[Federal Register Volume 81, Number 12 (Wednesday, January 20, 2016)]
[Rules and Regulations]
[Pages 3246-3288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-00761]



[[Page 3245]]

Vol. 81

Wednesday,

No. 12

January 20, 2016

Part II





Federal Housing Finance Agency





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12 CFR Part 1263





Members of Federal Home Loan Banks; Final Rule

  Federal Register / Vol. 81 , No. 12 / Wednesday, January 20, 2016 / 
Rules and Regulations  

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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: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) has adopted a final 
rule revising its regulations governing Federal Home Loan Bank (Bank) 
membership. The final rule adopts several key revisions included in the 
Notice of Proposed Rulemaking. These revisions will prevent the 
circumvention of the statute's membership restrictions by ineligible 
entities using captive insurers as conduits for Bank membership by 
defining the term ``insurance company'' to exclude captive insurers, 
thereby making them ineligible for Bank membership; permit any Bank 
that has admitted captives to membership a transition period within 
which to wind down its affairs with those entities; require a Bank to 
obtain and review an insurance company's audited financial statements 
when considering its application for membership; clarify the standards 
by which a Bank is to determine the ``principal place of business'' for 
its members, including specific standards for insurance companies and 
community development financial institutions; and remove obsolete 
provisions and make numerous non-substantive textual revisions so as to 
provide greater clarity. The final rule does not implement the proposed 
rule's provisions with respect to continuing eligibility requirements, 
in order, as explained below, to avoid compliance burdens that may 
outweigh the benefits. The specific revisions made, and the rationale 
for making them, are set forth in the SUPPLEMENTARY INFORMATION below.

DATES: Effective Date: February 19, 2016.

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, Supervisory and 
Regulatory Policy, Division of Bank Regulation, [email protected], 
(202) 649-3201 (not toll-free numbers), 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. Background

A. Overview of the Existing Bank Membership Requirements

1. Statutory Requirements
    The Federal Home Loan Bank System (Bank System) consists of eleven 
district Banks and the Office of Finance. The Banks are wholesale 
financial institutions, organized under authority of the Federal Home 
Loan Bank Act (Bank Act) to serve the public interest by enhancing the 
availability of residential housing finance and community lending 
credit through their member institutions and, to a very limited extent, 
through certain eligible nonmembers.\1\ Each Bank is structured as a 
regional cooperative in that it is owned and controlled by member 
institutions located within its district, which are its primary 
customers.\2\
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    \1\ See 12 U.S.C. 1423, 1431(e), 1432(a). See also Fahey v. 
O'Melveny & Myers, 200 F.2d 420, 446 (9th Cir. 1952) (stating that a 
Bank is ``a federal instrumentality organized to carry out public 
policy''); ADAPSO v. FHLBB, 568 F.2d 478, 480 (6th Cir. 1977) 
(stating that the Banks remain federal instrumentalities although 
their stock is now held entirely by private entities). In addition 
to advances to members, the Bank Act also authorizes the Banks to 
make advances to nonmember mortgagees, including state housing 
finance agencies, that have been approved under title II of the 
National Housing Act, 12 U.S.C. 1707, et seq., and that meet certain 
additional requirements. See 12 U.S.C. 1430b. These entities are 
referred to as ``housing associates'' in FHFA's regulations. See 12 
CFR 1201.1, 1264.1-.6, 1266.16-.17.
    \2\ Specifically, only members may own the capital stock of a 
Bank, 12 U.S.C. 1426(a)(4)(B), all members are required to maintain 
a minimum investment in Bank stock, 12 U.S.C. 1426(c)(1), each Bank 
is managed by a board of directors that is elected by its members, 
see 12 U.S.C. 1427(a), (b), (c), and (with limited exceptions noted 
in footnote 1 above) only members may obtain advances and access 
other products and services provided by a Bank, see 12 U.S.C. 1429, 
1430(a)(1), 1430b.
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    The Banks carry out their public policy function primarily by 
providing low cost loans, known as advances, to their members. These 
must be fully secured by one or more specific types of collateral, 
including residential mortgage loans and residential mortgage-backed 
securities, but also government securities, cash, other real estate 
related collateral, and, in some cases, secured small business, 
agriculture, or community development loans, or securities backed by 
such loans.\3\ In most cases, Bank members must use the proceeds of 
long-term advances (that is, advances with an original term to maturity 
of more than five years) to fund residential housing finance, although, 
since 1999, smaller bank and thrift members have also been permitted to 
obtain long-term advances to fund small business and community 
development activities.\4\ Bank members may use the proceeds of 
shorter-term advances for any business purpose. The Banks also may 
provide members with a limited range of other products and services, 
such as they provide through the ``acquired member asset'' (AMA) 
programs, under which they may purchase qualifying residential mortgage 
loans from their members or facilitate the sale of such loans to third-
party investors.\5\
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    \3\ 12 U.S.C. 1430(a)(3).
    \4\ See 12 U.S.C. 1430(a)(2).
    \5\ See 12 CFR part 955.
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    The Banks fund their operations principally through the issuance of 
consolidated obligations (COs), which are debt instruments issued on 
their behalf by the Office of Finance (a joint office of the Banks) and 
on which all of the Banks are jointly and severally liable.\6\ Congress 
has vested in the Banks market advantages designed to enable them to 
raise funds in the capital markets at interest rates only slightly 
higher than those on comparable Treasury instruments. These government-
sponsored entities have various advantages, which include, among other 
things: The exemption of the Banks' corporate earnings and the earnings 
on their COs from state and federal income taxes; \7\ the 
classification of the Banks' COs as ``exempted securities'' under the 
Securities Act of 1933 and as ``government securities'' under the 
Securities Exchange Act of 1934; \8\ and the authority of the U.S. 
Department of the Treasury (Treasury Department) to purchase up to $4 
billion in COs under certain circumstances and the fact that Congress 
has occasionally granted it authority to purchase higher amounts during 
periods of financial crisis.\9\ These market 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. These 
advantages accrue not only to consumers, but also to the members 
themselves, which benefit from a lower cost of funds that makes those 
institutions more competitive in their markets as compared with non-
members who do not have access to such low-cost wholesale funding.
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    \6\ See 12 U.S.C. 1431; 12 CFR part 1270.
    \7\ See 12 U.S.C. 1433.
    \8\ See 12 U.S.C. 1426a(c)(2).
    \9\ See 12 U.S.C. 1431(i), (l).
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    In line with the public policy goals underlying the creation of the 
Banks

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and in conjunction with its decision to provide the Banks, and 
consequently their members, with the market advantages described above, 
Congress made a decision to limit eligibility for Bank membership to 
the types of financial institutions listed in section 4(a) of the Bank 
Act. When the statute was originally enacted in 1932, these included 
thrift institutions of various types that existed at the time (i.e., 
building and loan associations, savings and loan associations, 
cooperative banks, homestead associations, and savings banks), as well 
as insurance companies. Since 1932, Congress has amended section 4(a) 
to expand the list of institutions that may be eligible for Bank 
membership only three times, adding federally insured depository 
institutions in 1989,\10\ non-depository Community Development 
Financial Institutions (CDFIs) in 2008,\11\ and non-federally insured 
credit unions in 2015.\12\ Today, because most depository institutions 
(including the types of thrifts listed in section 4(a)) are now 
federally insured, essentially four types of institutions may be 
eligible for membership: (1) Federally insured depository institutions 
(including banks and thrifts whose deposits are insured by the Federal 
Deposit Insurance Corporation (FDIC) and credit unions whose deposits 
are insured by the National Credit Union Administration (NCUA)); (2) 
insurance companies; (3) CDFIs that are certified by the Community 
Development Financial Institutions Fund of the Treasury Department; and 
(4) non-federally insured credit unions meeting certain statutory 
criteria. Entities that do not fall within one of those categories are 
ineligible for Bank membership.
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    \10\ See Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), Public Law 101-73, Sec.  704, 103 
Stat. 183, 415 (1989).
    \11\ See Housing and Economic Recovery Act of 2008, Public Law 
110-289, Sec.  1206, 122 Stat. 2654, 2787 (2008). CDFI credit unions 
were eligible for Bank membership prior to 2008 due to their status 
as insured depository institutions.
    \12\ On December 4, 2015, the President signed into law an 
amendment to section 4(a) of the Bank Act that allows any non-
federally insured credit union meeting certain specified criteria to 
be treated as an ``insured depository institution'' for purposes of 
determining its eligibility for Bank membership. See Fixing 
America's Surface Transportation Act, Public Law 114-94, Sec.  82001 
(2015). This final rule does not implement or otherwise address that 
recent statutory amendment. To the extent that regulatory revisions 
are necessary or appropriate to implement the amendment, they must 
be the subject of a separate rulemaking.
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    While qualifying as one of those enumerated types of institutions 
is one prerequisite for membership eligibility, an institution must 
meet several other requirements set forth in section 4 of the Bank Act 
in order to obtain membership. Section 4(a)(1) of the Bank Act requires 
that an institution, regardless of type: (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; and (C) ``makes such home mortgage loans as, in the 
judgment of the Director [of FHFA], are long-term loans.'' \13\ An 
institution that fails to satisfy any of those requirements is not 
eligible for Bank membership. (Hereinafter, those requirements are 
referred to as the ``duly organized,'' ``subject to inspection and 
regulation,'' and ``makes long-term home mortgage loans'' requirements, 
respectively).
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    \13\ 12 U.S.C. 1424(a)(1). 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 Treasury Department. 
See 12 U.S.C. 1424(a)(1)(B).
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    Section 4(a)(2) of the Bank Act imposes additional eligibility 
requirements on insured depository institutions that were not members 
of a Bank as of January 1, 1989. These require 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 financing.\14\ (Hereinafter, those 
requirements are referred to as the ``10 percent,'' ``financial 
condition,'' ``character of management,'' and ``home financing policy'' 
requirements, respectively). However, section 4(a)(4) exempts from the 
``10 percent'' requirement any ``community financial institution'' 
(CFI),\15\ which the statute defines as an FDIC-insured depository 
institution with less than $1 billion in average total assets (adjusted 
annually for inflation) over the preceding three years.\16\
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    \14\ 12 U.S.C. 1424(a)(2).
    \15\ 12 U.S.C. 1424(a)(4).
    \16\ 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 2015 was $1.123 
billion. See 80 FR 6712 (Feb. 6, 2015).
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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 requirements in order to be 
considered eligible for membership: The ``duly organized,'' ``subject 
to inspection and regulation,'' \17\ 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.\18\ 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 CFIs, CDFIs or insurance 
companies.\19\ 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 considered eligible.\20\
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    \17\ As provided in the statute, 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.
    \18\ 12 CFR 1263.6(a).
    \19\ 12 CFR 1263.6(b).
    \20\ 12 CFR 1263.6(c). The regulation does not define the term 
``mortgage-related assets.''
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    For each of the six general eligibility requirements and for the 
``10 percent'' requirement, part 1263 includes at least one separate 
section specifying in more detail how a Bank that is considering an 
institution's application for membership is to determine whether the 
applicant satisfies the requirement.\21\ An applicant that meets the 
criteria of any of those more detailed provisions is deemed to be in 
compliance with the corresponding statutory eligibility requirement, 
although that presumption

