquisition. Subsequent compliance with these requirements shall be
based on the post-merger regulatory financial reports filed by the
combined entity.
Sec. 1263.17 Financial condition requirement for insurance company
and certain CDFI applicants.
(a) Insurance companies.--(1) An insurance company applicant shall
be deemed to meet the financial condition requirement of Sec.
1263.6(a)(4) if the Bank determines:
(i) Based on the information contained in the applicant's most
recent regulatory financial report filed with its appropriate
regulator, that the applicant meets all of its minimum statutory and
regulatory capital requirements and the capital standards established
by the NAIC; and
(ii) Based on the applicant's most recent audited financial
statements, that the applicant's financial condition is such that the
Bank can safely make advances to it.
(2) In making this determination required under paragraph
(a)(1)(ii) of this section, the Bank shall use audited financial
statements of the insurance company applicant that have been prepared
in accordance with generally accepted accounting principles, if they
are available, or, in their absence, audited financial statements
prepared in accordance with statutory accounting principles.
(b) CDFIs other than CDFI credit unions.--(1) Review requirement.
In order for a Bank to determine whether a CDFI applicant, other than a
CDFI credit union, has complied with the financial condition
requirement of Sec. 1263.6(a)(4), the applicant shall submit, as a
part of its membership application, each of the following documents,
and the Bank shall consider all such information prior to acting on the
application for membership:
(i) Financial statements. An independent audit conducted within the
prior year in accordance with generally accepted auditing standards by
a certified public accounting firm, plus more recent quarterly
statements, if available, and financial statements for the two years
prior to the most recent audited financial statement. At a minimum, all
such financial statements must include income and expense statements,
statements of activities, statements of financial position, and
statements of cash flows. The financial statement for the most recent
year must include separate schedules or disclosures of the financial
position of each of the applicant's affiliates, descriptions of their
lines of business, detailed financial disclosures of the relationship
between the applicant and its affiliates (such as indebtedness or
subordinate debt obligations), disclosures of interlocking
directorships with each affiliate, and identification of temporary and
permanently restricted funds and the requirements of these
restrictions;
(ii) CDFI Fund certification. The certification that the applicant
has received from the CDFI Fund. If the certification is more than
three years old, the applicant must also submit a written statement
attesting that there have been no material events or occurrences since
the date of certification that would adversely affect its strategic
direction, mission, or business operations; and
(iii) Additional information. Any other relevant document or
information a Bank requests concerning the applicant's financial
condition that is not contained in the applicant's financial
statements, as well as any other information that the applicant
believes demonstrates that it satisfies the financial condition
requirement of Sec. 1263.6(a)(4), notwithstanding its failure to meet
any of the financial condition standards of paragraph (b)(2) of this
section.
(2) Standards. A CDFI applicant, other than a CDFI credit union,
shall be deemed to be in compliance with the financial condition
requirement of Sec. 1263.6(a)(4) if it meets all of the following
minimum financial standards--
(i) Net asset ratio. The applicant's ratio of net assets to total
assets is at least 20 percent, with net and total assets including
restricted assets, where net assets is calculated as the residual value
of assets over liabilities and is based on information derived from the
applicant's most recent financial statements;
(ii) Earnings. The applicant has shown positive net income, where
net income is calculated as gross revenues less total expenses, is
based on information derived from the applicant's most recent financial
statements, and is measured as a rolling three-year average;
(iii) Loan loss reserves. The applicant's ratio of loan loss
reserves to loans and leases 90 days or more delinquent (including
loans sold with full recourse) is at least 30 percent, where loan loss
reserves are a specified balance sheet account that reflects the amount
reserved for loans expected to be uncollectible and are based on
information derived from the applicant's most recent financial
statements;
(iv) Liquidity. The applicant has an operating liquidity ratio of
at least 1.0 for the four most recent quarters, and for one or both of
the two preceding years, where the numerator of the ratio includes
unrestricted cash and cash equivalents and the denominator of the ratio
is the average quarterly operating expense.
