[Federal Register Volume 80, Number 242 (Thursday, December 17, 2015)]
[Proposed Rules]
[Pages 78689-78699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31660]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 955

FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1201 and 1268

RIN 2590-AA69


Acquired Member Assets

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

ACTION: Notice of proposed rulemaking; request for comment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing 
amendments to the existing Acquired Member Assets (AMA) regulation, 
which applies to the Federal Home Loan Banks (Banks). In particular, 
FHFA proposes to remove from the regulation requirements based on 
ratings issued by a Nationally Recognized Statistical Ratings 
Organization (NRSRO), as required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act). Additionally, FHFA 
proposes to transfer the AMA regulation from the former Federal Housing 
Finance Board (Finance Board) regulations to FHFA's regulations. FHFA 
also proposes to reorganize the current regulation and to modify and 
clarify a number of provisions in the regulation.

DATES: FHFA must receive written comments on or before April 15, 2016.

ADDRESSES: You may submit your comments, identified by Regulatory 
Information Number (RIN) 2590-AA69, 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-AA69 in the subject line of the 
message.
     Courier/Hand Delivery: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA69, 
Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor, 
Washington, DC 20219. Deliver the package to the Seventh Street 
entrance Guard Desk, First Floor, on business days between 9 a.m. and 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-AA69, Federal Housing 
Finance Agency, 400 Seventh Street SW., Eighth Floor, Washington, DC 
20219.

FOR FURTHER INFORMATION CONTACT: Christina Muradian, Principal 
Financial Analyst, [email protected], 202-649-3323, Division 
of Bank Regulation; or Thomas E. Joseph, Associate General Counsel, 
[email protected], 202-649-3076 (these are not toll-free numbers), 
Office of General Counsel, Federal Housing Finance Agency, 400 Seventh 
Street SW., Washington, DC 20219. 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 regulation. 
After considering all comments, FHFA will develop a final regulation. 
FHFA will post without change copies of all comments received on the 
FHFA Web site at http://www.fhfa.gov, and will include any personal 
information you provide, such as your name, address, email address, and 
telephone number. FHFA will make copies of all comments timely received 
available for examination by the public on business days between the 
hours of 10 a.m. and 3 p.m., at the Federal Housing Finance Agency, 400 
Seventh Street SW., Eighth Floor, Washington, DC 20219. To make an 
appointment to inspect comments, please call the Office of General 
Counsel at 202-649-3804.

II. Background

A. Creation of the Federal Housing Finance Agency

    Effective July 30, 2008, the Housing and Economic Recovery Act of 
2008 (HERA) \1\ created FHFA as a new independent agency of the federal 
government. HERA transferred to FHFA the supervisory and oversight 
responsibilities of the Office of Federal Housing Enterprise Oversight 
(OFHEO) over the Federal National Mortgage Association (Fannie Mae), 
the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, 
Enterprises), and of the Finance Board over the Banks and the Bank 
System's Office of Finance. Under the legislation, the Enterprises, the 
Banks, and the Office of Finance continue to operate under regulations 
promulgated by OFHEO and the Finance Board until such regulations are 
superseded by regulations issued by FHFA.\2\
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    \1\ Public Law 110-289, 122 Stat. 2654
    \2\ See 12 U.S.C. 4511, note.
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B. Dodd-Frank Act Provisions

    Section 939A of the Dodd-Frank Act requires federal agencies to: 
(i) Review regulations that require the use of an assessment of the 
creditworthiness of a security or money market instrument; and (ii) to 
the extent those regulations contain any references to, or requirements 
regarding credit ratings, remove such references or requirements.\3\ In 
place of such credit-rating based requirements, the Dodd-Frank Act 
instructs agencies to substitute appropriate standards for determining 
creditworthiness. The new law further provides that, to the extent 
feasible, an agency should adopt a uniform standard of creditworthiness 
for use in its regulations, taking into account the entities regulated 
by it and the purposes for which such regulated entities would rely on 
the creditworthiness standard.
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    \3\ See 15 U.S.C. 78o-7 note.
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    On November 8, 2013, FHFA promulgated a final rule removing 
references to credit ratings in certain regulations governing the 
Banks; this rule became effective on May 7, 2014.\4\ That rulemaking 
removed references to credit ratings in FHFA regulations related to 
Bank investments, standby letters of credit, and liabilities.\5\ When 
those rule amendments were proposed, FHFA stated that it would 
undertake separate rulemakings to remove NRSRO references and 
requirements contained in the Banks' capital regulations and in the 
regulations governing the Banks' AMA programs.\6\ In this rulemaking, 
FHFA is proposing to remove the references to NRSRO credit ratings in

[[Page 78690]]

the current AMA regulation. FHFA will separately address removal of 
credit ratings from the capital regulation in a future rulemaking.
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    \4\ See Final Rule, Removal of References to Credit Ratings in 
Certain Regulations Governing the Federal Home Loan Banks, 78 FR 
67004 (Nov. 8, 2013).
    \5\ See 12 CFR parts 1267, 1269, and 1270.
    \6\ See Proposed Rule, Removal of References to Credit Ratings 
in Certain Regulations Governing the Federal Home Loan Banks, 78 FR 
30784, 30786 (May 23, 2013).
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C. The Bank System

    The eleven Banks are wholesale financial institutions organized 
under the Federal Home Loan Bank Act (Bank Act).\7\ The Banks are 
cooperatives; only members of a Bank may purchase the capital stock of 
a Bank, and only members or certain eligible housing associates (such 
as state housing finance agencies) may obtain access to secured loans, 
known as advances, or other products provided by a Bank.\8\ Each Bank 
is managed by its own board of directors and serves the public interest 
by enhancing the availability of residential credit through its member 
institutions.\9\ Any eligible institution (generally a federally 
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock.\10\ As 
government-sponsored enterprises, federal law grants the Banks certain 
privileges. In light of those privileges, the Banks typically can 
borrow funds at spreads over the rates on U.S. Treasury securities of 
comparable maturity that are narrower than those available to most 
other entities. The Banks pass along a portion of their funding 
advantage to their members and housing associates--and ultimately to 
consumers--by providing advances and other financial services at rates 
that would not otherwise be available to their members. Among those 
financial services are the Banks' AMA programs, under which the Banks 
provide financing for members' housing activities by purchasing 
mortgage loans that meet the requirements of the AMA regulation.
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    \7\ See 12 U.S.C. 1423, 1432(a).
    \8\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
    \9\ See 12 U.S.C. 1427.
    \10\ See 12 U.S.C. 1424; 12 CFR part 1263.
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D. Acquired Member Assets

    On July 17, 2000, the Finance Board adopted a final AMA regulation, 
which remains in effect.\11\ Neither the Finance Board nor FHFA has 
amended the regulation since its adoption. The current rule authorizes 
the Banks to acquire certain loans (principally conforming residential 
mortgage loans) from their members and housing associates as a means of 
advancing their housing finance mission, and prescribes the parameters 
within which the Banks may do so. In adopting the rule, the Finance 
Board noted that AMA was functionally equivalent to the business of 
making advances. It allowed members and housing associates to use 
eligible assets to access liquidity for further mission-related 
lending, while the member or housing associate maintained its exposure 
to all or a material portion of the credit risk associated with the AMA 
loans sold to a Bank.\12\ The members or housing associates of a Bank, 
or members or housing associates of another Bank (pursuant to an 
arrangement between the Bank acquiring the AMA and the Bank in which 
the participating financial institution is a member), that are 
authorized to sell mortgage loans to the Bank through its AMA program 
generally are referred to as participating financial institutions.
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    \11\ See Final Rule, Federal Home Loan Bank Acquired Member 
Assets, Core Mission Activities, Investment and Advances, 65 FR 
43969 (July 17, 2000) (hereinafter ``Final AMA Rule'').
    \12\ Id. at 43974.
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    The core of the current AMA rule, which remains unchanged in the 
proposed rule, establishes a three-part test for a loan to qualify as 
AMA. First, the asset requirement establishes that assets must be 
conforming whole mortgage loans, certain interests in such loans, whole 
loans secured by manufactured housing, certain state or federal housing 
finance agency (HFA) bonds, and certain other assets enumerated in the 
rule. Second, assets must meet a member-nexus requirement whereby a 
Bank must acquire the AMA assets from a participating financial 
institution or another Bank. In either case, the assets acquired by a 
Bank must be originated or held for a valid business purpose by a 
participating financial institution (or an affiliate thereof). Finally, 
to meet the credit risk-sharing requirement, a Bank must structure its 
AMA products such that a substantial portion of the associated credit 
risk is borne by a participating financial institution. Specifically, 
participating financial institutions must provide sufficient credit 
enhancement on the assets sold so that the AMA purchased by a Bank is 
equivalent to an asset rated at least investment grade by an NRSRO or 
such higher rating as required by the Bank.
    Banks currently offer two AMA programs--Mortgage Partnership 
Finance (MPF) and Mortgage Purchase Program (MPP). FHFA has authorized 
other mortgage products outside of the AMA rule that are not subject to 
the requirements of the rule. These products, as structured by the 
Bank, generally are conduit programs that allow eligible members to 
access the secondary mortgage markets but do not result in a Bank 
holding the mortgages on its balance sheet. Non-AMA products currently 
offered by some Banks are MPF Xtra and MPF Direct.