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may be rebutted if the Bank obtains substantial evidence to the 
contrary.\22\ Conversely, an applicant that does not meet the criteria 
of the more detailed provisions is presumed to be out of compliance 
with the corresponding statutory eligibility requirements. With respect 
to several of the requirements, the presumption of non-compliance can 
be rebutted if certain additional criteria are met.\23\ However, the 
presumption of non-compliance arising from failure to meet the criteria 
for the ``makes long-term home mortgage loans,'' and ``10 percent'' 
requirements (as well as the ``duly organized'' requirement) is 
conclusive and may not be rebutted.
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    \21\ See 12 CFR 1263.7-1263.18. In the case of the ``financial 
condition'' requirement, there are two such sections--one (Sec.  
1263.11) setting forth the specific criteria for insured depository 
institutions and another (Sec.  1263.16) setting forth the specific 
criteria for insurance companies and CDFIs. There are also separate 
sections setting forth specific criteria for determining all of the 
eligibility requirements for recently chartered insured depository 
institutions (Sec.  1263.14) and for determining some of the 
eligibility requirements for recently consolidated institutions of 
any type (Sec.  1263.15).
    \22\ 12 CFR 1263.17(a).
    \23\ See 12 CFR 1263.17(b) through (f).
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    In the case of the ``10 percent'' requirement, the regulation deems 
any insured depository institution to which that statutory requirement 
applies to have satisfied that requirement if, at the time of its 
application for Bank membership, its most recently filed regulatory 
financial report indicates that it has at least 10 percent of its total 
assets in ``residential mortgage loans.'' \24\ In contrast to the ``10 
percent'' requirement, neither the Bank Act nor the regulation 
establishes a quantitative standard for determining compliance with the 
``makes long-term home mortgage loans'' requirement. The regulation 
deems an institution to have satisfied that 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.\25\ The regulation does not 
specify the level of activity that is needed to meet the requirement. 
The membership regulation does not require a Bank to determine an 
institution's compliance with either the ``10 percent'' or ``makes 
long-term home mortgage loans'' requirement once that institution has 
become a Bank member.
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    \24\ The regulation defines the term ``residential mortgage 
loan,'' which the statute does not define, to include generally all 
assets that qualify as home mortgage loans (see definition in 
footnote 25 below), 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. 12 CFR 1263.1.
    \25\ 12 CFR 1263.9. The Bank Act defines the term ``home 
mortgage loan'' to mean ``a loan made by a member upon the security 
of a home mortgage.'' 12 U.S.C. 1422(4). 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 U.S.C. 1422(5). The existing 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. 12 CFR 1263.1. The regulation also 
defines the term ``long-term,'' which the statute does not define, 
to mean ``a term to maturity of five years or greater.'' See id.
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B. FHFA's Review of the Membership Regulation

    This final rule is one of the results of a continuing review of 
FHFA's Bank membership regulation that the Agency began in 2010. Most 
of the fundamental aspects of the existing membership regulation were 
adopted as part of two rulemakings undertaken by the Finance Board in 
the mid-1990s.\26\ Although the membership regulation was subsequently 
amended several times (in some cases to make important substantive 
changes \27\), until 2010 there had been no comprehensive review of the 
regulation as a whole since it was amended to grant the Banks the 
authority to approve or deny membership applications in 1996. FHFA's 
decision to undertake such a review was prompted in part by the 
evolution of the financial services industry in the intervening years, 
which had given rise to a number of issues that the existing regulation 
either did not address or addressed inadequately. The goal of this 
review, which is ongoing, has been to determine whether the existing 
regulatory provisions continue to effectively implement the 
requirements of the Bank Act and the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) 
and to fulfill the purposes underlying those requirements. FHFA has 
also sought to determine whether certain provisions that do not need 
substantive revision should nonetheless be revised to address questions 
that have arisen about their application, or simply to read more 
clearly or conform more closely to the style, structure and 
nomenclature FHFA now uses in its other regulations.
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    \26\ In 1993, the Finance Board adopted a new membership 
regulation in order to implement the revisions to the statutory 
membership requirements made by FIRREA in 1989. See 58 FR 43522 
(Aug. 17, 1993). Most of the existing material addressing the 
general eligibility requirements (now located in Sec.  1263.6), the 
stock requirements (Sec. Sec.  1263.19-1263.23), and membership 
withdrawal, termination, and readmission requirements (Sec. Sec.  
1263.24-1263.30) was adopted at that time. A 1996 rulemaking made 
significant revisions and additions to the regulation in order to 
authorize the Banks to approve or deny all membership applications. 
See 61 FR 42531 (Aug. 16, 1996). Prior to that time, the Finance 
Board had the ultimate authority to approve or deny membership 
applications, although it had delegated some of that decision-making 
authority to the Banks in the case of institutions meeting certain 
``safe harbor'' criteria. Most of the existing material regarding 
the application process (Sec. Sec.  1263.2-1263.5) and the 
rebuttable presumptions that apply to the various eligibility 
requirements (Sec. Sec.  1263.7-1263.18) were adopted as part of the 
1996 rulemaking.
    \27\ For example, the regulation was amended in 2000 to 
implement the new statutory exemption of CFIs from the ``10 
percent'' requirement, see 65 FR 13866 (Mar. 15, 2000), and in 2010 
to implement the statutory amendments making non-depository CDFIs 
eligible for membership, see 75 FR 678 (Jan. 5, 2010).
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    In December 2010, after FHFA had completed an initial review of the 
membership regulation, the Agency published an Advance Notice of 
Proposed Rulemaking (ANPR) in which it requested comments on a number 
of issues.\28\ Primary among those issues was whether the existing 
regulation was effectively implementing the statutory ``10 percent,'' 
``makes long-term home mortgage loans,'' and ``home financing policy'' 
eligibility requirements. The ANPR asked whether it would be 
appropriate to establish more objective and quantifiable standards for 
either of the latter two requirements and whether any or all of those 
requirements should be revised to explicitly apply on a continuing 
basis, rather than only at the time of admission to membership. The 
ANPR also requested comment on other issues, including whether, in 
light of FHFA's supervisory concerns about the acceptance of so-called 
``captive'' insurers as members by several Banks, the Agency should 
amend the regulation to exclude such entities from Bank membership. 
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. However, because very few of those letters 
provided detailed responses to the questions FHFA asked, the Agency 
continued to study the issues and ultimately decided to proceed with a 
Notice of Proposed Rulemaking (proposed rule).
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    \28\ See 75 FR 81145 (Dec. 27, 2010).
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C. The Proposed Rule

    FHFA published a proposed rule in the Federal Register on September 
12, 2014.\29\ It proposed to make two fundamental changes to the Bank 
membership regulation, as well as several other substantive, but less 
fundamental, changes, and numerous non-substantive revisions to clarify 
various existing regulatory provisions.
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    \29\ See 79 FR 54848 (Sept. 12, 2014).
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    First, the proposed rule would have revised the regulation to 
require that an institution hold at least one percent of its assets in 
home mortgage loans in order to be deemed to satisfy the statutory 
``makes long-term home mortgage loans'' requirement and to require that 
each Bank member comply

[[Page 3249]]

with that ``one percent'' requirement and, where applicable, with the 
``10 percent'' requirement on an ongoing basis as a condition of 
remaining a member. The proposed rule would have required each Bank to 
determine member compliance with those ongoing requirements annually, 
using data from members' regulatory financial reports where possible, 
to calculate the relevant ratios based on a three-year rolling average. 
Members found to be out of compliance with either requirement would 
have been given one year to return to compliance. As proposed, the rule 
would have required a Bank to terminate the membership of any 
institution that remained out of compliance for two consecutive years.
    Second, the proposed rule sought to address the growing use of 
captive insurers as vehicles through which parent companies not meeting 
the membership eligibility requirements of the Bank Act could 
circumvent those requirements and gain access to low-cost Bank advances 
to fund their own operations and investments.\30\ Several real estate 
investment trusts (REITs), which are not eligible for Bank membership, 
had established captive subsidiaries that became Bank members and then 
obtained advances that were disproportionately large in comparison with 
the investments and operations of the captives themselves, and 
additional REITs and other ineligible entities were seeking to do the 
same. This, combined with the facts that many of the parents were 
guaranteeing repayment of the advances made to their captive 
subsidiaries and providing the collateral for those advances, led FHFA 
to the conclusion that the real purpose of those arrangements was to 
provide the non-member REITs with access to Bank funding to which they 
were not legally entitled.
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    \30\ A captive is a special-purpose insurer formed primarily to 
underwrite the risks of its parent company or affiliated companies. 
A typical captive resembles a traditional commercial insurance 
company in that it is licensed under state law, sets premiums and 
writes policies for the risks it underwrites, collects premiums, and 
pays out claims. The biggest difference between a captive insurer 
and a commercial insurance company is that a captive does not sell 
insurance to the general public. In 1972, Colorado became the first 
state in the U.S. to enact legislation recognizing and governing 
captives as a class of entity distinct from commercial insurance 
companies. To date, over 30 states and the District of Columbia have 
enacted such captives-specific statutes. Primarily because captives 
do not sell insurance to the general public, these state statutes 
establish standards for the formation, licensing, operation, and 
supervision of captives that are generally less onerous than either 
the state statutory regimes that apply to commercial insurance 
companies or the state and federal laws under which depository 
institutions are chartered, operated, and supervised. See Frank 
Seneco, Wesley Sierk & Evan Jehle, Do-It-Yourself Insurance, Private 
Wealth Magazine, July/Aug. 2014, at 21-22, http://www.fa-mag.com/news/do-it-yourself-insurance-18548.html?issue=230 (last visited 
Dec. 8, 2015); see also National Association of Insurance 
Commissioners, Captive and Special Purpose Vehicle Use Subgroup of 
the Financial Condition Committee, Captives and Special Purpose 
Vehicles--An NAIC White Paper (June 6, 2013), http://www.naic.org/store/free/SPV-OP-13-ELS.pdf (last visited Dec. 8, 2015).
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    The proposed rule would have addressed this supervisory concern by 
defining the term ``insurance company''--which is not defined in either 
the Bank Act or the existing regulation--to exclude captives, thereby 
rendering those types of entities ineligible for Bank membership. 
Specifically, the proposed rule would have defined ``insurance 
company'' to mean ``a company whose primary business is the 
underwriting of insurance for nonaffiliated persons or entities.'' A 
typical captive, whose primary business is the underwriting of 
insurance for its parent company or for other affiliates, would not be 
included within the scope of the proposed definition of ``insurance 
company.'' Because, as discussed above, the Bank Act and the membership 
regulation limit eligibility for Bank membership to institutions that 
qualify as an insured depository institution, a CDFI, or an insurance 
company, defining ``insurance company'' to exclude captives effectively 
removes such entities from among the types of institutions that may be 
eligible for membership.
    Although the proposed rule would have made all captives ineligible 
for membership, it would have permitted any captive that had been 
admitted to membership prior to the publication date of the proposed 
rule to remain a member of its current Bank for five years following 
the effective date of the final rule. However, the rule would have 
capped the amount of advances that a Bank could have outstanding to 
such a member at 40 percent of the member's total assets and prohibited 
a Bank from making a new advance, or renewing an existing advance, with 
a maturity date beyond the five-year grace period. As proposed, the 
regulatory text would not have explicitly addressed the treatment of 
any captives that a Bank may have admitted to membership on or after 
the date on which the proposed rule was published. FHFA stated in the 
SUPPLEMENTARY INFORMATION to the proposed rule, however, that it would 
interpret the regulation to require the immediate termination of such 
captives' membership and the prompt liquidation of any outstanding 
advances.
    The proposed rule also would have made several other substantive, 
but less fundamental, changes: (1) To expand the list of assets that 
qualify as ``home mortgage loans'' to include all types of mortgage-
backed securities (MBS) (as opposed to only mortgage pass-through 
securities) that are fully backed by qualifying whole loans; (2) to 
require that a Bank examine an insurance company applicant's most 
recent audited financial statements in determining whether it meets the 
``financial condition'' eligibility requirement; and (3) to revise the 
existing regulation and add a new provision addressing how a Bank 
should determine the ``principal place of business'' (and, therefore, 
the appropriate Bank district for membership) for insurance companies 
or CDFIs. In addition to those primary revisions, FHFA also proposed to 
make a number of conforming changes necessary to integrate the new 
requirements into the regulation and to make numerous non-substantive 
revisions to clarify various regulatory provisions.