Sec. 1263.18 Rebuttable presumptions applicable to applicants for
Bank membership.
(a) Rebutting presumptive compliance. The presumption that an
applicant meeting the requirements of Sec. Sec. 1263.7 to 1263.17 is
in compliance with the corresponding eligibility requirements of
section 4(a) of the Bank Act (12 U.S.C. 1424(a)) and Sec. 1263.6(a)
and (b), may be rebutted, and the Bank may deny membership to an
applicant, if the Bank obtains substantial evidence to overcome the
presumption of compliance.
(b) Rebutting presumptive noncompliance. The presumption that an
applicant not meeting a particular requirement of Sec. Sec. 1263.8,
1263.12, 1263.13, 1263.14, or 1263.17, is not in compliance with the
corresponding eligibility requirement of section 4(a) of the Bank Act
(12 U.S.C. 1424(a)) and Sec. 1263.6(a) may be rebutted. The applicant
shall be deemed to be in compliance with an eligibility requirement, if
it satisfies the applicable requirements in this section.
(c) Presumptive noncompliance by insurance company applicant with
``subject to inspection and regulation'' requirement of Sec. 1263.8.
If an insurance company applicant is not subject to inspection and
regulation by an appropriate State regulator accredited by the NAIC, as
required by Sec. 1263.8, the applicant or the Bank shall prepare
[[Page 54878]]
a written justification that provides substantial evidence acceptable
to the Bank that the applicant is subject to inspection and regulation
as required by Sec. 1263.6(a)(2), notwithstanding the regulator's lack
of NAIC accreditation.
(d) Presumptive noncompliance with financial condition requirements
of Sec. Sec. 1263.12 and 1263.17.--(1) Applicants subject to Sec.
1263.12. For applicants subject to Sec. 1263.12, in the case of an
applicant's lack of a composite regulatory examination rating within
the two-year period required by Sec. 1263.12(b)(1), a variance from
the rating required by Sec. 1263.12(b)(3)(i), or a variance from a
performance trend criterion required by Sec. 1263.12(b)(3)(i), the
applicant or the Bank shall prepare a written justification pertaining
to such requirement that provides substantial evidence acceptable to
the Bank that the applicant is in the financial condition required by
Sec. 1263.6(a)(4), notwithstanding the lack of rating or variance.
(2) Applicants subject to Sec. 1263.17. For applicants subject to
Sec. 1263.17, in the case of an insurance company applicant's variance
from a capital requirement or standard of Sec. 1263.17(a) or, in the
case of a CDFI applicant's variance from the standards of Sec.
1263.17(b), the applicant or the Bank shall prepare a written
justification pertaining to such requirement or standard that provides
substantial evidence acceptable to the Bank that the applicant is in
the financial condition required by Sec. 1263.6(a)(4), notwithstanding
the variance.
(e) Presumptive noncompliance with character of management
requirement of Sec. 1263.13.--(1) Enforcement actions. If an applicant
or any of its directors or senior officers is subject to, or operating
under, any enforcement action instituted by its appropriate regulator,
the applicant shall provide or the Bank shall obtain:
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the applicant or its directors
or senior officers are in substantial compliance with all aspects of
the enforcement action; or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the applicant or its directors or senior officers are
in substantial compliance with all aspects of the enforcement action.
The written analysis shall state each action the applicant or its
directors or senior officers are required to take by the enforcement
action, the actions actually taken by the applicant or its directors or
senior officers, and whether the applicant regards this as substantial
compliance with all aspects of the enforcement action.
(2) Criminal, civil or administrative proceedings. If an applicant
or any of its directors or senior officers has been the subject of any
criminal, civil or administrative proceedings reflecting upon
creditworthiness, business judgment, or moral turpitude since the most
recent regulatory examination report or, in the case of a CDFI
applicant, during the past three years, the applicant shall provide or
the Bank shall obtain--
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the proceedings will not likely
result in an enforcement action; or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the proceedings will not likely result in an
enforcement action or, in the case of a CDFI applicant, that the
proceedings will not likely have a significantly deleterious effect on
the applicant's operations. The written analysis shall state the
severity of the charges, and any mitigating action taken by the
applicant or its directors or senior officers.