III. The Proposed Rule

A. Highlights of the Proposed Rule

    The proposed rule would re-organize current 12 CFR part 955 and re-
adopt it as part 1268 of FHFA's regulations. More significantly, as 
required by the Dodd-Frank Act, it would remove and replace references 
to, or requirements based on, ratings issued by an NRSRO. It would 
provide Banks greater flexibility in choosing the models they can use 
to estimate the credit enhancement required for AMA loans. 
Additionally, the proposed rule would add a provision allowing a Bank 
to authorize the transfer of mortgage servicing rights to any 
institution, including a non-member of the Bank System. The proposal 
would remove provisions allowing the use of private supplemental 
mortgage insurance (SMI) in the required member credit enhancement 
structure. Finally, the proposal would delete some obsolete provisions 
from the current rule, and clarify certain other provisions.

B. Proposed Changes

    As already noted, Section 939A of the Dodd-Frank Act requires 
federal agencies to review regulations that require an NRSRO assessment 
of the creditworthiness of a security or money market instrument, or 
that includes any references to or requirements related to credit 
ratings issued by NRSROs. The Dodd-Frank Act further requires the 
removal of such references or requirements. The AMA rule currently 
establishes a number of requirements based on NRSRO ratings, which the 
proposed rule would remove or amend consistent with the Dodd-Frank Act 
mandate. In addition to the proposed changes related to credit ratings, 
FHFA is proposing other changes that would re-organize, modify, and 
clarify certain provisions of the current regulation.
1. Definitions Section Proposed Sec.  1268.1
    In the definitions section (current Sec.  955.1 and proposed Sec.  
1268.1), FHFA proposes to modify the definition of ``expected losses'' 
to remove a reference to NRSROs. As discussed more fully below, FHFA 
would also make other changes to the definition of ``expected losses'' 
to account for the fact that a Bank would have more modelling options 
under the proposed rule for calculating the required credit 
enhancement. Also, as discussed more

[[Page 78691]]

fully below, FHFA would add to the rule a definition for ``investment 
quality'' to implement changes needed to remove references in the 
current rule to specific NRSRO credit ratings.
    FHFA proposes to add to new Sec.  1268.1 definitions for the terms 
``AMA product,'' ``AMA program,'' ``participating financial 
institution,'' and ``pool.'' FHFA intends for these newly defined terms 
to help simplify and clarify other provisions in the rule and avoid use 
of repetitive, descriptive language in those provisions. It also 
proposes to amend slightly the definition of ``AMA'' in Sec.  1201.1 to 
mean ``assets acquired in accordance with, and satisfying the 
applicable requirements of, part 1268 of this chapter [XII], or any 
successor thereto.''
2. Authorization for Acquired Member Assets Section Proposed Sec.  
1268.2
    FHFA is proposing to amend the language in the current 
authorization provision (current 12 CFR 955.2) and to reorganize it 
into separate sections as proposed Sec. Sec.  1268.2 through 1268.5.
    Under the proposed rule, Sec.  1268.2 generally would authorize a 
Bank to invest in AMA subject to the requirements of parts 1268 and 
1272 of FHFA's regulations. FHFA is also proposing to include in this 
new authorization section a ``grandfather'' provision that would allow 
a Bank to continue to hold any AMA loans that the Finance Board or FHFA 
previously authorized for purchase, even if the loan would not meet the 
requirements of the proposed rule. This proposed provision, set forth 
at Sec.  1268.2(b), would cover loans that were authorized for purchase 
by rule, order, or other agency action such as waiver of particular 
requirements so a Bank to purchase the loan.\13\ It would assure that a 
Bank could continue to hold any legacy loans, including those that no 
longer meet the credit enhancement or other requirements in the 
proposed rule. It would replace the current provision that allows a 
Bank to continue to purchase and hold loans that had been authorized 
under the Finance Board's and FHFA's former Financial Management Policy 
even if the credit enhancement structure did not meet the current AMA 
rule.\14\ While the proposed grandfather provision would not authorize 
continued purchase of AMA that do not comply with the proposed rule, 
FHFA believes that all currently active AMA products would meet the 
requirements in proposed part 1268.
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    \13\ For example, on August 5, 2011, FHFA waived the ratings 
requirement for SMI providers in the current regulation to allow 
Banks to continue to buy loans that used SMI as part of the credit 
enhancement structure, even though no SMI provider met the ratings 
requirement. This grandfather provision would allow the Banks that 
bought loans pursuant to that waiver to continue to hold those loans 
even if FHFA changes the credit enhancement provision to no longer 
allow SMI, as it proposed to do in this rulemaking.
    \14\ FHFA terminated the Financial Management Policy on June 20, 
2012, when its revised investment rule (12 CFR part 1267) took 
effect. See Final Rule: Federal Home Loan Bank Investments, 76 FR 
29147, 29151 (May 20, 2011).
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    FHFA proposes to move the loan type, member nexus, and credit 
enhancement requirements found in current 12 CFR 955.2 to Sec. Sec.  
1268.3, 1268.4, and 1268.5. As discussed below, FHFA is also proposing 
to make other changes to these provisions.
3. Asset Requirement Section Proposed Sec.  1268.3
a. Renaming Section
    FHFA is proposing to rename this section from the current ``loan 
type requirement'' to ``asset requirement'' because not all of the 
interests this section authorizes for purchase are technically loans. 
Specifically, HFA bonds and certificates representing interests in 
whole loans, which the current rule authorizes, are better classified 
as securities.
b. Asset Types
    Current 12 CFR 955.2(a) sets forth the types of assets that are 
permissible as AMA. Proposed Sec.  1268.3(a)(1) and (2) are 
substantively unchanged from the existing rule and set forth the asset 
types that are eligible for purchase as AMA. The proposed rule, as does 
the current regulation, allows the acquisition of whole loans that are 
eligible to secure advances to members under FHFA's advances regulation 
(part 1266). These assets include: (1) Fully disbursed, whole first 
mortgage loans on improved residential real property not more than 90 
days delinquent; (2) mortgages or other loans, regardless of 
delinquency status, to the extent that the mortgage or loan is insured 
or guaranteed by the United States or any agency thereof, or otherwise 
is backed by the full faith and credit of the United States, and such 
insurance, guarantee, or other backing is for the direct benefit of the 
holder of the mortgage or loan; (3) other real estate-related 
collateral provided that such collateral has a readily ascertainable 
value, can be reliably discounted to account for liquidation and other 
risks, can be liquidated in due course, and that the Bank can perfect a 
security interest in such collateral; and (4) when acquired from 
community financial institution (CFI) members or their affiliates, 
small business loans, small farm loans, small agri-business loans, or 
community development loans, in each case fully secured by collateral 
other than real estate, or securities representing a whole interest in 
such secured loans, provided that such collateral has a readily 
ascertainable value, can be reliably discounted to account for 
liquidation and other risks, and can be liquidated in due course.
c. Restrictions on Certain Loans
    FHFA is proposing to adopt as Sec.  1268.3(a)(1) the current 
regulation provision that excludes from AMA those single-family 
mortgages where the loan amount exceeds the conforming loan limits 
established pursuant to 12 U.S.C. 1717(b)(2). This limit is consistent 
with the limits imposed on the Enterprises. As noted when the Finance 
Board first adopted the AMA rule, it intended this provision to 
prohibit purchase of jumbo loans and to create a level playing field 
with the Enterprises concerning the types of loans that a Bank can 
purchase.\15\
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    \15\ See Final AMA Rule, 65 FR at 43974.
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    As a point of clarification, FHFA confirms that under the amended 
rule, loans on properties located in designated ``high-cost areas,'' 
where the conforming loan limit is adjusted in accordance with the 
criteria established in 12 U.S.C. 1717(b)(2), would remain eligible for 
purchase as AMA as long as the loan value is within the adjusted 
conforming loan limit. The criteria in 12 U.S.C. 1717(b)(2), as 
currently enacted, allows that the conforming loan limits:

may be increased by not to exceed 50 per centum with respect to 
properties located in Alaska, Guam, Hawaii, and the Virgin Islands. 
Such foregoing limitations shall also be increased, with respect to 
properties of a particular size located in any area for which 115 
percent of the median house price for such size residence exceeds 
the foregoing limitation for such size residence, to the lesser of 
150 percent of such limitation for such size residence or the amount 
that is equal to 115 percent of the median house price in such area 
for such size residence.

    FHFA specifically requests comments as to any issues regarding a 
Bank's purchase of loans as AMA in designated high-cost areas as well 
as any issues related to whether the rule should continue to limit AMA 
loans to those that meet the conforming loan limits more generally.
    FHFA is proposing to add language to Sec.  1268.3(a)(3) and (b) to 
restrict a Bank from purchasing as AMA any home mortgage loans made to 
any directors,

[[Page 78692]]

officers, employees, attorneys, or agents of a Bank or of the selling 
institution unless the board of directors of the Bank has specifically 
approved such purchase by resolution.\16\ This restriction is statutory 
with regard to home mortgages used as collateral for advances.\17\ The 
proposed change would extend the restriction to AMA purchases. Loans 
made to such persons pose the same or greater risk when purchased by a 
Bank as when taken as collateral for advances. The restriction would be 
implemented by citing to 12 CFR 1266.7(f) of the FHFA regulations, 
which is the provision that implements the statutory restriction with 
regard to advances.\18\ FHFA does not propose to apply the restriction 
to HFA bonds, given that FHFA does not apply the restriction to 
securities allowed as collateral for advances under part 1266 of this 
chapter.
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    \16\ This restriction would also apply with regard to an 
interest in whole loans under proposed Sec.  1263.3(d), given that 
such interest must be in loans that otherwise meet the requirements 
of proposed Sec.  1263.3(a) or (b) for the interest to qualify as 
AMA.
    \17\ 12 U.S.C. 1430(b).
    \18\ 12 CFR 1266.7(f)
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d. Manufactured Housing Loans
    The current AMA regulation allows the purchase of manufactured 
housing loans regardless of whether such housing constitutes real 
property under state law, and FHFA is not proposing changes to this 
provision (proposed as Sec.  1268.3(b)). FHFA recognizes that the 
Enterprises also may purchase manufactured housing loans that are 
chattel loans under the Federal National Mortgage Association Charter 
Act and the Federal Home Loan Mortgage Corporation Act. In addition, 
under its advances regulation, FHFA considers chattel loans on 
manufactured housing to be residential housing finance assets for 
purposes of the long-term advances proxy test, and allows Banks to 
extend long-term advances to members for the purchase or funding of 
such loans.\19\
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    \19\ See 12 CFR 1266.1 and 1266.3.
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    Other FHFA regulations, however, treat chattel loans on 
manufactured housing differently from loans on real property. For 
example, in 2010, FHFA adopted a change to the definition of 
``mortgage'' as used in the Enterprise housing goals regulations with 
the result that purchases of chattel loans on manufactured housing 
would not qualify for credit under the housing goals.\20\ FHFA adopted 
the same definition of ``mortgage'' in the Bank housing goals 
regulations so chattel loans on manufactured housing also do not 
qualify for credit under Bank housing goals.\21\ In its proposed 
Enterprise duty to serve regulations, FHFA similarly proposed that it 
would consider only manufactured housing loans titled as real property 
toward the Enterprises' duty to serve underserved markets.\22\
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    \20\ See Final Rule: Enterprise Housing Goals; Enterprise Book-
entry Procedures, 75 FR 55892, 55896-895 (Sept. 14, 2010). FHFA 
continued this exclusion in its most recently adopted Enterprise 
housing goals rule. See 12 CFR 1282.1 (definition of ``mortgage'').
    \21\ See Final Rule: Federal Home Loan Bank Housing Goals, 75 FR 
81096, 81100 (Dec. 27, 2010).
    \22\ See Proposed Rule: Enterprise Duty to Serve Underserved 
Markets, 75 FR 32099, 32101-105 (June 7, 2010). FHFA has not yet 
adopted this proposed rule as a final rule.
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    FHFA is also concerned that chattel loans display a higher level of 
default risk, and present greater credit and operational risks, than 
other mortgage loans authorized for purchase under the AMA regulation. 
Given these concerns and the differences in how some current FHFA 
regulations treat chattel loans, FHFA specifically requests comment as 
to whether it should continue to authorize the purchase of manufactured 
housing loans as AMA if relevant state law considers the loans as 
chattel loans.
e. Certificates Representing Interests in Whole Loans
    Proposed Sec.  1268.3(d) is a new provision. It would bring into 
the rule text the authority for Banks to acquire as AMA certain 
certificates representing interests in whole loans. When the Finance 
Board adopted the current AMA rule, it noted, in response to comments, 
that the rule allowed the Banks to buy structured products as AMA, 
provided the products met certain identified conditions. The proposed 
language would adopt in the rule text the conditions that were set 
forth in this discussion. Currently, this authority is set forth in a 
discussion in the SUPPLEMENTARY INFORMATION of the Federal Register 
release adopting the current regulation.\23\ The Finance Board approved 
one AMA product under this authority (in December 2002), which is now 
inactive. By moving the preamble language to the rule text, FHFA would 
clarify that such programs are possible under the amended regulation 
and bring all relevant authority into the rule text. FHFA continues to 
believe that under the circumstances in proposed Sec.  1268.3(d), the 
use of a third party to securitize the whole loans would merely 
represent a vehicle to invest in certain types of AMA under more 
favorable terms and should, therefore, be permitted under the rule. 
However, if the certificates have been created as a security initially 
available to investors generally, they will not be considered to 
qualify as AMA under Sec.  1268.3(d).\24\
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    \23\ Final AMA Rule, 65 FR at 43974, 43977.
    \24\ Id.
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4. Member or Housing Associate Nexus Requirement Section Proposed Sec.  
1268.4
    FHFA is proposing to reorganize as Sec.  1268.4(a) and (b) the 
member nexus requirements currently found at 12 CFR 955.2(b). The 
proposed rule would continue to impose the requirement that for a loan 
to be eligible for purchase as AMA, the participating financial 
institution would have either to originate or issue the assets or have 
held them for a valid business purpose. The ``valid business purpose 
requirement'' in the current regulation accounts for the fact that a 
member may acquire loans from a non-member during the normal course of 
business and then sell those loans to the Bank. It excludes any loans 
that merely pass from a non-member through a member to a Bank, with the 
intent of extending the benefits of membership to the non-member.\25\
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    \25\ See Proposed Rule: Federal Home Loan Bank Acquired Member 
Assets, Core Mission Activities, Investments and Advances, 65 FR 
25676, 25681 (May 3, 2000) (hereinafter 2000 Proposed AMA Rule).
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    The reference in the proposed rule to assets issued ``through, or 
on behalf of the participating financial institution'' also carries 
over from the current regulation. As under the current regulation, the 
provision would allow HFA bonds issued by an underwriter for the 
participating financial institution to qualify as AMA.\26\
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    \26\ Id.
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    Proposed Sec.  1268.4(b) would adopt without substantive change 
current special requirements in 12 CFR 955.2(b)(2)(ii) that apply when 
a Bank purchases HFA bonds as AMA from a housing associate of another 
Bank. Under this provision, a Bank may acquire initial-offering taxable 
HFA bonds from out-of-district associates, provided the Bank in whose 
district the HFA is located (local Bank) has a right of first refusal 
to purchase, or negotiate the terms of, a particular bond issue. If the 
local Bank refuses, or does not respond within three days, the HFA may 
then offer the bonds to an out-of-district Bank. The Finance Board 
adopted this approach to preserve the integrity of the Bank Districts, 
while at the same time preventing any one Bank from denying an HFA in 
its District from financing that another Bank is willing to 
provide.\27\
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    \27\ See Final AMA Rule, 65 FR at 43975.