D. Overview of Comments on the Proposed Rule

    The proposed rule initially provided for a comment period of 60 
days, but, in response to numerous requests, FHFA extended the comment 
period to 120 days.\31\ The extended comment period closed on January 
12, 2015, and FHFA received over 1,300 comment letters in response to 
the proposed rule. Nearly 60 percent of the comment letters came from 
bank and thrift institutions and related trade associations; about 12 
percent came from credit unions and related trade associations. The 
remainder of the letters were from the Banks (all of which sent more 
than one letter), insurance companies, CDFIs, affordable housing 
agencies and organizations, various types of community support 
organizations, home builders, REITs, public officials, and others. 
About two-thirds of all letters were versions of one form letter 
template or another.
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    \31\ See 79 FR 60384 (Oct. 7, 2014).
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    Few of the comment letters expressed support for any aspect of the 
proposed rule, and the vast majority expressed opposition to, or 
requested that FHFA withdraw, the entire rule. The most commonly 
expressed concerns arose from a belief that the rule, if implemented, 
would result in the Banks having fewer members on average and that 
this, in turn, would result in a reduction in their income. This, 
commenters contended, would compromise the Banks' ability to act as 
reliable sources of liquidity, inhibit their ability to carry out their 
housing

[[Page 3250]]

finance and community development mission, and reduce the amount of 
funds available for their Affordable Housing Programs and Community 
Investment Cash Advance programs. However, few of the commenters 
expressing these views provided factual support for their opinions or 
attempted to quantify the effects they believed the rule would have on 
the Banks' operations.
    FHFA reviewed every comment letter and considered all of the 
comments in developing the final rule. The primary comments regarding 
each of the substantive aspects of the proposed rule, as well as FHFA's 
responses to some of those comments, are discussed immediately below. 
Comments addressing specific rule provisions are discussed in part III 
of this SUPPLEMENTARY INFORMATION, which describes the final rule in 
detail and the ways in which it differs from the proposed rule.
1. Comments on the Proposed Ongoing Asset Ratio Requirements
    Over 800 of the comment letters addressed FHFA's proposal to 
measure compliance with the ``makes long-term home mortgage loans'' 
requirement based on a quantitative standard and to apply that 
quantitative requirement to members on an ongoing basis. Over 600 of 
the letters addressed the proposal to apply the ``10 percent'' 
requirement to members on an ongoing basis. Almost all of the 
commenters addressing those proposals were opposed to the proposed 
revisions. Approximately 66 percent of those opposed to the ongoing 
quantitative ``makes long-term home mortgage loans'' requirement and 
approximately 51 percent of those opposed to the ongoing ``10 percent'' 
requirement stated that managing their balance sheets for compliance 
would hinder members' business by putting them in the position of 
choosing between optimal balance sheet management and continued access 
to their Banks as a source of liquidity. About half of the commenters 
opposed to the proposed revisions stated that members would be harmed 
by losing membership in the Bank System and about half also cited 
concerns regarding the additional regulatory burden on members.
    As further objections to the proposal, commenters also stated, 
among other things, that the proposal would create a significant 
operational burden on the Banks because the member financial 
information required to determine compliance with the ongoing 
requirements is not perfectly aligned with specific call report line 
items; the proposal would provide little or no benefit to the Bank 
System; members could never be certain that FHFA would not increase the 
quantitative requirements in the future; the proposed ongoing 
requirements would reduce membership levels at the Banks; the current 
regulations and collateral requirements already ensure that members 
maintain a nexus to the Banks' housing finance mission; the proposed 
ongoing requirements have no foundation in the Bank Act or its 
legislative history; and the requirements do not take into account that 
financial services organizations are often structured such that they 
hold mortgages and mortgage securities in various entities within their 
corporate organization for a range of business reasons.
    Commenters also expressed concerns specific to the proposal to make 
the ``10 percent'' requirement ongoing, including that CFIs with total 
assets approaching the CFI threshold amount might forego acquiring 
another institution or reduce other activities that could grow their 
business solely because doing so would push their asset size above the 
CFI threshold and thus make them immediately subject to the ``10 
percent'' requirement. In addition, some commenters expressed concern 
that, because the Bank Act does not exempt smaller credit unions from 
the ``10 percent'' requirement as it does for small banks and thrifts, 
the proposed changes would impose a disproportionately greater 
compliance burden on small credit unions than they would on small banks 
and thrifts.
    Having reviewed all of the comment letters addressing the proposed 
ongoing asset ratio requirements, FHFA has decided not to include those 
revised requirements in the final rule. The Agency's research indicates 
that over 98 percent of current members likely would be in compliance 
with both proposed requirements (as applicable). This suggests that, 
for the time being, FHFA can address its supervisory concerns about 
members abandoning their commitment to housing finance by continuing to 
monitor the levels of residential mortgage assets held by members.
    FHFA also recognizes that establishing a system to monitor members' 
compliance with the proposed ongoing asset ratio requirements could 
pose an additional incremental burden on the Banks and their members, 
particularly on members whose asset ratios are close to the required 
minimums. FHFA also carefully considered the comments received from the 
credit union industry, which contended that the proposed ongoing ``10 
percent'' requirement would impose a disproportionate burden on small 
credit unions because they cannot qualify as CFIs. That view is 
consistent with the Agency's recent research, which indicates that, of 
the current members that would not meet an ongoing ``10 percent'' 
requirement, about 68 percent of them would be small credit unions.
    Although FHFA has determined not to adopt the ongoing asset ratio 
requirements as part of the final rule, the Agency believes that 
members' ongoing commitment to housing finance is important to ensuring 
fidelity to the Bank Act and the purposes for which the Bank System was 
established and that the issue warrants continued monitoring going 
forward. FHFA therefore will continue to monitor this issue carefully 
and may revisit the issue in the future should its monitoring reveal a 
need for further action. Any such action would be undertaken through a 
separate rulemaking, with prior notice to, and an opportunity for 
comments from, all interested parties.
2. Comments on the Proposed Exclusion of Captives From Membership
    About 400 of the comment letters addressed FHFA's proposal to 
exclude captives from Bank membership to some degree, with about 60 of 
those letters treating the issue in some depth. Almost all of the 
letters expressed opposition to all aspects of the captives proposal 
and none expressed support for the overall proposal. Almost all of the 
commenters' specific arguments in opposition to the captives proposal 
fell into two general categories: (1) That FHFA does not have the legal 
authority to implement the proposal; and (2) that the proposal is 
flawed from a policy perspective. Many commenters included arguments 
falling into both categories in their letters.
    A few of the comment letters expressed no opposition to the 
proposal, but suggested some clarifying textual revisions. One 
commenter explicitly supported the idea of excluding REIT-controlled 
captives from membership, stating that, because REITs are uninsured, 
they pose ``unnecessary risks'' to the Bank system and, because REITs 
already benefit from tax preferences, it is questionable public policy 
to allow them access to the lower cost funding the Banks provide. 
However, that commenter was opposed to the exclusion of captives 
controlled by other types of entities.

[[Page 3251]]

a. Comments on FHFA's Legal Authority To Implement the Captives 
Proposal
    Commenters who expressed legally based objections to the captives 
proposal made three types of arguments in support of those objections: 
(1) FHFA lacks the legal authority to define the term ``insurance 
company'' to exclude captives; (2) irrespective of its general 
authority, FHFA cannot legally exclude all captives from membership as 
proposed because the proposal lacks a factual basis, arbitrarily 
singles out captives, or is overly broad; and (3) in any event, FHFA 
lacks the legal authority to terminate or require termination of a 
captive member. These three general categories, including most of the 
specific legal arguments offered within those categories, are addressed 
in turn below.
    The general legal argument expressed most frequently in the comment 
letters was that FHFA lacks the legal authority to define the term 
``insurance company'' to exclude captives. Many commenters stated that, 
because ``insurance company'' is not defined in the statute, the term 
must be given what they believe to be its plain meaning--i.e., that a 
captive must be considered to be an ``insurance company'' under the 
Bank Act, apparently because it is chartered or licensed under state 
insurance laws. Because a captive is considered to be an ``insurance 
company'' under the laws of the states that have captive insurance 
statutes, these commenters argued, FHFA has no authority to interpret 
the term any differently for purposes of the Bank Act, and thus cannot 
exclude captives from the category of ``insurance company'' as used in 
the Bank Act. In support of this argument, several commenters 
specifically cited the federal McCarran-Ferguson Act,\32\ which 
reserves to the states the authority to regulate and tax the business 
of insurance, except in cases where Congress has adopted a statutory 
provision that explicitly provides otherwise.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 1011-1015.
---------------------------------------------------------------------------