(3) Criminal, civil or administrative monetary liabilities,
lawsuits or judgments. If there are any known potential criminal, civil
or administrative monetary liabilities, material pending lawsuits, or
unsatisfied judgments against the applicant or any of its directors or
senior officers since the most recent regulatory examination report or,
in the case of a CDFI applicant, occurring within the past three years,
that are significant to the applicant's operations, the applicant shall
provide or the Bank shall obtain--
(i) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator that the liabilities, lawsuits or
judgments will not likely cause the applicant to fall below its
applicable capital requirements set forth in Sec. Sec. 1263.12(b)(2)
and 1263.17(a); or
(ii) Written analysis. A written analysis acceptable to the Bank
indicating that the liabilities, lawsuits or judgments will not likely
cause the applicant to fall below its applicable capital requirements
set forth in Sec. 1263.12(b)(2) or Sec. 1263.17(a), or the net asset
ratio set forth in Sec. 1263.17(b)(2)(i). The written analysis shall
state the likelihood of the applicant or its directors or senior
officers prevailing, and the financial consequences if the applicant or
its directors or senior officers do not prevail.
(f) Presumptive noncompliance with home financing policy
requirements of Sec. Sec. 1263.14 and 1263.15(d). If an applicant
received a ``Substantial Non-Compliance'' rating on its most recent CRA
performance evaluation, or a ``Needs to Improve'' CRA rating on its
most recent CRA performance evaluation and a CRA rating of ``Needs to
Improve'' or better on any immediately preceding formal CRA performance
evaluation, the applicant shall provide or the Bank shall obtain:
(1) Regulator confirmation. Written or verbal confirmation from the
applicant's appropriate regulator of the applicant's recent
satisfactory CRA performance, including any corrective action that
substantially improved upon the deficiencies cited in the most recent
CRA performance evaluation(s); or
(2) Written analysis. A written analysis acceptable to the Bank
demonstrating that the CRA rating is unrelated to home financing, and
providing substantial evidence of how and why the applicant's home
financing credit policy and lending practices meet the credit needs of
its community.
Sec. 1263.19 Determination of appropriate Bank district for
membership.
(a) Eligibility.--(1) An institution eligible to be a member of a
Bank under the Bank Act and this part may be a member only of the Bank
of the district in which the institution's principal place of business
is located, except as provided in paragraph (a)(2) of this section. A
member shall promptly notify its Bank in writing whenever it relocates
its principal place of business to another state and the Bank shall
inform FHFA in writing of any such relocation.
(2) An institution eligible to become a member of a Bank under the
Bank Act and this part may be a member of the Bank of a district
adjoining the district in which the institution's principal place of
business is located, if demanded by convenience and then only with the
approval of FHFA.
(b) Principal place of business. Except as otherwise designated in
accordance with this section, the principal place of business of an
institution is the state in which the institution maintains its home
office established as such in conformity with the laws under which the
institution is organized and from which the institution conducts
business operations.
(c) Designation of principal place of business.--(1) A member or an
applicant for membership may request in writing to the Bank in the
district where the institution maintains its home office that a state
other than the state in which it maintains its home
[[Page 54879]]
office be designated as its principal place of business. Within 90
calendar days of receipt of such written request, the board of
directors of the Bank in the district where the institution maintains
its home office shall designate a state other than the state where the
institution maintains its home office as the institution's principal
place of business, provided that, all of the following criteria are
satisfied:
(i) At least 80 percent of the institution's accounting books,
records, and ledgers are maintained, located or held in such designated
state;
(ii) A majority of meetings of the institution's board of directors
and constituent committees are conducted in such designated state; and
(iii) A majority of the institution's five highest paid officers
have their place of employment located in such designated state.