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[[Page 78693]]

5. Credit Risk-Sharing Requirement Section Proposed Sec.  1268.5
a. General Requirement
    FHFA is proposing to reorganize as Sec.  1268.5 the credit risk-
sharing requirements currently found at 12 CFR 955.2(c) and 955.3. FHFA 
proposes to re-adopt several of the credit risk-sharing provisions 
without substantive changes, including the requirement that all AMA 
loans carry a credit enhancement. Proposed Sec.  1268.5(c) also 
generally would maintain the design requirement for the credit 
enhancement structure that helps ensure that the participating 
financial institution retains an economic incentive to reduce actual 
losses that is both material in amount and early enough in the 
structure to be meaningful.\28\ Thus, the proposed rule would continue 
to prohibit any AMA product that removes the participating financial 
institution's incentive to reduce actual credit losses.
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    \28\ Id. at 43967- 98.
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    As discussed below, the proposed rule also would change some of the 
credit risk-sharing provisions to remove references to NRSRO ratings, 
as required by the Dodd-Frank Act. Proposed Sec.  1268.5(e) would set 
forth the requirements for the Bank's use of a methodology and model 
for calculating the credit enhancement obligation that is not 
necessarily tied to one used by an NRSRO. Additionally, FHFA is not 
proposing to re-adopt current provisions that allow the use of private 
SMI or pool insurance as part of the credit enhancement structure. 
Consequently, FHFA is proposing to remove provisions from the current 
regulation requiring eligible SMI providers to maintain specific NRSRO 
ratings.
b. Determining Credit Enhancements on AMA Pools
    The proposed rule would modify 12 CFR 955.3(a) of the current 
regulation, and re-adopt it as proposed Sec.  1268.5(b)(1). FHFA's 
proposed modification to this provision would remove current 
requirements based on NRSRO ratings and methodologies in accordance 
with the Dodd-Frank Act. Otherwise, FHFA continues to believe the 
credit risk-sharing approach in the current regulation is valid. The 
principles underlying the AMA regulation establish that risks are borne 
by those entities best suited to manage them. Therefore, the credit 
risk-sharing requirements provide that participating financial 
institutions selling mortgages must retain a substantial portion of the 
credit risk, given their expertise in underwriting mortgages. In 
requiring the participating financial institution to have ``skin in the 
game,'' the rule provides them an incentive to sell high-quality loans 
to the Banks and the opportunity to benefit financially from good 
underwriting practices.
    To ensure that participating financial institutions bear a material 
portion of the credit risk, existing Sec.  955.3(a) currently requires 
a participating financial institution that sells AMA loans to a Bank to 
enhance the pool to be equivalent to an asset rated at least the fourth 
highest credit grade rating from an NRSRO (i.e., to be at least 
investment grade) or to a higher rating required by the Bank. The 
provision also requires the Bank to make a determination of the amount 
of the required credit enhancement using a methodology that is 
confirmed in writing by an NRSRO to be equivalent to one used by the 
NRSRO in rating a comparable pool of assets.
    Proposed Sec.  1268.5(a)(1) would amend the current provision to 
remove the requirement that AMA loans be enhanced to a specific rating 
that is equivalent to one issued by an NRSRO. Under the proposed 
amendment, a participating financial institution must credit enhance 
AMA loans to at least ``investment quality.''
    FHFA proposes to define the term ``investment quality'' in the AMA 
regulation by reference to the definition of that term adopted by FHFA 
in the Bank investment regulation (12 CFR part 1267). That definition 
reads:

    Investment quality means a determination made by the Bank with 
respect to a security or obligation that, based on documented 
analysis, including consideration of the sources for repayment on 
the security or obligation: (1) There is adequate financial backing 
so that full and timely payment of principal and interest on such 
security or obligation is expected; and (2) There is minimal risk 
that the timely payment of principal or interest would not occur 
because of adverse changes in economic and financial conditions 
during the projected life of the security or obligation.\29\
---------------------------------------------------------------------------

    \29\ 12 CFR 1267.1 (defining ``investment quality'').

    Under proposed Sec.  1268.5(b)(1), the Bank could specify as part 
of the terms and conditions for a particular AMA product that a 
participating financial institution provide a credit enhancement 
greater than that needed to enhance the loan or pool to investment 
quality. The enhancement would need to be defined in relation to a 
model and methodology of the Bank's choosing, subject to conditions 
established in Sec.  1268.5(e) of the proposed rule. If a Bank chooses 
to continue to use the same NRSRO model it currently uses, it would not 
necessarily need to alter the credit enhancement levels it currently 
requires, unless FHFA directs it to do so or its estimated enhancement 
levels otherwise would not comply with the rule. For example, a Bank 
would need to increase credit enhancement levels if it determined that 
the credit enhancement currently estimated by its NRSRO model was not 
sufficient for an asset or pool of assets to be ``investment quality'' 
under the proposed definition of that term.
    In addition, the proposed rule carries over requirements in the 
current regulation that a Bank's authority to hold AMA assets is 
specifically contingent on the Bank complying with FHFA's New business 
activity (NBA) regulation (12 CFR part 1272).\30\ If the terms and 
conditions for a Bank's new AMA product or a modification to an 
existing AMA product triggered the requirements of the NBA rule, the 
Bank would need to file an NBA notice. FHFA would expect the Bank to 
provide a clear explanation in the notice of how the new or modified 
product's credit risk-sharing structure meets the AMA credit 
enhancement requirements, and how the Bank would calculate that 
obligation.
---------------------------------------------------------------------------

    \30\ See Proposed Sec.  1268.2.
---------------------------------------------------------------------------

    As now is the case under the current regulation, proposed Sec.  
1268.5(c), at least with respect to loans that would not be insured or 
guaranteed by the U.S. government, would continue to require the 
participating financial institution providing the credit enhancement to 
bear the direct economic consequences of actual credit losses on the 
assets from the first dollar of loss up to expected losses or 
immediately following expected losses but in an amount equal to or 
exceeding expected losses.\31\ Consistent with previous Finance Board 
statements, the participating financial institution itself would be 
required to bear the economic responsibility of the expected credit 
losses, as required by proposed Sec.  1268.5(c), to ensure 
participating financial institution involvement and to ensure that the 
participating financial institution bears the consequences of the 
credit quality of the asset or pool. The participating financial 
institution could not transfer

[[Page 78694]]

this responsibility to an affiliate or non-member entity.\32\
---------------------------------------------------------------------------

    \31\ As is discussed below, FHFA is proposing to change 
requirements in the current regulation for government insured or 
guaranteed loans so that members or housing associates would no 
longer have to bear responsibility for unreimbursed servicing 
expenses up to the amount of expected losses for the loan to qualify 
as AMA.
    \32\ See 2000 Proposed AMA Rule, 65 FR at 25683; see also, Final 
AMA Rule, 65 FR 43976.
---------------------------------------------------------------------------