    Numerous commenters argued that FHFA's proposal to define 
``insurance company'' to exclude captives from membership is outside 
the Agency's authority because it runs contrary to Congress's clear 
intent regarding the meaning of the term and the scope of Bank 
membership. In this vein, many cited the fact that the Bank Act 
provides that ``any'' insurance company may be eligible for membership 
as evidence of Congress's unambiguous intent to prohibit the Bank 
System regulator from narrowing the scope of the term to exclude any 
entity chartered as any type of insurance company. Others disputed 
FHFA's assertion in the proposed rule that in 1932 Congress could not 
have contemplated that the term ``insurance company'' would include 
captives because they did not exist at that time. These commenters 
contended that the concept of ``self-insurance'' has existed for 
hundreds of years and that other types of self-insurance vehicles did 
exist in 1932, although they were not at that time referred to as 
``captives.'' Several commenters also noted that Congress has never 
acted to exclude captives from membership, despite the fact that an 
increasing number of states have adopted captive insurance statutes 
since the first such statutes were enacted domestically in the 1970s. 
Finally, many commenters cited Congress's decision to extend 
eligibility for Bank membership to commercial banks and credit unions 
in 1989 and to CDFIs in 2008 as evidence of its intent to effect ``an 
inclusive and expansive approach'' to membership and characterized 
FHFA's attempt to exclude captives from membership as running counter 
to that intent.
    In addition to the broader assertions that FHFA lacks any authority 
to interpret the scope of the term ``insurance company'' as not 
including captives, numerous commenters argued, more narrowly, that the 
Agency cannot legally implement the specific approach set forth in the 
proposed rule because it lacks any factual basis to justify that 
approach. Many of the commenters advancing such arguments 
mischaracterized the Agency's proposal to exclude captives as being 
based primarily on either safety and soundness concerns or a view that 
captives (or their parents) do not support housing finance. Those 
making such mischaracterizations asserted, and in some cases cited 
specific evidence, that the assumptions underlying those purported 
bases are erroneous. Others, who correctly characterized FHFA's primary 
goal as being to prevent the circumvention of the statute by ineligible 
entities, such as REITs, that have formed captives for the express 
purpose of gaining access to Bank funding to which they are not legally 
entitled, argued that the proposed rule provided no evidence to show a 
factual basis for those concerns.
    Some commenters argued that, even if FHFA has a legitimate factual 
basis for its concerns regarding the ability of ineligible entities to 
obtain indirect access to Bank funding through eligible subsidiaries, 
the Agency's decision to focus only on the exclusion of captives in the 
proposed rule is arbitrary because it disregards the possibility that 
other types of members could be utilized for a similar purpose.
    While commenters advancing the foregoing argument asserted that the 
proposed prohibition would be too narrow, others asserted that it would 
be overly broad. Commenters taking the latter view contended that, if 
FHFA wishes to prevent entities that are not eligible for Bank 
membership from using captives to access Bank funding, then it should 
exclude from membership only captives that are owned by ineligible 
entities or, even more narrowly, only captives that FHFA has determined 
are actually being used as a funding conduit for an ineligible parent.
    Finally, a number of commenters, while not conceding that FHFA has 
the authority to prevent the Banks from accepting captives as new 
members going forward, argued specifically that the Agency may not 
terminate, or require the Banks to terminate, captives that have 
already been approved for membership under the existing regulations. In 
support of this contention, several commenters noted that, while the 
Bank Act at one time explicitly authorized the Bank System regulator to 
require a Bank to terminate a member in certain circumstances, Congress 
removed this explicit authorization in 1999.
    Another commenter who focused on FHFA's comments in the proposed 
rule SUPPLEMENTARY INFORMATION regarding the possibility that captive 
membership may pose unique safety and soundness issues asserted that 
those concerns could not serve as a basis for requiring the termination 
of captive members until the Agency had taken the steps required by 
section 8 of the Bank Act.\33\ Specifically, the commenter asserted 
that section 8 of the Bank Act requires FHFA, if it believes that any 
of the state laws under which captives are regulated give rise to 
safety and soundness concerns, to undertake a study of those laws and 
that only after concluding that a state's laws fail to provide adequate 
protection to the Banks may FHFA restrict the membership of otherwise 
eligible members in that state.
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 1428.
---------------------------------------------------------------------------

    One commenter asserted that termination of existing captive members 
would give rise to a ``takings'' claim against the United States in 
that it would deprive former captive members of their right to a pro 
rata share of the retained earnings of their former Banks and of access 
to Bank advances and other products and services without adequate 
compensation. The commenter

[[Page 3252]]

argued that, therefore, such termination is prohibited under a ruling 
by the U.S. Court of Appeals for the D.C. Circuit that no federal 
agency may adopt a rule that would give rise to a ``takings'' claim 
against the United States unless it is expressly authorized it to do so 
by statute.\34\
---------------------------------------------------------------------------

    \34\ See Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441, 1445-46 
(D.C. Cir. 1994).
---------------------------------------------------------------------------

b. Comments Asserting That the Proposal Is Flawed From a Policy 
Perspective
    While many of the commenters did not address FHFA's legal authority 
to implement the proposed exclusion of captives from membership, almost 
all of the commenters asserted that doing so would represent a poor 
policy choice. The arguments made in support of commenters' policy-
based objections focused primarily on issues of (1) safety and 
soundness, (2) mission achievement, and (3) the financial health of the 
Banks, their members, and the overall residential mortgage market.
    Again focusing on FHFA's comments regarding the possibility that 
captive membership may pose unique safety and soundness issues, 
numerous commenters argued that captives do not pose safety and 
soundness risks that are materially greater than or different from 
those posed by other types of members. These commenters offered a 
number of contentions in support of this argument, including that 
captives are subject to regulatory regimes that are generally the same 
as those that apply to traditional insurers and are supervised in a 
similar fashion; captives have a lower rate of insolvency and default 
than traditional insurers because they tend to be over-capitalized and 
operated conservatively so as to ensure that they will be able to pay 
the claims of their owners; and Banks have been admitting captives as 
members for over 20 years and have experienced no losses on advances to 
captive members. Other commenters asserted that to the extent that 
captives may present unique safety and soundness concerns, those 
concerns can be addressed with more targeted requirements, such as 
requiring captive members to meet special seasoning requirements, 
minimum capital levels, or maximum leverage ratios. Still others 
contended that the Banks already have sufficient processes and 
procedures to manage any additional risk that captives may pose.
    Many commenters urged FHFA to continue to allow captives--
particularly those controlled by REIT parents--to be admitted to Bank 
membership, stressing that mortgage REITs' substantial commitment to 
the residential mortgage market in the U.S. is consistent with the 
mission of the Banks. Going further, many argued that, contrary to the 
approach taken in the proposed rule, FHFA should actually encourage 
membership approval for REIT-controlled captives as a means of 
increasing the level of private capital in the residential mortgage 
market. Several of these commenters asserted that the collateral 
requirements applying to Bank advances would tend to dissuade entities 
whose business practices are not consistent with the housing finance 
mission of the Banks from forming captives in order to gain access to 
Bank advances.
    A number of commenters argued that FHFA offered no analysis of the 
financial impact the proposed exclusion of captives would have on the 
Banks and their members. Many commenters noted that the Bank System 
benefits from a diverse and robust membership and asserted that 
eliminating one class of existing and potential members would result in 
lost income for the Banks now and in the future. At least one commenter 
asserted that, for certain Banks, the financial impact of the proposal 
could be so significant as to jeopardize their independent status, 
thereby forcing them to consolidate with other Banks. Many commenters 
pointed out that any action that might reduce the income of any Bank to 
any extent would necessarily reduce the amount of funds available for 
those Banks' Affordable Housing Programs (AHP) because the statute 
requires 10 percent of a Bank's earnings to be dedicated to its AHP.
    In addition to the predictions of negative consequences for the 
Banks and their members, a number of commenters asserted that 
preventing mortgage REITs and similar companies from accessing Bank 
funding through captive subsidiaries would have negative consequences 
for the overall residential mortgage market. Noting that the long-term 
and reliable nature of Bank funding assists in reducing the likelihood 
that mortgage market crises will occur and in mitigating such crises 
when they do occur, several of these commenters argued that preventing 
captive parents from accessing that funding could increase instability 
in the residential mortgage market by reducing liquidity and curtailing 
the availability of long-term funding.
c. Comment Letters Suggesting Alternative Approaches
    A number of commenters suggested alternative approaches to address 
what they perceived to be FHFA's concerns regarding captives that would 
be less severe than the outright exclusion of all captives from Bank 
membership.
    Several commenters that believed FHFA's concerns to be primarily 
related to safety-and-soundness or mission achievement issues suggested 
that the Agency could address these concerns by adopting borrowing, 
financial condition, or mission standards to apply specifically to 
captives (or, in some cases, to insurance companies generally). For 
example, one commenter suggested that FHFA could require ongoing 
periodic reporting to the Bank of information that would allow it to 
adequately assess the financial health and investment strategies of, 
and other risk metrics pertaining to, both the captive and its parent; 
apply a more stringent mission test to potential captive members and 
their parents using asset or income tests; or require that all 
collateral pledged by captives or their parents to secure advances be 
real estate related.
    Commenters that more appropriately focused on FHFA's primary 
concern--the misuse of the captive vehicle by non-eligible entities--
stated that FHFA should prevent those practices specifically, without 
excluding all captives from membership. For example, some suggested 
that the final rule allow captives with a parent or affiliate that is 
itself eligible for Bank membership to remain eligible. One such 
commenter favored the use of captives to allow parent companies that 
are themselves eligible for membership (``particularly . . . 
institutions that now have substantially higher liquidity requirements 
than in the past'') essentially to become members of more than one 
Bank, which the commenter asserted ``would not only help to serve the 
industry's liquidity needs, but would reduce the concentration risk 
posed by large institutions belonging to only one or two [Banks].''
    Other commenters suggested that the final rule exclude from 
membership only captives that FHFA or the Banks have determined are 
owned by non-eligible entities that are using or have used those 
captives as conduits to receive Bank funding for their own use. Those 
commenters did not provide much detail as to how that would be 
accomplished, although one suggested that FHFA itself should review 
captives' applications for Bank membership in order to determine the 
purpose behind each application. Finally, one commenter, who asserted 
that FHFA ``is not well informed about captives,'' suggested that the 
Agency should ``increase its knowledge in this area and find ways to 
address issues raised in the

[[Page 3253]]