(2) Written notice of a designation made pursuant to paragraph
(c)(1) of this section shall be sent to the Bank in the district
containing the designated state, FHFA, and the institution.
(3) The notice of designation made pursuant to paragraph (c)(1) of
this section shall include the state designated as the principal place
of business and the Bank of which the subject institution is eligible
to be a member.
(4) If the board of directors of the Bank in the district where the
institution maintains its home office fails to make the designation
requested by the member or applicant pursuant to paragraph (c)(1) of
this section, then the member or applicant may request in writing that
FHFA make the designation.
(d) Transfer of membership.--(1) In the case of a member that has
designated its principal place of business in accordance with paragraph
(c) to a State located in another Bank district, or in the case of a
member that has relocated its principal place of business to a State in
another Bank district, the transfer of membership from one Bank to
another Bank shall not take effect until the Banks involved reach an
agreement on a method of orderly transfer.
(2) In the event that the Banks involved fail to agree on a method
of orderly transfer, FHFA shall determine the conditions under which
the transfer shall take place.
(e) Effect of transfer. A transfer of membership pursuant to this
section shall be effective for all purposes, but shall not affect
voting rights in the year of the transfer and shall not be subject to
the provisions on termination of membership set forth in section 6 of
the Bank Act (12 U.S.C. 1426) or Sec. Sec. 1263.26 and 1263.27, nor
the restriction on reacquiring Bank membership set forth in Sec.
1263.30.
(f) Insurance companies and CDFIs. For an insurance company or CDFI
that cannot satisfy the requirements of paragraphs (b) or (c) of this
section for designating its principal place of business, a Bank shall
designate as the principal place of business the geographic location
from which the institution actually conducts the predominant portion of
its business activities. Such designations shall be based on the
totality of the circumstances of the particular case and shall be
evidenced by objective factors, such as the location from which the
institution's senior officers direct, control and coordinate its
activities, the locations of the offices from which the institution
conducts its business, or the locations from which its other officers
and employees carry out the business activities. In the case of an
insurance company that maintains no physical offices of its own and has
no employees of its own, or whose senior officers are situated at
multiple locations, a Bank shall designate the state of domicile as the
principal place of business for the insurance company. A Bank
designating the principal place of business for a member under this
provision shall document the bases for its determination in writing and
shall include such documentation in the membership digest and
application file for the institution.
Subpart D--Stock Requirements
Sec. 1263.20 Stock purchase.
(a) Minimum purchase requirement. An institution that has been
approved for membership in a Bank as provided in this part shall become
a member of that Bank upon purchasing the amount of stock required
under the membership stock purchase provisions of that Bank's capital
plan. If an institution fails to purchase the minimum amount of stock
required for membership within 60 calendar days after the date on which
it is approved for membership, the membership approval shall become
void and that institution may not become a member of that Bank until
after it has filed a new application and the Bank has approved that
application pursuant to the requirements of this part.
(b) Issuance of stock. After approving an institution for
membership, and in return for payment in full of the par value, a Bank
shall issue to that institution the amount of capital stock required to
be purchased under the Bank's capital plan.
(c) Reports. Each Bank shall report to FHFA information regarding
the minimum investment in Bank capital stock made by each new member
referred to in paragraph (a) of this section, in accordance with the
instructions provided in the Data Reporting Manual.
Sec. 1263.21 [Reserved]
Sec. 1263.22 Annual calculation of stock holdings.
A Bank shall calculate annually each member's required minimum
holdings of Bank stock using calendar year-end financial data provided
by the member to the Bank, pursuant to Sec. 1263.31(d), and shall
notify each member of the result. The notice shall clearly state that
the Bank's calculation of each member's minimum stock holdings is to be
used to determine the number of votes that the member may cast in that
year's election of directors and shall identify the state within the
district in which the member will vote. A member that does not agree
with the Bank's calculation of the minimum stock purchase requirement
or with the identification of its voting state may request FHFA to
review the Bank's determination. FHFA shall promptly determine the
member's minimum required holdings and its proper voting state, which
determination shall be final.