    While the current regulation defines ``expected losses'' as the 
base loss scenario in the methodology of an NRSRO applicable to a 
particular AMA asset, the proposed definition would refer to the loss 
given the expected future economic and market conditions in the model 
or methodology used by the Bank to calculate the credit enhancement for 
an AMA product under proposed Sec.  1268.5. This change accounts for 
the fact that the proposed rule would no longer require a Bank to use 
an NRSRO model and would accommodate the potential for a Bank to adopt 
a model that applies a methodology that differs from that used in the 
Banks' current models. Otherwise, FHFA believes that this proposed 
change would not alter what is currently required by the AMA rule; nor 
is this change intended to alter how a Bank would calculate ``expected 
losses'' if it continued to use its current model. Therefore, as under 
the current regulation, the proposed rule would require a member to 
provide a credit enhancement against losses for all non-government 
insured or guaranteed loans at least equal to the expected losses 
calculated by the credit enhancement model used by the Bank whether 
this enhancement is positioned in the first loss position or 
immediately following the first loss.
    The proposed rule at Sec.  1268.5(c)(1)(ii) would also continue to 
require the participating financial institution to secure fully its 
credit enhancement obligation in parallel with the requirement for 
advances to members under part 1266 of this chapter. This provision 
addresses the concern that a Bank might be exposed to credit risk if 
the member were not able to comply with its contractual credit 
enhancement obligation.
    The proposed rule would not change the requirement that a Bank 
determine the necessary credit enhancement on a pool at the earlier of 
270 days from the date of the Bank's acquisition of the first loan in a 
pool or the date at which the pool reaches $100 million in assets. This 
provision continues to be relevant in that it addresses safety and 
soundness concerns that could arise if a Bank did not timely perform 
the credit enhancement determination on large pools formed over 
extended periods. This provision ensures the Bank uses its model early 
enough in the process to determine that the contracted amount of the 
credit enhancement is sufficient to credit enhance the pool to the 
level consistent with the terms and conditions of the specific AMA 
product.\33\
---------------------------------------------------------------------------

    \33\ See Final AMA Rule, 65 FR at 43975.
---------------------------------------------------------------------------

    The proposed rule would also continue to require that the credit 
enhancement must be for the life of the asset or pool. This requirement 
would exclude, for example, structures that would comply with the 
credit rating requirement in the first year, but would then scale back 
the amount of the member's credit enhancement in future years so the 
pool is no longer credit enhanced to the level consistent with the 
terms and conditions of the AMA product.\34\
---------------------------------------------------------------------------

    \34\ See id. at 43976.
---------------------------------------------------------------------------

    The current regulation at 12 CFR 955.3(b) and (c) set forth 
specific requirements for a Bank to obtain the NRSRO verifications with 
regard to the adequacy of the credit enhancement structure and Bank's 
use of the NRSRO model for estimating the required enhancement in each 
AMA product. Given that under the proposed rule FHFA would no longer 
require a Bank to use NRSRO models, these requirements would become 
obsolete, and FHFA is proposing to remove them.
    In their place, FHFA is proposing Sec.  1268.5(b)(2), which would 
require a Bank to document the basis for its conclusion that the 
contractual credit enhancement required for a particular pool is 
sufficient to meet the required credit enhancement obligation for a 
particular AMA product, given the Bank's chosen model's relevant stress 
scenarios. This information will help FHFA monitor the Banks' use of 
their models and the adequacy of the specific credit enhancement 
structures used in each AMA product.
c. Transfer of Credit Enhancement Obligation
    The proposed rule would modify current 12 CFR 955.3(b)(1) and re-
adopt it as Sec.  1268.5(c)(2). This section would establish the 
acceptable forms a member may use to provide the credit enhancement for 
AMA loans, subject to certain limitations. The proposed rule would 
clarify that a participating financial institution, ``with the approval 
of the Bank,'' may choose to transfer its credit enhancement obligation 
to its insurance affiliate (but only where the insurance is positioned 
after the participating financial institution bears losses in an amount 
at least equal to expected losses) or to another participating 
financial institution. The Bank could give this permission either by 
establishing the required form of credit enhancement in the terms of a 
particular AMA product, or by providing specific approval for the 
transfer. The proposed change is consistent with how the AMA 
regulations are currently applied, and with current Bank practice with 
regard to AMA product structures and permissible transfers of the 
credit enhancement obligations.
d. Credit Quality of Mortgage Insurers--Supplementary Mortgage 
Insurance
    Current 12 CFR 955.3(b) of the AMA regulation allows a member to 
meet part of its credit enhancement obligation through the purchase of 
SMI, provided that the insurer is rated not lower than the second 
highest credit rating category. The proposed rule would remove the 
option to use SMI as part of the credit enhancement structure. While 
the current AMA regulation addresses use of SMI as part of the credit 
enhancement structure and minimum criteria for providers of such 
insurance, it does not address borrower-funded primary mortgage 
insurance (PMI) or set minimum criteria for providers of PMI. Instead, 
the rule allows a Bank to set the minimum criteria for PMI providers. 
Nothing in the proposed rule alters this approach with respect to PMI. 
FHFA will continue to review the Banks' assessments of PMI providers 
through the annual examination process.
    The main reason for proposing to remove the option to use SMI in 
the credit enhancement structure is the fact that during the recent 
financial crisis, no private insurance company maintained the second 
highest credit rating as required by the current AMA regulation. FHFA 
had to waive the rule requirement for the products that relied on SMI 
for existing business and required the Banks with only products that 
relied on SMI to develop alternate structures for new business in their 
programs. Given that the Banks have alternate AMA structures and 
products that do not rely on SMI and that private mono-line insurers 
could face similar problems if another financial crisis were to arise, 
FHFA is proposing to remove these provisions. FHFA also believes that 
eliminating the use of SMI from authorized credit enhancement 
structures remains consistent with the intent of the AMA regulation to 
require participating financial institutions to bear the direct 
economic consequences of the credit risk associated with AMA loans and 
not transfer such risk to third parties.
    For similar reasons, FHFA also proposes to eliminate the provision 
in 12 CFR 955.3(b) that authorizes the use of pool level insurance as 
part of the

[[Page 78695]]

credit enhancement structure where such insurance covers that portion 
of the credit enhancement obligation related to geographic 
concentration or pool size. As discussed in more detail below, however, 
the proposed rule would still allow a participating financial 
institution to use U.S. government insurance or guarantees to meet 
credit enhancement requirements.
    FHFA specifically requests comments regarding the use and 
importance of SMI or private pool insurance as part of an allowable 
credit enhancement structure. In particular, FHFA solicits comments on 
what type of requirement could replace the specific credit rating 
requirement for private insurance providers if it were to retain these 
insurance options as part of the credit enhancement structure. 
Additionally, FHFA requests comments on how a Bank might evaluate the 
claims-paying ability of an insurer in the absence of a specific credit 
rating requirement. Finally, FHFA requests comment on whether, if it 
were to adopt in the AMA regulation specific minimum requirements for 
providers of SMI and pool insurance, such requirements also should 
apply to PMI providers.
e. U.S. Government Insurance or Guarantee
    The proposed rule would modify current 12 CFR 955.3(b)(1)(ii)(A) 
and (B) with regard to the use of U.S. government insurance or 
guarantees as part of the credit enhancement and re-adopt the provision 
as Sec.  1268.5(d). The proposed provision would clarify that a 
participating financial institution may provide all or a portion of the 
required credit enhancement by having the loan insured or guaranteed by 
an agency or department of the U.S. government. Unlike the current 
regulation, however, the new, proposed language would not require 
government insured or guaranteed loans to meet the specific credit 
enhancement structure requirements (wherein the member bears the first 
dollar of losses for a loan or pool up to the amount of expected losses 
or bears losses immediately following expected losses in an amount that 
equals or exceeds expected losses).\35\
---------------------------------------------------------------------------