[proposed rule] by participating in a task force with insurance 
regulators and others in the captive insurance industry.''
d. Results of FHFA's Review of Comments on the Captives Proposal
    FHFA has reviewed all of the comments regarding its proposal to 
exclude captives from Bank membership and has studied especially 
closely the considered opinions of those commenters that addressed the 
issue in depth. After giving careful consideration to all of the 
viewpoints expressed, the Agency has decided to finalize the captives 
provisions essentially as proposed, albeit with some minor 
modifications to the transition provisions. The final provisions, the 
reasons FHFA has decided to adopt them, the bases for FHFA's conclusion 
that it possesses the authority to adopt those provisions, and the 
Agency's responses to the points raised in the comment letters are all 
discussed in detail in parts II and III of this SUPPLEMENTARY 
INFORMATION.
3. Comments on the Other Substantive Proposed Revisions
    About 80 commenters addressed the proposal to require a Bank to 
obtain and review an insurance company applicant's most recent audited 
financial statements in determining whether it meets the ``financial 
condition'' eligibility requirement. Nearly all of the commenters 
opposed the inclusion of that requirement in the final rule. Most of 
those commenters based their objections on the assertion that the 
requirement would be burdensome for insurance companies--especially 
those that are not required by law to have their financial statements 
reviewed by an outside auditor. FHFA has considered these concerns, but 
has decided to include the requirement, as proposed, in the final rule.
    The Agency recognizes that there are costs associated with 
obtaining audited financial statements. It also believes, however, that 
there are significant benefits to the Banks from being able to rely on 
financial statements that have been audited by a third party, 
particularly when assessing an insurance company's financial condition 
prior to admitting it to membership, which is the only time at which 
this requirement will apply. Even with this additional requirement, the 
financial information that insurance company applicants will be 
required to provide to the Banks will be far less than the financial 
information that insured depository institution applicants must 
provide.
    About 80 of the comment letters addressed the parts of the proposed 
rule that would have amended the regulations governing how an 
institution's principal place of business is to be determined which, in 
turn, dictates the Bank it may join. The proposal included one 
provision specific to insurance companies and CDFIs, which would have 
required a Bank to use objective factors to identify the geographic 
location from which an insurance company or CDFI conducts the 
predominant portion of its business operations. The proposal also would 
have revised the general provision, which presumes the location of an 
institution's ``home office'' to be its principal place of business, by 
adding a requirement that the institution actually conduct business 
from its home office in order to benefit from that presumption. The 
effect of that revision would have been to prevent a Bank from relying 
solely on an institution's state of domicile or incorporation as the 
principal place of business for Bank membership purposes.
    Most of the comments focused specifically on the effect the 
proposed revisions would have on insurance companies.\35\ Almost all of 
those commenters (with the exception of a few of the Banks, as 
discussed below) opposed the proposed revisions and stated their 
preference that the final rule should instead provide that an insurance 
company's principal place of business shall in all cases be its state 
of domicile (i.e., the state in which it is chartered). The commenters 
preferred the latter approach to the standard set forth in the proposed 
rule because they believed that it would be simpler to apply and would 
ultimately impose less burden on both the Banks and state insurance 
regulators. In other words, under a state of domicile standard each 
Bank would then need to deal only with the insurance regulators and 
insurance laws of the states within its district, and each insurance 
regulator would then need to establish a working relationship only with 
its local Bank.\36\
---------------------------------------------------------------------------

    \35\ One comment letter addressed the issue specifically as it 
relates to CDFIs and expressed support for the approach taken in the 
proposed rule.
    \36\ FHFA expects each Bank to communicate regularly with the 
regulator for each of its insurance company members and to be 
thoroughly familiar with the state insurance laws that apply to each 
of those members. See FHFA Advisory Bulletin AB 2013-09, 
Collateralization of Advances and Other Credit Products to Insurance 
Company Members (Dec. 23, 2013). Regardless of where an insurance 
company may be licensed to do business or where it carries out its 
back office operations, it is regulated and supervised by the 
insurance regulator of its state of domicile under the laws of that 
state.
---------------------------------------------------------------------------

    Although there may be some practical benefits to using the state of 
domicile as a proxy for an institution's principal place of business, 
the core question is whether such an approach would be consistent with 
the requirements of the Bank Act. FHFA has previously determined that 
the term ``principal place of business'' contemplates a physical 
location at which a company conducts the predominant portion of its 
business activities, and that a ``presence'' that is legal only, 
without any actual business activity, falls short of what the Bank Act 
requires. While the state laws under which insurance companies and 
CDFIs are chartered typically require companies to provide an in-state 
address for service of legal notices or for other purposes, those laws 
do not necessarily require a company to maintain any kind of business 
presence in the state. It is possible, then, that an insurance company 
or a CDFI may not conduct any of its business in its state of domicile. 
To amend the regulation, as the commenters suggest, to provide that the 
principal place of business of an insurance company or CDFI is in all 
cases to be its state of domicile would allow for the possibility that 
a Bank member's principal place of business could be a location at 
which it actually has no place of business. Such a result would not 
comport with FHFA's view of the term ``principal place of business'' 
and thus would not be consistent with the requirements of the Bank Act.

II. Treatment of Captive Insurers Under the Final Rule

    FHFA has carefully considered the thoughts and opinions expressed 
in the comment letters and thoroughly analyzed possible alternative 
means of addressing its concerns about the use of captive insurers by 
entities not eligible for Bank membership to gain access to Bank 
advances. Having done so, the Agency has decided to include in the 
final rule, with some modifications, the provisions excluding captives 
from Bank membership and requiring the Banks, after a transition 
period, to terminate the membership of all captives that were admitted 
under the existing regulations. As proposed, the final rule defines 
``insurance company'' to exclude captives, thereby making them 
ineligible for Bank membership.
    These provisions of the final rule address FHFA's supervisory 
concerns about the ability of entities ineligible for Bank membership 
(including mortgage REITs and other entities) to circumvent the Bank 
Act and obtain de facto Bank membership through captive subsidiaries 
that become members and then act as conduits to low-cost Bank

[[Page 3254]]

funding for the ineligible entity. The use of captives for this purpose 
under the existing regulation has grown dramatically in recent years, 
and has continued since the publication of the proposed rule. FHFA has 
well-founded concerns that this use of captive subsidiaries is open to 
multiple types of ineligible entities such as equity REITs, hedge 
funds, investment banks, and finance companies and that the practice 
may spread to those and other types of ineligible entities once they 
become aware of the advantages of gaining de facto Bank membership 
through such arrangements. As regulator of the Bank System, FHFA is 
responsible for ensuring the effective implementation of the provisions 
and purposes of the Bank Act. That responsibility includes ensuring 
that only entities eligible for Bank membership obtain the benefits of 
membership. FHFA is fulfilling that responsibility by including in this 
final rule provisions intended to prevent further use of captives to 
circumvent the membership eligibility requirements of the Bank Act.
    Like the proposed rule, the final rule also sets forth a transition 
provision permitting captives that became members prior to the 
publication date of the proposed rule to remain members for five years 
after the effective date of the final rule, but limiting their 
outstanding advances to 40 percent of their assets and, while 
permitting new advances below the 40 percent threshold, prohibiting new 
advances or renewals that mature beyond the five-year transition 
period. The final rule also contains an additional transition 
provision, not included in the proposed rule, to address the treatment 
of captives admitted to membership on or after the date of publication 
of the proposed rule. This provision permits any Bank that has admitted 
such captives one year following the effective date of the final rule 
within which to terminate the membership of those captives. The rule 
allows such captives until the end of that one-year period (or until 
the date of termination, if earlier) to repay their existing advances, 
but prohibits them from taking new advances or renewing existing 
advances that expire during that grace period.
    In reaching its decision to include these provisions in the final 
rule, FHFA gave due consideration to the fact that the vast majority of 
commenters addressing the proposed exclusion of captives from 
membership objected to that aspect of the proposed rule. Ultimately, 
however, the volume of adverse comments does not drive FHFA's policy 
determinations, particularly in this case, where FHFA has found 
significant evidence that REITs and other entities have been forming 
captives solely for the purpose of providing ineligible institutions 
access to Bank advances.
    FHFA carefully considered the merits of the opinions expressed and 
assertions made by commenters, including from those commenters that 
provided verifiable information that the Agency could assess as part of 
the rulemaking process. The arguments taken as a whole did not persuade 
the Agency that the existing statute should be applied to allow 
admission of captives to membership. The policy reasons behind FHFA's 
decision to include the captives provisions in the final rule, the 
legal bases for including those provisions, and the Agency's responses 
to a number of specific comments are set forth in detail below.

A. Policy Reasons for Excluding Captives From Bank Membership

1. Until Recently, Only a Few Captives Had Become Bank Members, and 
Most of Those Had Parents or Other Affiliated Entities That Were 
Eligible To Be Bank Members Themselves
    As mentioned above, the Bank Act provides that, in addition to 
insured depository institutions and CDFIs, ``any . . . insurance 
company'' shall be eligible to become a member of a Bank if it meets 
the applicable requirements. The Bank Act does not define ``insurance 
company,'' and neither FHFA nor its predecessor agencies had previously 
adopted a regulatory definition of that term. Consequently, as a 
practical matter, any entity chartered or licensed as an ``insurance 
company'' under state law and that has met the other applicable 
requirements historically has been permitted to become a Bank member. 
Because captive insurers are chartered or licensed as insurance 
companies under the laws of states that have enacted captive insurance 
statutes, a number of those types of entities have been permitted to 
become Bank members under the existing membership regulation.
    Although a Bank first admitted a captive to membership over twenty 
years ago, until recently Banks had accepted very few captives. The 
first captive to be admitted became a member in 1994. In the ensuing 
years, up until mid-2012, no more than eleven additional captives 
joined the Bank System. Most of the captive members that were admitted 
during that time period have parent companies that either are 
themselves eligible to be Bank members or are holding companies that 
own another eligible entity.
2. Recently, There Has Been a Dramatic Increase in Captive Members and 
Applicants, Almost All of Which Are Controlled by Ineligible Entities 
Seeking Access to Bank Funding
    Over the last several years, however, new captive members and 
membership applications by captives have shown a significant and 
accelerating increase. Since mid-2012, the Banks have admitted 27 new 
captive members, 25 of which are owned by mortgage REITs, finance 
companies, and other types of entities that are not themselves eligible 
for membership. Twenty of those 25 have become members since the 
publication of the proposed rule in September of 2014. This trend has 
become a matter of growing concern to FHFA, as it has become 
increasingly clear that captives are being promoted and used as 
vehicles to provide access to Bank funding and to other benefits of 
membership for institutions that are legally ineligible for membership. 
The Banks that have accepted these captive members have based their 
approvals on the financial strength of the parent and not the captive 
itself and have projected a level of advances activity that is 
disproportionately large in relation to the captives own business 
operations and related investment needs. In many cases (although, to 
date, not all), captive members have fulfilled the projections 
reflected in the membership digests by maintaining disproportionately 
large levels of outstanding advances, almost all of which have been 
secured by collateral provided by the parent. As a result of these 
developments, FHFA sees a current need to define ``insurance company'' 
in a manner that will prevent the creation of such de facto membership 
arrangements.
    The information contained in the membership application digests 
prepared by the Banks in connection with the admission of most of those 
captive subsidiaries supports a conclusion that they applied for 
membership--and, in fact, were established--for the primary purpose of 
accessing Bank funding for their parents' business needs; they did not 
seek membership to obtain support for their own operations or 
investments.\37\

[[Page 3255]]