Sec. 1263.23 Excess stock.
(a) Sale of excess stock. Subject to the restriction in paragraph
(b) of this section, a member may purchase excess stock as long as the
purchase is approved by the member's Bank and is permitted by the laws
under which the member operates.
(b) Restriction. Any Bank with excess stock greater than one
percent of its total assets shall not declare or pay any dividends in
the form of additional shares of Bank stock or otherwise issue any
excess stock. A Bank shall not issue excess stock, as a dividend or
otherwise, if after the issuance, the outstanding excess stock at the
Bank would be greater than one percent of its total assets.
Subpart E--Withdrawal, Termination and Readmission
Sec. 1263.24 Consolidations involving members.
(a) Consolidation of members. Upon the consolidation of two or more
institutions that are members of the same Bank into one institution
operating under the charter of one of the consolidating institutions,
the membership of the surviving institution shall continue and the
membership of
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each disappearing institution shall terminate on the cancellation of
its charter. Upon the consolidation of two or more institutions, at
least two of which are members of different Banks, into one institution
operating under the charter of one of the consolidating institutions,
the membership of the surviving institution shall continue and the
membership of each disappearing institution shall terminate upon
cancellation of its charter, provided, however, that if more than 80
percent of the assets of the consolidated institution are derived from
the assets of a disappearing institution, then the consolidated
institution shall continue to be a member of the Bank of which that
disappearing institution was a member prior to the consolidation, and
the membership of the other institutions shall terminate upon the
effective date of the consolidation.
(b) Consolidation into nonmember.--(1) In general. Upon the
consolidation of a member into an institution that is not a member of a
Bank, where the consolidated institution operates under the charter of
the nonmember institution, the membership of the disappearing
institution shall terminate upon the cancellation of its charter.
(2) Notification. If a member has consolidated into a nonmember
that has its principal place of business in a state in the same Bank
district as the former member, the consolidated institution shall have
60 calendar days after the cancellation of the charter of the former
member within which to notify the Bank of the former member that the
consolidated institution intends to apply for membership in such Bank.
If the consolidated institution does not so notify the Bank by the end
of the period, the Bank shall require the liquidation of any
outstanding indebtedness owed by the former member, shall settle all
outstanding business transactions with the former member, and shall
redeem or repurchase the Bank stock owned by the former member in
accordance with Sec. 1263.29.
(3) Application. If such a consolidated institution has notified
the appropriate Bank of its intent to apply for membership, the
consolidated institution shall submit an application for membership
within 60 calendar days of so notifying the Bank. If the consolidated
institution does not submit an application for membership by the end of
the period, the Bank shall require the liquidation of any outstanding
indebtedness owed by the former member, shall settle all outstanding
business transactions with the former member, and shall redeem or
repurchase the Bank stock owned by the former member in accordance with
Sec. 1263.29.
(4) Outstanding indebtedness. If a member has consolidated into a
nonmember institution, the Bank need not require the former member or
its successor to liquidate any outstanding indebtedness owed to the
Bank or to redeem its Bank stock, as otherwise may be required under
Sec. 1263.29, during:
(i) The initial 60 calendar-day notification period;
(ii) The 60 calendar-day period following receipt of a notification
that the consolidated institution intends to apply for membership; and
(iii) The period of time during which the Bank processes the
application for membership.
(5) Approval of membership. If the application of such a
consolidated institution is approved, the consolidated institution
shall become a member of that Bank upon the purchase of the amount of
Bank stock necessary, when combined with any Bank stock acquired from
the disappearing member, to satisfy the minimum stock purchase
requirements established by the Bank's capital plan.
(6) Disapproval of membership. If the Bank disapproves the
application for membership of the consolidated institution, the Bank
shall require the liquidation of any outstanding indebtedness owed by,
and the settlement of all other outstanding business transactions with,
the former member, and shall redeem or repurchase the Bank stock owned
by the former member in accordance with Sec. 1263.29.