    \35\ See 12 CFR 955.3(b)(1)(ii) and (b)(2).
---------------------------------------------------------------------------

    As already noted, the purpose of the credit enhancement structure 
requirement was to ensure that participating financial institutions, 
``when responsible for such losses, [had] incentive to seek ways to 
achieve better than expected performance [for the loans sold as AMA].'' 
\36\ As the Finance Board explained, in order for a participating 
financial institution to meet this structure requirement with respect 
to government insured or guaranteed loans, given that losses eventually 
would be covered by the government insurance or guarantee, the 
participating financial institution would have to bear the economic 
responsibility of all unreimbursed servicing expenses, up to the amount 
of expected losses.\37\ As a result, the member's credit enhancement 
obligation for AMA government loans is tied closely to its servicing 
obligations. This link limits a participating financial institution's 
ability to transfer mortgage-servicing rights for the AMA government 
loans to non-participating financial institutions.
---------------------------------------------------------------------------

    \36\ Final AMA Rule, 65 FR at 43977.
    \37\ Id. (explaining how government insured loans meet the 
credit enhancement requirements of the AMA rule).
---------------------------------------------------------------------------

    In addition, FHFA does not believe that requiring a member to 
retain an obligation to cover unreimbursed servicing rights for AMA 
government loans provides an additional incentive to improve 
underwriting in order to achieve better than expected loan performance. 
To qualify for government insurance or guarantee, members will already 
be underwriting loans to standards imposed by the relevant government 
agency or department. Further, government insurance and guarantee will 
usually cover any losses experienced on the loan. Therefore, this 
requirement does not necessarily provide additional protection to the 
Bank beyond that provided by the government insurance or guarantee.
    Thus, FHFA is proposing in Sec.  1268.5(d) to remove the 
requirement that U.S. government insured or guaranteed loans meet the 
specific structure requirement now set forth in proposed Sec.  
1268.5(c). Proposed Sec.  1268.5(d) would continue to require the 
credit enhancement provided by government insurance or guarantee be 
maintained for the entire period a Bank owns the AMA government loan. 
The proposed rule would not necessarily require that a Bank member 
maintain the insurance or guarantee. Instead, the Bank would have to 
ensure that the participating financial institution or another entity 
maintains the insurance or guarantee for as long as the Bank owns the 
loan. For example, a Bank might require any entity that acquires the 
mortgage servicing rights to a loan to maintain the insurance. FHFA 
believes increasing the flexibility allowed in transferring mortgage-
servicing rights under this proposed change would prove beneficial for 
many smaller or medium sized members. These members, in particular, 
might wish to sell their AMA government loans into AMA government 
products but may lack the ability to perform the servicing obligations 
now required by the AMA regulation. In addition, given changes in the 
mortgage industry, Banks may find it increasingly difficult to find 
member institutions to meet the servicing obligations for AMA 
government loans. Banks may need the flexibility to transfer such 
obligations to non-member institutions in order to continue to offer 
the product to a wide cross section of its members. The current 
regulation does not allow such flexibility with respect to government 
insured or guaranteed loans.
f. Model and Methodology Validation
    Proposed Sec.  1268.5(e) would set forth the specific requirements 
applicable to a Bank's use of a model and methodology for estimating 
the required member credit enhancements for AMA loans that a 
participating financial institution sells to a Bank. Specifically, it 
would require a Bank to: (1) Validate its model and methodology at 
least annually and make the results available upon request by FHFA 
(proposed Sec.  1268.5(e)(1)); (2) institute and maintain a process for 
monitoring model performance that would include tracking, back-testing, 
benchmarking, and stress testing a model and its results (proposed 
Sec.  1268.5(e)(2)) and be otherwise consistent with applicable FHFA 
model guidance; (3) inform FHFA prior to making any material changes to 
the model and methodology (proposed Sec.  1268.5(e)(3)); and (4) 
promptly change its model and methodology as directed by FHFA (proposed 
Sec.  1268.5(e)(4)).
    The requirements of proposed Sec.  1268.5(e) are generally 
consistent with the requirements governing the Bank's market risk 
capital models (12 CFR 932.5(c)) and have been added here for safety 
and soundness reasons. FHFA also expects a Bank to have policies and 
procedures commensurate with the complexity of the model and 
methodology, including, but not limited to, a governance structure, 
oversight by its board of directors, as well as formal controls. 
Effective model risk management should entail a comprehensive approach 
in identifying risk throughout the model lifecycle and should be 
consistent with any applicable FHFA guidance.
    As proposed, the rule would allow a Bank to institute changes in 
its model immediately upon notifying FHFA. FHFA, however, would review 
a Bank's model and methodology for estimating credit enhancements as 
part of the annual examination process, as well as

[[Page 78696]]

through its on-going off-site monitoring program. If FHFA found that 
the model or the Bank's use of the model were inadequate or did not 
result in a credit enhancement that would reasonably protect a Bank 
against risk of loss as required under the proposed rule, FHFA would 
use authority in the proposed rule to direct the Bank to make changes 
to the model. FHFA could also use other authorities, such as its 
authority to issue cease-and-desist orders, to require the Bank to make 
necessary changes to its model, or AMA products, to address any 
violations of the regulation or unsafe or unsound practices. FHFA 
believes that this proposed approach would allow a Bank sufficient 
flexibility to make timely changes to its credit enhancement model in 
response to technological or market developments while still allowing 
FHFA adequate oversight of the Bank's use of its credit enhancement 
model.
    While the proposed new provisions would no longer require a Bank to 
use an NRSRO model for estimating the required credit enhancement, 
nothing in the proposed rule would prohibit a Bank from continuing to 
use its existing NRSRO model. However, use of all models, including a 
currently used model, would be subject to the requirements of proposed 
Sec.  1268.5(e).
6. Servicing Section Proposed Sec.  1268.6
    FHFA proposes to add new Sec.  1268.6 to address the servicing of 
AMA loans. This provision incorporates current FHFA positions, as set 
forth in a recent regulatory interpretation, on the rights of the Banks 
to allow for transfer of mortgage servicing rights from the 
participating financial institution that originally sold the AMA loans 
at issue.\38\ Thus, proposed Sec.  1268.6 would clarify that a Bank can 
allow for a transfer of servicing rights to any institution, including 
a non-Bank System member. However, any transfer of mortgage servicing 
rights may only occur as long as it does not result in the AMA loan 
failing to meet any requirements of the rule, including the credit 
enhancement requirement. In particular, because proposed Sec.  
1268.5(c) would require that the credit enhancement on an AMA loan not 
insured or guaranteed by the U.S. government continue to be held by a 
participating financial institution for the life of the loan, the 
transfer of servicing cannot result in the transfer of any portion of 
the credit enhancement obligation to a non-Bank System member. However, 
as already discussed, changes proposed in Sec.  1268.5(d) would, if 
adopted, allow the Banks to transfer servicing of government insured or 
guaranteed AMA loans to non-member institutions, an action that is not 
necessarily allowed under current regulations.
---------------------------------------------------------------------------

    \38\ See Regulatory Interpretation, 2015-RI-01 (June 23, 2015).
---------------------------------------------------------------------------

    Proposed Sec.  1268.6 also would require the approval of the Banks 
that have any ownership interest in the loans prior to the transfer of 
the servicing obligation. Finally, the proposed provision would provide 
that the Banks have in place policies and procedures that ensure the 
transfer of servicing would not negatively affect the credit 
enhancement on the loans in question or substantially increase the 
Bank's exposure to risk. FHFA would expect such policies and procedures 
specifically to address transfers to non-Bank System member servicers 
given that in the case of default on an obligation to the Bank, a Bank 
may enjoy more rights against a member than it would against a non-
member. For example, the Bank Act provides enhanced status with regard 
to a Bank's lien on member assets, and the Bank's membership agreement 
may allow the Bank to take certain actions against a member in the case 
of a breach of an obligation that would not be available against a non-
member.\39\ In addition, FHFA would expect policies and procedures to 
include contingency plans to address a case in which a large servicer 
fails or is otherwise unable to continue to service a Bank's AMA 
portfolio.
---------------------------------------------------------------------------