As an initial matter, those digests indicate that all but one of the 25 
captive members owned by a REIT or similar ineligible entity were de 
novo entities at the time they applied for membership; at least 20 of 
the 25 had been chartered within the preceding six months and all but 
one of the remaining five had been chartered within the preceding 12 
months. The digests also show that the dollar amounts of anticipated 
advances to be made to most of those captives are grossly 
disproportionate to the amount of insurance business underwritten by 
the captive, contemplate that the parents will provide both the 
collateral and a guaranty for the captives' debt, and, in some cases, 
acknowledge that the captives will use the advance proceeds to make 
loans to their parents. The Banks themselves recognized the conduit 
nature of these captives by basing their assessment of the financial 
condition of their new captive members, and the amount of advances they 
may obtain, on the financial resources of their parents, rather than on 
the captives themselves.
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    \37\ The regulations require that a Bank ``prepare a written 
digest for each applicant stating whether or not the applicant meets 
each of the [applicable membership eligibility requirements], the 
Bank's findings, and the reasons therefor.'' See 12 CFR 1263.2(b). 
Since September 2012, FHFA has had a special data request in place 
pursuant to which it has received from the Banks the membership 
digests for each new insurance company and CDFI member approved 
during that time period. See FHFA Special Data Request SDR 2012-02, 
``Membership Decision Documentation for New Insurance Company and 
CDFI Members'' (Sept. 17, 2012).
---------------------------------------------------------------------------

    The chart below illustrates the recent dramatic increases in the 
number of captive members and in the amount of advances outstanding to 
captive members.
[GRAPHIC] [TIFF OMITTED] TR20JA16.000


[[Page 3256]]


3. There Are Currently Ongoing Efforts To Encourage Ineligible Entities 
To Use Captive Subsidiaries as a Means of Accessing Low-Cost Bank 
Funding
    Numerous public statements made by captive management companies and 
consultants, insurance regulators, and the parent companies themselves 
tend to confirm that almost all of the captives in the recent wave of 
new members and applicants were established and applied for membership 
for the purpose of providing their ineligible parents with access to 
Bank funding and other benefits of membership. For example, Marsh & 
McLennan (Marsh), a firm that characterizes itself as ``the world's 
leading captive manager,'' published an article in its quarterly 
newsletter in early 2014 stating that it had been working with REIT 
clients since the summer of 2013 ``to create captives for the purpose 
of accessing funding with the Federal Home Loan Bank system'' and 
advertising that ``low-cost funding'' obtained from a Bank through a 
captive subsidiary can allow a REIT parent to ``increase leverage and 
improve liquidity at attractive rates.'' \38\ After noting that 
captives were being formed in two particular states to permit access to 
the two Banks in whose respective districts those states lie, Marsh 
concluded by stating that its captive advisory team ``is likely to 
begin forming captives in other domiciles to access additional branches 
of the [Bank System].'' It is clear from that article, as well as from 
a contemporaneous Marsh report containing similar statements,\39\ that 
the firm is not encouraging existing captives to become Bank members to 
obtain funding for their own investments and operations, but is instead 
encouraging REITs and possibly other ineligible entities to create new 
captives to use as conduits to low-cost Bank funding for their own 
operations.
---------------------------------------------------------------------------

    \38\ See Marsh & McLennan Companies, Using Captives to Access 
Federal Home Loan Banking System Funding, Marsh Insights: Captives 
(Mar. 2014) at 5, http://usa.marsh.com/Portals/9/Documents/6454MA14-12785CAPNewsletter03-2014.pdf (last visited Dec. 8, 2015).
    \39\ See Marsh & McLennan Companies, The Evolution of Captives: 
50 Years Later (Annual Captive Benchmarking Report) (May 2014) at 2, 
5.
---------------------------------------------------------------------------

    At around the same time that Marsh published those materials, 
another firm, Willis Group Holdings PLC (which describes itself as ``a 
leading global risk advisor, insurance and reinsurance broker'') 
published a brochure on its Web site entitled ``Joining the Federal 
Home Loan Bank Offers Significant Advantages for Captive Owners, 
Including Low Interest Loans and Letters of Credits [sic].'' \40\ After 
describing how the firm had ``experienced a significant increase in 
existing and prospective captive owners looking to join [a Bank] via a 
captive subsidiary'' and summarizing the benefits of Bank membership, 
the brochure concludes by encouraging ``[p]rospective members [to] 
contact Willis or the regional [Bank] to discuss the prospect of their 
captive joining the [Bank].''
---------------------------------------------------------------------------

    \40\ Willis Group Holdings, Joining the Federal Home Loan Bank 
Offers Significant Advantages for Captive Owners, Including Low 
Interest Loans and Letters of Credits, Willis Global Captive 
Management Alert (Apr. 2014), http://www.willis.com/documents/publications/services/captives/20140426_50294_PUBLICATION_Global_Captive_Management_Alert_FINAL.pdf 
(last visited Dec. 8, 2015).
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    Even state insurance regulators have been publicly extolling the 
advantages a company can enjoy by having a captive subsidiary become a 
Bank member. For example, a recent article that focused on the 
formation of so-called ``831(b) captives'' quoted one state's regulator 
as remarking that such captive entities can be ``a portal for 
membership'' in the Bank System.\41\ In the same vein, several of the 
mortgage REITs that commented on the proposed rule revealed their 
intentions regarding their captive subsidiaries by advocating ``access 
by mortgage REITs'' to the Bank System, describing the proposed rule as 
``[d]enying access to [Bank] funding for a mortgage REIT,'' or making 
similar statements.
---------------------------------------------------------------------------

    \41\ See Caroline McDonald, Steady As She Goes: 2014 Domicile 
Captive Review, Risk Management (Aug. 1, 2014), http://www.rmmagazine.com/2014/08/01/steady-as-she-goes-2014-captive-domicile-review/ (last visited Dec. 8, 2015). An ``831(b) captive,'' 
sometimes referred to as a ``microcaptive,'' is a captive that does 
not underwrite life insurance and that generates annual premiums of 
$1.2 million or less. Under section 831(b) of the Internal Revenue 
Code, such an entity can elect to pay federal income tax based only 
on its investment income instead of on its taxable income as a 
corporation. 26 U.S.C. 831(b). The use of 831(b) captives by 
individuals and businesses has drawn close scrutiny from the 
Internal Revenue Service in recent years.
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4. Captives Are Uniquely Suited To Act as Conduits for Accessing the 
Bank System
    Among the types of institutions that, to date, have been considered 
eligible for Bank membership, captive insurers are uniquely suited to 
act as conduit vehicles for business entities that wish to gain access 
to the Bank System, but that are ineligible to become members in their 
own right. Because captives are self-insurance mechanisms and typically 
do not sell insurance policies to the public at large, it is generally 
far easier and less expensive to charter, capitalize, and operate a 
captive than to establish and operate a traditional life or casualty 
company that sells policies to the public.\42\ This was cogently 
explained by the captive regulator of one of the leading domestic 
captive domiciles in a response to a ``Frequently Asked Question'' 
(FAQ) appearing on its official Web site. There, the regulator noted 
that, while ``[c]ommercial insurance companies sell insurance to the 
general public and are licensed in all states in which they do 
business,'' captives by contrast ``directly insure only their owners,'' 
are ``licensed in only one state, and operate[] under the captive 
insurance law of that domicile.'' Because of those differences, the 
regulator explained, ``the degree of regulatory oversight required for 
captives is less than that which is required for commercial insurers.''
---------------------------------------------------------------------------

    \42\ See Daniel Schwarcz, A Critical Take on Group Regulation of 
Insurers in the United States, 5 U.C. Irvine L. Rev. 537, 555 (Aug. 
2015) (stating that captives have typically been viewed ``as 
presenting limited regulatory concerns'' due to their status as 
self-insurance mechanisms and that ``[a]s a result, captives are 
subject to very limited regulatory restrictions: Their financial 
statements are not publicly available, they do not have to comply 
with statutory accounting rules and the associated reserve 
requirements, and they generally are not subject to standard risk-
based capital requirements''). One state insurance regulator, in 
reporting to the state legislature on the desirability of enacting 
insurance legislation specific to captives, stated that a captive 
``is not regulated like an admitted insurance carrier, but operates 
under relaxed rules governing the captive's formation, 
capitalization, and solvency.'' In noting in this Supplementary 
Information the differences between the regulation of captives and 
the other types of institutions that have, to date, been considered 
eligible for Bank membership, FHFA is not expressing any judgment as 
to the adequacy of captive regulation generally or in any particular 
state with a captive statute, for purposes of the limited businesses 
for which captives are organized.
---------------------------------------------------------------------------

    Despite the fact that captives are already easier to establish and 
more lightly regulated than commercial insurance companies, the 
competition among states to attract businesses to organize captive 
subsidiaries in their respective borders is leading some states to 
amend, or modify the manner in which they apply, their captive laws to 
further reduce the regulatory burdens in relation to those imposed by 
other states. In a recent report prepared by a state insurance 
regulator that was required by statute to study the advisability of 
establishing a captive insurer industry in that state, that regulator 
recommended that the state's legislature ``forgo captive legislation at 
this time'' in part because ``the industry has developed in ways that 
have caused considerable regulatory concern at the federal and state 
levels.'' The report explained, ``To become a thriving captive domicile 
today, a state must be willing to relax important regulatory

[[Page 3257]]

safeguards. Attractive new domiciles are those that have a high risk 
appetite, demand few hurdles to formation, have low premium taxes and 
fees, have minimal solvency and capital requirements, and require 
little in the way of reporting.'' \43\
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    \43\ In addition, a 2011 New York Times article entitled 
``Seeking Business, States Loosen Insurance Rules,'' came to 
conclusions that were similar to those reached by the state 
insurance regulator quoted above. The article, which appeared on the 
newspaper's front page, cited numerous examples of states competing 
among themselves to relax their regulatory requirements in order to 
attract captives to their respective domiciles. It reported that one 
state, after observing the success of another in attracting 
captives, responded by amending its laws governing the tax rates 
captives must pay on premium revenues to make its rates lower than 
those of the other state; this prompted the other state to 
reconsider its own rates. The article also noted that the number of 
captives domiciled in a particular state had doubled in the 
preceding calendar year, after its insurance commissioner was given 
the power to exempt captives from various provisions of the state's 
captive insurer laws. The bulk of the article was devoted to 
investigating the growing trend of commercial insurance companies 
forming captives to reinsure blocks of outstanding policies in order 
to take advantage of the lower reserve requirements that apply to 
captives under the laws of some states. See Mary Williams Walsh and 
Louise Story, Seeking Business, States Loosen Insurance Rules, New 
York Times (New York ed.) (May 8, 2011) at A1, http://www.nytimes.com/2011/05/09/business/economy/09insure.html?pagewanted=all&_r=0 (last visited on Dec. 8, 2015).
---------------------------------------------------------------------------