(c) Dividends on acquired Bank stock. A consolidated institution
shall be entitled to receive dividends on the Bank stock that it
acquires as a result of a consolidation with a member in accordance
with applicable FHFA regulations.
Sec. 1263.25 [Reserved]
Sec. 1263.26 Voluntary withdrawal from membership.
(a) In general.--(1) Any institution may withdraw from membership
by providing to the Bank written notice of its intent to withdraw from
membership. A member that has so notified its Bank shall be entitled to
have continued access to the benefits of membership until the effective
date of its withdrawal. The Bank need not commit to providing any
further services, including advances, to a withdrawing member that
would mature or otherwise terminate subsequent to the effective date of
the withdrawal. A member may cancel its notice of withdrawal at any
time prior to its effective date by providing a written cancellation
notice to the Bank. A Bank may impose a fee on a member that cancels a
notice of withdrawal, provided that the fee or the manner of its
calculation is specified in the Bank's capital plan.
(2) A Bank shall notify FHFA within 10 calendar days of receipt of
any notice of withdrawal or notice of cancellation of withdrawal from
membership.
(b) Effective date of withdrawal. The membership of an institution
that has submitted a notice of withdrawal shall terminate as of the
date on which the last of the applicable stock redemption periods ends
for the stock that the member is required to hold, as of the date that
the notice of withdrawal is submitted, under the terms of a Bank's
capital plan as a condition of membership, unless the institution has
cancelled its notice of withdrawal prior to the effective date of the
termination of its membership.
(c) Stock redemption periods. The receipt by a Bank of a notice of
withdrawal shall commence the applicable 6-month and 5-year stock
redemption periods, respectively, for all of the Class A and Class B
stock held by that member that is not already subject to a pending
request for redemption. In the case of an institution, the membership
of which has been terminated as a result of a merger or other
consolidation into a nonmember or into a member of another Bank, the
applicable stock redemption periods for any stock that is not subject
to a pending notice of redemption shall be deemed to commence on the
date on which the charter of the former member is cancelled.
Sec. 1263.27 Involuntary termination of membership.
(a) Grounds. The board of directors of a Bank may terminate the
membership of any institution that:
(1) Fails to comply with any requirement of the Bank Act, any
regulation adopted by FHFA, or any requirement of the Bank's capital
plan;
(2) Becomes insolvent or otherwise subject to the appointment of a
conservator, receiver, or other legal custodian under federal or state
law; or
(3) Would jeopardize the safety or soundness of the Bank if it were
to remain a member.
(b) Stock redemption periods. The applicable 6-month and 5-year
stock redemption periods, respectively, for all of the Class A and
Class B stock owned by a member and not already subject to a pending
request for redemption, shall
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commence on the date that the Bank terminates the institution's
membership.
(c) Membership rights. An institution whose membership is
terminated involuntarily under this section shall cease being a member
as of the date on which the board of directors of the Bank acts to
terminate the membership, and the institution shall have no right to
obtain any of the benefits of membership after that date, but shall be
entitled to receive any dividends declared on its stock until the stock
is redeemed or repurchased by the Bank.
Sec. 1263.28 Loss of eligibility for continued membership;
opportunity to cure.
(a) Loss of membership. A member that fails to remain in compliance
with the ``makes long-term home mortgage loans'' requirement of Sec.
1263.9 or, if applicable, the ``10 percent'' requirement of Sec.
1263.10 as of the end of two consecutive calendar years shall become
ineligible to remain a member of a Bank and shall have its membership
terminated in accordance with this section.
(b) Initial noncompliance. If, when making its annual
determinations of its members' ongoing compliance with Sec. Sec.