    \39\ See, e.g., 12 U.S.C. 1430(c) and (e).
---------------------------------------------------------------------------

7. Risk-Based Capital Requirements
    The current regulation at 12 CFR 955.6 established the risk-based 
capital requirements for AMA, based on NRSRO ratings. These risk-based 
capital requirements, however, applied only so long as a Bank had not 
converted to the Gramm-Leach-Bliley Act capital structure and was not 
yet subject to the risk-based capital requirements in 12 CFR part 
932.\40\ Given that all Banks have converted their capital structures 
and are now subject to the AMA credit and market risk charges 
established by 12 CFR part 932 of the current capital regulations, this 
section has no continuing applicability, and FHFA proposes to remove 
it.
---------------------------------------------------------------------------

    \40\ In adopting the current AMA regulations, the Finance Board 
noted that the AMA capital requirements in Sec.  955.6 were 
``interim risk based capital requirements'' and when the Finance 
Board's new Gramm-Leach-Bliley Act capital requirements became 
effective with respect to a Bank, the Bank would need to hold 
capital for AMA based on those new requirements. Final AMA Rule, 65 
FR at 43979 (July 17, 2000).
---------------------------------------------------------------------------

8. Other Sections--Sec. Sec.  1268.7 and 1268.8
    Proposed Sec. Sec.  1268.7 and 1268.8 would adopt without 
substantive change 12 CFR 955.4 and 955.5 of the current regulation. 
These provisions address, respectively, reporting requirements for AMA 
and administrative transactions and agreements between Banks involving 
AMA.

IV. Consideration of Differences Between the Banks and the Enterprises

    When promulgating regulations relating to the Banks, section 
1313(f) of the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (Safety and Soundness Act) requires the Director 
of FHFA (Director) to consider the differences between the Banks and 
the Enterprises with respect to the Banks' cooperative ownership 
structure, mission of providing liquidity to members, affordable 
housing and community development mission, capital structure, and joint 
and several liability.\41\ The Director also may consider any other 
differences that FHFA deems appropriate. The changes proposed in this 
rulemaking apply only to the Banks. Many of the proposed amendments are 
necessary to implement requirements under the Dodd-Frank Act; a number 
of others are technical or conforming in nature. FHFA, in preparing 
this proposed rule, considered the differences between the Banks and 
the Enterprises as they relate to the above factors and requests 
comments from the public about whether these differences should result 
in any revisions to the proposed rule.
---------------------------------------------------------------------------

    \41\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The information collection, entitled ``Federal Home Loan Bank 
Acquired Member Assets, Core Mission Activities, Investments and 
Advances'' contained in current 12 CFR part 955 of the regulations that 
would be transferred to 12 CFR part 1268 by this proposed rule has been 
assigned control number 2590-0008 by the Office of Management and 
Budget (OMB). The proposed rule if adopted as a final rule would not 
substantively or materially modify the current, approved information 
collection.

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) 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

[[Page 78697]]

impact on small entities. FHFA need not undertake such an analysis if 
the agency has certified the regulation will not have a significant 
economic impact on a substantial number of small entities. 5 U.S.C. 
605(b). FHFA has considered the impact of the proposed rule under the 
Regulatory Flexibility Act.
    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 is applicable only to 
the Banks, which are not small entities for purposes of the Regulatory 
Flexibility Act.

List of Subjects

12 CFR Part 955

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

12 CFR Part 1201

    Administrative practice and procedure, Federal home loan banks, 
Government-sponsored enterprises, Office of Finance, Regulated 
entities.

12 CFR Part 1268

    Acquired member assets, Credit, Federal home loan bank, Housing, 
Nationally recognized statistical rating agency.

Authority and Issuance

    For reasons stated in the SUPPLEMENTARY INFORMATION, and under the 
authority of 12 U.S.C. 1430, 1430b, 1431, 4511, 4513, 4526, FHFA 
proposes to amend subchapter G of chapter IX and subchapters A and D of 
chapter XII of title 12 of the Code of Federal Regulations as follows:

CHAPTER IX--FEDERAL HOUSING FINANCE BOARD

Subchapter G--[Removed and Reserved]

0
1. Subchapter G, consisting of part 955 is removed and reserved.

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

Subchapter A--Organization and Operations

PART 1201--GENERAL DEFINITIONS APPYING TO ALL FEDERAL HOUSING 
FINANCE AGENCY REGULATIONS

0
2. The authority citation for part 1201 continues to read:

    Authority: 12 U.S.C. 4511(b), 4513(a), 4513(b).

0
3. Amend Sec.  1201.1 by revising the definition of ``Acquired member 
assets or AMA'' to read as follows:


Sec.  1201.1  Definitions.

* * * * *
    Acquired member assets or AMA means assets acquired in accordance 
with, and satisfying the applicable requirements of, part 1268 of this 
chapter, or any successor thereto.
* * * * *

Subchapter D--Federal Home Loan Banks

0
4. Part 1268 is added to subchapter D to read as follows:

PART 1268--ACQUIRED MEMBER ASSETS

Sec.
1268.1 Definitions.
1268.2 Authorization for acquired member assets.
1268.3 Asset requirement.
1268.4 Member or housing associate nexus requirement.
1268.5 Credit risk-sharing requirement.
1268.6 Servicing.
1268.7 Reporting requirements for acquired member assets.
1268.8 Administrative transactions and agreements between Banks.

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

Sec.  1268.1  Definitions.

    As used in this part:
    Affiliate means any business entity that controls, is controlled 
by, or is under common control with, a member.
    AMA product means an AMA structure defined by a specific set of 
terms and conditions that comply with this part.
    AMA program means a Bank-established program to buy mortgage loans 
that meet the requirements of this part, which may comprise multiple 
AMA products.
    Expected losses means the loss given the expected future economic 
and market conditions in the model or methodology used by the Bank 
under Sec.  1268.5 and applicable to an AMA product.
    Investment quality has the meaning set forth in Sec.  1267.1 of 
this chapter.
    Participating financial institution means a member or housing 
associate of a Bank that is authorized to sell mortgage loans to its 
own Bank through an AMA program, or a member or housing associate of 
another Bank that has been authorized to sell mortgage loans to the 
Bank pursuant to an agreement between the Bank acquiring the AMA 
product and the Bank of which the selling institution is a member or 
housing associate.
    Pool means a group of assets acquired under a given master 
commitment or similar agreement.
    Residential real property has the meaning set forth in Sec.  1266.1 
of this chapter.


Sec.  1268.2  Authorization for acquired member assets.

    (a) General. Each Bank is authorized to invest in assets that 
qualify as AMA, subject to the requirements of this part and part 1272 
of this chapter.
    (b) Grandfathered transactions. Notwithstanding paragraph (a) of 
this section, a Bank may continue to hold as AMA assets that were 
previously authorized by the Federal Housing Finance Board or FHFA for 
purchase as AMA, provided that the assets were purchased, and continue 
to be held, in compliance with that authorization.


Sec.  1268.3  Asset requirement.

    Assets that qualify as AMA shall be limited to the following:
    (a) Whole loans that are eligible to secure advances under Sec.  
1266.7(a)(1)(i), (a)(2)(ii), (a)(4), or (b)(1) of this chapter, 
excluding:
    (1) Single-family mortgage loans where the loan amount exceeds the 
limits established pursuant to 12 U.S.C. 1717(b)(2);
    (2) Loans made to an entity, or secured by property, not located in 
a state; and
    (3) Loans that would not be eligible to serve as collateral for an 
advance under Sec.  1266.7(f) of this chapter;
    (b) Whole loans secured by manufactured housing, regardless of 
whether such housing qualifies as residential real property, unless 
such loan would not be eligible to serve as collateral for an advance 
under Sec.  1266.7(f) of this chapter;
    (c) State and local housing finance agency bonds; or
    (d) Certificates representing interests in whole loans if:
    (1) The loans qualify as AMA under paragraphs (a) or (b) of this 
section and meet the nexus requirements of Sec.  1268.4; and
    (2) The certificates:
    (i) Meet the credit enhancement requirements of Sec.  1268.5;
    (ii) Are issued pursuant to an agreement between the Bank and a 
participating financial institution to share risks consistent with the 
requirements of this part; and
    (iii) Are acquired substantially by the initiating Bank or Banks.