    The competition between states is further evidenced by a 
proliferation of press releases from state insurance regulators touting 
their selection as, or nomination for, a ``U.S. captive domicile of the 
year'' award that is bestowed annually by a major captive industry 
magazine. For example, one state regulator noted in a press release 
regarding its selection as a finalist for the 2015 award that, after 
having twice amended its captive laws in recent years, the state had 
``positioned itself to become a preferred domicile to companies seeking 
a sophisticated regulatory infrastructure.'' An article in the 
sponsoring magazine announcing the winner of the 2015 award (which, 
ultimately, was not the state regulator that issued the above-quoted 
press release) stated that its judges selected the announced winner in 
part because, ``despite being an established jurisdiction, [the 
victorious domicile] continues to review its statute on an annual basis 
to ensure it continues delivering efficiency and value.'' \44\
---------------------------------------------------------------------------

    \44\ See Richard Cutcher, 2015 US Captive Services Awards: 
Winners Announced, Captive Review (Aug. 11, 2015), http://captivereview.com/news/2015-us-captive-services-awards-winners-announced/ (last visited on Dec. 8, 2015).
---------------------------------------------------------------------------

    The same characteristics that make captives far more viable than 
traditional insurance companies to use as vehicles for achieving de 
facto Bank membership also set them apart from insured depository 
institutions in that respect. Given the many obstacles to obtaining a 
commercial bank, savings and loan, or credit union charter,\45\ as well 
as the comprehensive systems of prudential regulation and supervision 
to which those types of institutions are subject, FHFA must regard as 
highly improbable the prospect of an ineligible entity chartering a 
depository institution for the primary purpose of providing itself with 
de facto Bank membership. FHFA is unaware of a single instance of such 
an occurrence in the history of the Bank System. The additional layer 
of supervision and examination to which a company would become subject 
under either the Bank Holding Company Act \46\ or the Savings and Loan 
Holding Company Act \47\ if it were to acquire control of a commercial 
bank or savings and loan association makes those types of institutions 
even more unlikely to be used as mere conduits to Bank funding. In 
contrast, the lack of any such requirements applying to the parent of a 
captive makes captives an especially attractive membership channel for 
REITs and other ineligible entities that are not subject to the type of 
inspection and regulation that applies to institutions that are 
eligible for Bank membership. The requirements for certification of 
CDFIs similarly make them unsuitable vehicles to serve as conduits for 
Bank funding to ineligible parents.\48\
---------------------------------------------------------------------------

    \45\ See, e.g., Patricia A. McCoy, Banking Law Manual: Federal 
Regulation of Financial Holding Companies, Banks and Thrifts Sec.  
[thinsp]3.02[2] (Matthew Bender, 2nd ed. 2015) (explaining that, 
because depository institution charters ``can be (and often are) 
denied for a variety of reasons, including unacceptable management, 
poor prospects for financial success, no perceived need for the 
institution's services or a competitive threat to existing 
institutions in the same market,'' they serve as ``powerful if 
erratic controls on entry into commercial banking and the thrift 
industry'').
    \46\ See 12 U.S.C. 1844; see also 12 CFR part 225 (implementing 
regulations).
    \47\ See 12 U.S.C. 1467a; see also 12 CFR parts 238, 239 
(implementing regulations).
    \48\ To be eligible for CDFI certification, an organization must 
have a primary mission of promoting community development; provide 
both financial and educational services; serve and maintain 
accountability to one or more defined target markets; maintain 
accountability to a defined market; and be a legal, non-governmental 
entity at the time of application (with the exception of Tribal 
governmental entities). 12 CFR 1805.201. An entity must meet 
quantitative mission requirements in order to obtain and maintain 
certification as a CDFI.
---------------------------------------------------------------------------

5. FHFA Has a Well-Founded Concern That the Use of Captives as Conduits 
to Bank Funding Will Grow Beyond Mortgage REITs To Include Additional 
Entities That Have Little or No Connection to Housing Finance
    As is evidenced by the recent surge in captive applications and 
membership approvals, an increasing number of mortgage REITs and 
similar ineligible entities have decided that the amount of effort and 
expense associated with forming and operating a captive is low enough 
to make it feasible to use this method to gain access to the Bank 
System. In light of the example set by those that appear to have 
successfully circumvented the statutory membership requirements through 
the use of captive subsidiaries, as well as the previously described 
efforts by some in the captives industry to promote this practice, FHFA 
expects that the prevalence of this practice will continue to grow 
unabated if the Agency does not take action now to end it. Having seen 
increasing numbers of mortgage REITs use the captive vehicle to gain 
access to the Bank System, the Agency is concerned that other types of 
entities, which may have no connection to housing finance, will begin 
to form captives for the same purpose.
    Indeed, some connected with the insurance industry have advocated 
the use of captives to provide access to the Bank System regardless of 
whether the parent company has any connection with residential mortgage 
lending. For example, an article re-published on the Web site of one 
state's department of insurance in 2011 reported that a ``budding 
concept is for captive owners, nonbank companies included, to use their 
captive insurers as portals to cheap bank credit under a federal 
banking law [i.e., the Bank Act] enacted decades before the first 
captive appeared.'' The article revealed that the concept is one that 
the state's captive regulator wants ``companies like manufacturers that 
have nothing to do with home financing'' to consider and that he is 
``promoting the concept with captive managers,'' in part as ``an engine 
of captive growth'' in his state. The same article also quoted a number 
of risk management consultants as stating that the use of captives as 
conduits to access Bank funding ``could grow'' and ``sounds like a 
wonderful arbitrage opportunity,'' that ``[r]esidential builders could 
benefit, as well as healthcare institutions'' from the strategy, and 
that it would be a ``prudent thing'' for a captive owner to take 
advantage of the opportunity to access such low-cost capital even if 
the owner

[[Page 3258]]

is ``building cars or running hotels.'' \49\ As noted above, Bank 
advances need not be collateralized with residential mortgage assets 
and need not be used for residential housing finance if they are of 
less than five years maturity.
---------------------------------------------------------------------------

    \49\ See Dave Lenckus, Cashing In On Captives, Risk & Insurance 
Newsletter (Mar. 1, 2011).
---------------------------------------------------------------------------

    The Agency's concerns about the prospect of wider use of the 
captive vehicle also arise from a number of other factors. Recently, 
for example, the first captive member owned by an equity REIT (as 
opposed to a mortgage REIT) joined the Bank System and, for the first 
time, a captive owned by an investment bank (in this case through a 
number of intermediating subsidiaries) was approved for Bank 
membership. In addition, at least one mortgage bank recently inquired 
about the possibility of a Bank admitting to membership a captive 
subsidiary that it proposed to establish for that purpose. While the 
use of captive subsidiaries to access the Bank System by entities that 
are not involved with housing finance is nascent, recent history with 
traditional insurance companies and, more recently, with REITs has 
shown that once one portion of an industry realizes the benefits of 
obtaining access to Bank advances, others in that industry will 
follow.\50\
---------------------------------------------------------------------------

    \50\ Although insurance companies have been eligible for 
membership since 1932, until recently only a very few insurance 
companies actually have become members. While only 31 insurance 
companies and captives were Bank members in 1996, 304 were members 
at the end of 2014.
---------------------------------------------------------------------------

6. The Bank Act Specifies the Types of Institutions That May Be 
Eligible To Be Bank Members, and FHFA Must Act To Prevent the Continued 
Circumvention of Those Eligibility Requirements by Entities That Are 
Not Eligible
    Abundant evidence exists of a prevalent and growing practice by 
entities that are themselves ineligible for Bank membership using 
captive subsidiaries to achieve a de facto membership status that 
effectively provides them with the same access to advances that is 
available to the types of institutions that are eligible to become 
members under the Bank Act. In light of the evidence, FHFA has 
concluded that it must take action to prohibit that practice in order 
to ensure the fulfillment of one of the key elements of the statutory 
scheme established by Congress--limiting Bank membership to the types 
of institutions specified in the Bank Act.
    As discussed above, section 4(a) of the Bank Act specifically 
enumerates the types of institutions that may be eligible for 
membership. By necessary implication, the statute must be read as a 
clear statement by Congress that entities of a type not included on 
that list of eligible institutions are not authorized to become members 
or otherwise to obtain the benefits of Bank membership, regardless of 
the extent to which those entities may be engaged in some part of the 
residential mortgage market. FHFA believes that in order to give effect 
to this congressional intent it must look to the substance of these 
transactions, and cannot ignore that the economic reality behind the 
growing trend of captive memberships is that the captives are being 
used to create a de facto membership for entities that are not among 
the types of entities that may become Bank members directly.
    Many commenters asserted that Congress's failure thus far to 
exclude captives from membership despite their increasing prevalence in 
the U.S. since the 1970s must necessarily lead to the conclusion that 
it has no concerns about the manner in which they are currently being 
used. Therefore, those commenters argue, FHFA must continue to consider 
captives to be a type of insurance company that is eligible for Bank 
membership. Congress's intent concerning the meaning of the term 
``insurance company,'' as used in the Bank Act, as well as FHFA's 
authority to interpret that term in the current context, are discussed 
in detail below. However, on the specific point raised by commenters, 
the phenomenon of ineligible companies using captives as a conduit to 
obtain access the Bank System is a very recent development. FHFA does 
not regard the lack of congressional action on the issue of Bank 
membership for captive insurers to be indicative of any particular 
congressional intent. FHFA will not attempt to interpret the views of a 
current Congress that has not acted to amend a statute enacted by a 
prior Congress decades earlier.
    Other commenters cited Congress's decision to extend eligibility 
for Bank membership to commercial banks and credit unions in 1989 and 
to CDFIs in 2008 as evidence of its intent to effect ``an inclusive and 
expansive approach'' to membership and characterized FHFA's attempt to 
exclude captives from membership as running counter to that intent. To 
the contrary, FHFA views those actions as an indication that when 
Congress determines that it is appropriate to permit a particular type 
of institution to have access to the Bank System, it will amend the 
Bank Act to expressly authorize that access. For example, at the time 
Congress enacted the Bank Act in 1932, the primary institutional 
holders of non-farm residential mortgage debt were savings and loan 
associations,\51\ which held 21.4 percent, followed by savings banks at 
17.1 percent, life insurance companies at 11.1 percent, and commercial 
banks at 10.4 percent.\52\ Despite the fact that commercial banks were 
significant participants in originating and investing in residential 
mortgage loans at that time, Congress declined to include them in the 
list of entities eligible for Bank membership. That remained the case 
until 1989, when Congress made federally insured commercial banks and 
credit unions eligible for membership. Moreover, although 
representatives of the mortgage banking industry have lobbied Congress 
to amend the Bank Act to allow mortgage bankers to become Bank members 
based on their active role in supporting residential housing finance, 
Congress has not done so.\53\
---------------------------------------------------------------------------