1263.9 and 1263.10 that are required under Sec. 1263.11, a Bank
determines that a member has failed to comply with an applicable
requirement as of the end of the most recent calendar year, the Bank
shall:
(1) Provide the member with a written notice that:
(i) Informs the member that it has failed to satisfy an eligibility
requirement for remaining a member of the Bank;
(ii) Identifies the eligibility requirements that the member has
failed to meet and provides the data and calculations on which the Bank
based its determination;
(iii) Describes the actions that the member must take in order to
comply with the eligibility requirements and prevent the loss of its
membership; and
(iv) Clearly states that the Bank will be required to terminate the
institution's membership if it does not come into compliance with the
particular eligibility requirement as of the end of the then-current
calendar year; and
(2) Monitor the member's progress toward meeting the eligibility
requirement by calculating the relevant asset ratio on a quarterly
basis for the remainder of that year, using the data sources specified
in Sec. 1263.11, and promptly notify the member of the Bank's
assessment of the member's compliance with the eligibility requirements
for each of those calendar quarters.
(c) Failure to cure noncompliance. If, when making its annual
determinations of its members' ongoing compliance with Sec. Sec.
1263.9 and 1263.10 that are required under Sec. 1263.11, a Bank
determines that a member that has been notified under paragraph (b) of
this section that it has failed to comply with an applicable
eligibility requirement as of the end of the preceding calendar year
has also failed to comply with that eligibility requirement as of the
end of a second consecutive year, the Bank shall terminate the
membership of that institution for failure to comply with the statutory
and regulatory eligibility requirements for membership, as provided
under Sec. 1263.27, and shall notify the member in writing of its
action.
Sec. 1263.29 Disposition of claims.
(a) In general. If an institution withdraws from membership or its
membership is otherwise terminated, the Bank shall determine an orderly
manner for liquidating all outstanding indebtedness owed by that member
to the Bank and for settling all other claims against the member. After
all such obligations and claims have been extinguished or settled, the
Bank shall return to the member all collateral pledged by the member to
the Bank to secure its obligations to the Bank.
(b) Bank stock. If an institution that has withdrawn from
membership or that otherwise has had its membership terminated remains
indebted to the Bank or has outstanding any business transactions with
the Bank after the effective date of its termination of membership, the
Bank shall not redeem or repurchase any Bank stock that is required to
support the indebtedness or the business transactions until after all
such indebtedness and business transactions have been extinguished or
settled.
Sec. 1263.30 Readmission to membership.
(a) In general. An institution that has withdrawn from membership
or otherwise has had its membership terminated and which has divested
all of its shares of Bank stock, may not be readmitted to membership in
any Bank, or acquire any capital stock of any Bank, for a period of
five years from the date on which its membership terminated and it
divested all of its shares of Bank stock.
(b) Exceptions. An institution that transfers membership between
two Banks without interruption shall not be deemed to have withdrawn
from Bank membership or had its membership terminated.
Subpart F--Other Membership Provisions
Sec. 1263.31 Reports and examinations.
As a condition precedent to Bank membership, each member:
(a) Consents to such examinations as the Bank or FHFA may require
for purposes of the Bank Act;
(b) Agrees that reports of examinations by local, state or federal
agencies or institutions may be furnished by such authorities to the
Bank or FHFA upon request;
(c) Agrees to give the Bank or the appropriate Federal banking
agency, upon request, such information as the Bank or the appropriate
Federal banking agency may need to compile and publish cost of funds
indices and to publish other reports or statistical summaries
pertaining to the activities of Bank members;
(d) Agrees to provide the Bank with calendar year-end financial
data each year, for purposes of making the calculation described in
Sec. 1263.22; and
(e) Agrees to provide the Bank with copies of reports of condition
and operations required to be filed with the member's appropriate
Federal banking agency, if applicable, within 20 calendar days of
filing, as well as copies of any annual report of condition and
operations required to be filed.
Sec. 1263.32 Official membership insignia.
Members may display the approved insignia of membership on their
documents, advertising and quarters, and likewise use the words
``Member Federal Home Loan Bank System.''
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2014-21114 Filed 9-11-14; 8:45 am]
BILLING CODE 8070-01-P