Sec.  1268.4  Member or housing associate nexus requirement.

    (a) General provision. To qualify as AMA, any assets described in 
Sec.  1268.3 must be acquired in a purchase or funding transaction only 
from:

[[Page 78698]]

    (1) A participating financial institution, provided that the asset 
was:
    (i) Originated or issued by, through, or on behalf of the 
participating financial institution, or an affiliate thereof; or
    (ii) Held for a valid business purpose by the participating 
financial institution, or an affiliate thereof, prior to acquisition by 
the Bank; or
    (2) Another Bank, provided that the asset was originally acquired 
by the selling Bank consistent with this section.
    (b) Special provision for housing finance agency bonds. In the case 
of housing finance agency bonds acquired by a Bank from a housing 
associate located in the district of another Bank (local Bank), the 
arrangement required by the definition of ``participating financial 
institution'' in Sec.  1268.1 between the acquiring Bank and the local 
Bank may be reached in accordance with the following process:
    (1) The housing finance agency shall first offer the local Bank 
right of first refusal to purchase, or negotiate the terms of, its 
proposed bond offering;
    (2) If the local Bank indicates, within a three-day period, it will 
negotiate in good faith to purchase the bonds, the housing finance 
agency may not offer to sell or negotiate the terms of a purchase with 
another Bank; and
    (3) If the local Bank declines the offer, or has failed to respond 
within the three-day period, the acquiring Bank will be considered to 
have an arrangement with the local Bank for purposes of this section 
and may offer to buy or negotiate the terms of a bond sale with the 
housing finance agency.


Sec.  1268.5  Credit risk-sharing requirement.

    (a) General credit risk-sharing requirement. For each AMA product, 
the Bank shall implement and have in place at all times, a credit risk-
sharing structure that:
    (1) Requires a participating financial institution to provide the 
credit enhancement necessary to enhance an eligible asset or pool to 
the credit quality specified by the terms and conditions of the AMA 
product, provided, however, that such credit enhancement results in the 
eligible asset or pool being at least investment quality, as defined in 
Sec.  1268.1; and
    (2) Meets the requirements of this section.
    (b) Determination of necessary credit enhancement. (1) At the 
earlier of 270 days from the date of the Bank's acquisition of the 
first loan in a pool, or the date at which the pool reaches $100 
million in assets, the Bank shall determine the total credit 
enhancement necessary to enhance the asset or pool to at least 
investment quality and to be consistent with the terms and conditions 
of a specific AMA product. The enhancement shall be for the life of the 
asset or pool. The Bank shall make this determination for each AMA 
product using a model and methodology that the Bank deems appropriate, 
provided, however, that the Bank's use of the model and methodology 
complies with to the requirements and conditions of paragraph (e) of 
this section.
    (2) A Bank shall document its basis for concluding that the 
contractual credit enhancement required from each participating 
financial institution with regard to a particular asset or pool will 
equal or exceed the credit enhancement level specified in the terms and 
conditions of the AMA product and determined in accordance with 
paragraph (b)(1) of this section.
    (c) Credit risk-sharing structure. Under any credit risk-sharing 
structure, the credit enhancement provided by the participating 
financial institution shall meet the following requirements:
    (1) The participating financial institution that is providing the 
credit enhancement required under this this paragraph (c) shall in all 
cases:
    (i) Bear the direct economic consequences of actual credit losses 
on the asset or pool:
    (A) From the first dollar of loss up to the amount of expected 
losses; or
    (B) Immediately following expected losses, but in an amount equal 
to or exceeding the amount of expected losses; and
    (ii) Fully secure its credit enhancement obligation subject to 
Sec.  1266.7 of this chapter; and
    (2) The participating financial institution also may provide all or 
a portion of the credit enhancement, with the approval of the Bank, by:
    (i) Contracting with an insurance affiliate of that participating 
financial institution to provide an enhancement, but only where such 
insurance is positioned in the credit risk-sharing structure so as to 
cover only losses remaining after the participating financial 
institution has borne losses as required under paragraph (c)(1)(i) of 
this section;
    (ii) Contracting with another participating financial institution 
in the Bank's district to provide a credit enhancement consistent with 
this section, in return for compensation; or
    (iii) Contracting with a participating financial institution in 
another Bank's district, pursuant to an arrangement between the two 
Banks, to provide a credit enhancement consistent with this section, in 
return for compensation.
    (d) U.S. government insured or guaranteed loans. Instead of the 
structure set forth in paragraph (c) of this section, a participating 
financial institution also may provide the required credit enhancement 
by purchasing loan-level insurance that is issued by an agency or 
department of the U.S. government or is a guarantee from an agency or 
department of the U.S. government, provided that the government 
insurance or guarantee remains in place for as long as the Bank owns 
the loan.
    (e) Appropriate methodology for calculating credit enhancement. A 
Bank shall use a model and methodology for estimating the amount of 
credit enhancement for a pool of AMA subject to the following 
requirements and conditions:
    (1) The Bank shall validate its model and methodology for 
calculating the credit enhancement for AMA pools at least annually, or 
more often if necessary, and make the results of such validation 
available to FHFA upon request;
    (2) The Bank shall institute and maintain a process to monitor the 
performance of its model to include tracking, back-testing, bench-
marking, and stress testing the model and the results it produces, and 
the Bank shall make information gathered from monitoring the model 
available to FHFA upon request;
    (3) The Bank shall inform FHFA prior to making any material changes 
to an approved model and methodology, providing a description of the 
changes that the Bank intends to make and its reasons for doing so; and
    (4) The Bank promptly shall make any FHFA-directed changes to its 
model and methodology.


Sec.  1268.6  Servicing.

    (a) Servicing of AMA loans may be transferred to and performed by 
any institution, including an institution that is not a member of the 
Bank System, provided that the loans, after such transfer, continue to 
meet all requirements to qualify as AMA under Sec. Sec.  1268.3, 1268.4 
and 1268.5.
    (b) The transfer of mortgage servicing rights and responsibilities 
must be approved by the Bank or Banks that own the loan or a 
participation interest in the loan.
    (c) A Bank shall have in place policies and procedures to ensure 
that the transfer of mortgage servicing rights does not negatively 
affect the credit enhancement on the loans in question or substantially 
increase the Bank's exposure to risk.

[[Page 78699]]

Sec.  1268.7  Reporting requirements for acquired member assets.

    Each Bank shall report information related to AMA in accordance 
with the instructions provided in the Data Reporting Manual issued by 
FHFA, as amended from time to time.


Sec.  1268.8  Administrative transactions and agreements between Banks.

    (a) Delegation of administrative duties. A Bank may delegate the 
administration of an AMA program to another Bank whose administrative 
office has been examined and approved by FHFA, or previously examined 
and approved by the Federal Housing Finance Board, to process AMA 
transactions. The existence of such a delegation, or the possibility 
that such a delegation may be made, must be disclosed to any potential 
participating financial institution as part of any AMA-related 
agreements signed with that participating financial institution.
    (b) Termination of Agreements. Any agreement made between two or 
more Banks in connection with any AMA program may be terminated by any 
party after a reasonable notice period.
    (c) Delegation of Pricing Authority. A Bank that has delegated its 
AMA pricing function to another Bank shall retain a right to refuse to 
acquire AMA at prices it does not consider appropriate.

     Dated: December 10, 2015.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2015-31660 Filed 12-16-15; 8:45 am]
 BILLING CODE 8070-01-P