    \51\ These were then also referred to by various other names, 
such as those used in section 4(a) of the Bank Act--building and 
loan associations, cooperative banks, and homestead associations. 
See Leo Grebler, David M. Blank & Louis Winnick, Capital Formation 
in Residential Real Estate: Trends and Prospects 203, n.14 (1956).
    \52\ See Grebler, supra at 473. The percentages shown are as of 
December 31, 1931. In 1932, as well as for decades before and up 
through the early 1970s, many life insurance companies were heavily 
involved in the origination of home mortgage loans through extensive 
mortgage lending networks. See Kenneth A. Snowden, The Anatomy of a 
Residential Mortgage Crisis: A Look Back to the 1930s 5-8 (Nat'l 
Bureau of Econ. Research, Working Paper No. 16244, 2010). At some 
points during those years, life insurance companies held more than 
20 percent of all domestic non-farm residential mortgage debt. See 
Grebler, supra at 472-74; Snowden, supra at 5. See also Raymond J. 
Saulnier, Urban Mortgage Lending by Life Insurance Companies 1-9 
(1950).
    \53\ For example, at a November 2013 hearing of the Senate 
Committee on Banking, Housing, and Urban Affairs on a bill to reform 
the secondary mortgage markets, the Chairman-elect of the Mortgage 
Bankers Association testified that ``Congress should give serious 
consideration to expanding Federal Home Loan Bank membership 
eligibility to include access for non-depository mortgage lenders'' 
and to ``community lenders of a variety of business models, 
including independent mortgage bankers.'' Housing Finance Reform: 
Protecting Small Lender Access to the Secondary Mortgage Market: 
Hearing on S. 1217 Before the S. Comm. on Banking, Housing, and 
Urban Affairs, 113th Cong. 65-66 (Nov. 5, 2013) (statement of Bill 
Cosgrove, Chief Executive Officer, Union Home Mortgage Corp., and 
Chairman-Elect, Mortgage Bankers Association). Earlier, the Housing 
and Community Development Act of 1992 required that the Finance 
Board and the Department of Housing and Urban Development, among 
other agencies, each study a multitude of issues related to the Bank 
System, including possible measures to increase membership in the 
System, and report to Congress on their recommendations with respect 
to those issues. See Public Law 102-550, Sec.  1393, 106 Stat. 3672, 
4009-11 (1992). For reasons relating to mission, safety and 
soundness, and competitive balance, the reports produced by both 
agencies recommended against expanding the list of institutions that 
may be eligible for Bank membership to include mortgage banks. See 
Federal Housing Finance Board, Report on the Structure and Role of 
the Federal Home Loan Bank System 119 (Apr. 1993); U.S. Department 
of Housing and Urban Development, Office of Policy Development and 
Research, Report to Congress on the Federal Home Loan Bank System, 
Vol. II 6-12 (Apr. 1994). In addition, at a 1994 hearing, Under 
Secretary of the Treasury for Domestic Finance Frank N. Newman 
testified that, as recommended in the reports, the Treasury 
Department did not believe that membership eligibility should be 
expanded beyond then-currently eligible group of depository 
institutions and insurance companies. See The Future of the Federal 
Home Loan Bank System: Hearing Before the S. Comm. on Banking, 
Housing, and Urban Affairs on the Need for a Comprehensive 
Legislative Package to Update and to Strengthen the Federal Home 
Loan Bank System's Mission, Structure, Capital Requirements, and 
Regulatory Oversight, 103rd Cong., 4, 25 (June 15, 1994).

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[[Page 3259]]

    Similarly, Congress has not authorized REITs to become members. If 
Congress believed that REITs' involvement in the residential mortgage 
markets warranted them having access to Bank advances, it could have 
authorized them to become members, just as it did for certain CDFIs in 
2008 \54\ and for certain non-federally insured credit unions in 
2015,\55\ when it amended the Bank Act to make those types of entities 
eligible for membership. The fact that it has not done so for REITs, or 
for other types of entities that are not enumerated in section 4(a) of 
the Bank Act, leads FHFA to conclude that Congress has not intended to 
permit those entities access to Bank funding.
---------------------------------------------------------------------------

    \54\ See Housing and Economic Recovery Act of 2008, Public Law 
110-289, Sec.  1206, 122 Stat. 2654, 2787 (2008).
    \55\ See Fixing America's Surface Transportation Act, Public Law 
114-94, Sec.  82001 (2015).
---------------------------------------------------------------------------

    Whether entities that are currently ineligible for membership 
should be permitted to have access to Bank advances is the type of 
public policy issue that is for Congress to address. By precluding 
ineligible institutions from gaining de facto membership through 
captive insurers, the final rule has the effect of preserving the 
decision of whether to allow REITs access to the Bank System for 
Congress to address, should it choose to do so. The transition periods, 
both the five-year transition for pre-NPR captives and the one-year 
transition for the post-NPR captives, will provide Congress sufficient 
time to consider whether Bank membership should be extended to 
additional categories of members before the Banks are required to begin 
terminating the membership of existing captive members. If Congress 
determines that permitting REITs, or any other entities that are not 
currently eligible, to have such access is the appropriate policy, then 
it will amend the Bank Act to make them explicitly eligible for 
membership as it has done in the past for commercial banks, credit 
unions, and CDFIs. If it decides to do so, it may also wish to consider 
whether special statutory provisions should be enacted with respect to 
REITs or other entities not subject to inspection and regulation to 
address their unregulated status, which would set them apart from other 
types of entities that are currently eligible, and whether and how to 
except them from the current statutory requirement that members be 
``subject to inspection and regulation.'' \56\
---------------------------------------------------------------------------

    \56\ For example, when Congress added CDFIs to the list of 
eligible member types, Congress exempted them from the requirement 
that they be subject to inspection and regulation (because they are 
not) and instead provided that they must be certified as CDFIs by 
the Treasury Department. See 12 U.S.C. 1424(a)(1)(B).
---------------------------------------------------------------------------

B. Legal Authority of FHFA To Exclude Captives From Membership and To 
Require the Banks To Terminate the Membership of Captives Previously 
Admitted

    FHFA possesses ample legal authority to adopt a regulation defining 
the term ``insurance company'' to exclude captives, thereby rendering 
them ineligible for membership, and to require the Banks to terminate 
the membership of all captives that they had admitted to membership 
before FHFA adopted this final rule making captives ineligible.
1. Congress Granted FHFA Broad Regulatory Authority To Ensure That the 
Purposes of the Bank Act Are Carried Out
    Congress has given FHFA, through its Director, broad authority to 
administer the Bank Act. Specifically, Congress granted the Director of 
FHFA general regulatory authority over the Banks and specified that he 
is to exercise that authority to ensure that the purposes of the Bank 
Act and the Safety and Soundness Act (under which the Agency is 
established) are carried out.\57\ Congress also enumerated a number of 
principal duties for the Director of FHFA, which include the duty to 
ensure that each Bank complies with the regulations issued under the 
Bank Act and Safety and Soundness Act, and granted the Director the 
authority to exercise such incidental powers as he deems necessary to 
fulfill his duties and responsibilities in the supervision and 
regulation of the Banks.\58\ Congress also provided the Director of 
FHFA with specific authority to issue any regulations and take other 
regulatory actions that he deems necessary not only to implement and 
enforce the specific requirements of the Bank Act, but also to ensure 
that the Banks operate in a safe and sound manner and that the purposes 
of the statutes are accomplished.\59\ Thus, FHFA has the authority to 
adopt regulations that the Director deems necessary to implement the 
specific membership provisions of the Bank Act, as well as those that 
the Director deems necessary to ensure that the purposes behind the 
statutory membership provisions are accomplished. By necessary 
implication, the grant of authority to ensure that the provisions and 
purposes of the Bank Act are carried out includes with it the authority 
to adopt regulations necessary to ensure that neither the Banks, their 
members, nor any other parties take any actions to circumvent, 
frustrate, or subvert the provisions or purposes of the Bank Act.
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 4511.
    \58\ 12 U.S.C. 4513(a)(1), (2).
    \59\ 12 U.S.C. 4526(a).
---------------------------------------------------------------------------

2. Congress Clearly Delineated the Types of Institutions That May Be 
Eligible for Bank Membership
    It is clear from the language of section 4(a)(1) of the Bank Act 
that Congress intended to permit only the types of institutions listed 
in that section to become Bank members and that it did not intend to 
permit any institutions not listed therein to become members. It also 
is reasonable to infer from the statutory language that Congress 
intended that entities not explicitly deemed eligible for membership 
should not be able to obtain indirectly any of the principal benefits 
of Bank membership--including the access to low-cost advances that the 
Banks are able to provide because of their statutory market 
advantages--that they are not permitted to obtain directly.\60\ 
Although Congress did include insurance companies among the types of 
institutions that may be eligible to become members, it manifestly did 
not include REITs, hedge funds, investment banks, finance companies, or 
other types of general business entities.\61\
---------------------------------------------------------------------------

    \60\ To enable the Banks to better fulfill their public policy 
mission, Congress vested in them market advantages that some might 
view as depriving government treasuries of revenue and exposing 
taxpayers to risk. This supports the conclusion that Congress 
intended to strictly limit access to the Bank System.
    \61\ See 12 U.S.C. 1424(a)(1).
---------------------------------------------------------------------------

3. Captives are Being Used To Circumvent the Membership Eligibility 
Provisions of the Bank Act and Are Uniquely Suited To Be Used for That 
Purpose
    As described in detail above, FHFA has determined that ineligible 
entities have been circumventing the statutory provisions limiting the 
types of entities that may become Bank members by

[[Page 3260]]

using captive subsidiaries as vehicles to access the benefits of 
membership to which they are not legally entitled. As also detailed 
above, captives as a class are uniquely suited to being used for that 
purpose due to the limited scope of their business activities, which 
makes them easier and less expensive to establish and operate, and 
because they are more lightly regulated than commercial insurance 
companies or insured depository institutions. There is also a relative 
absence of restrictions on the activities and investments of a 
captive's parent, as compared to those that apply to an entity that 
establishes a federally insured bank or savings association subsidiary. 
These unique characteristics, as among the types of institutions that 
are permitted to become Bank members under the existing membership 
regulation, have led captive promoters, insurance regulators, and 
others with vested interests in expanding the ubiquity of captives to 
promote them as vehicles through which REITs and other ineligible 
entities--including those having no connection to housing finance--may 
obtain access to low-cost Bank advances. This, along with the examples 
set by those whose attempts to use captives to obtain access to the 
Bank System have so far met with apparent success, makes it likely that 
the practice of using of captives for that purpose will continue to 
grow in the absence of any action by FHFA to halt the practice.
4. FHFA Has the Authority To Take Action To Prevent the Circumvention 
of the Provisions and Purposes of the Bank Act
    The authorities conferred upon FHFA by the Bank Act and the Safety 
and Soundness Act, described above, empower the Agency to adopt a 
regulation to prevent this circumvention of the provisions and purposes 
of the Bank Act. Given that the vast majority of captive members are 
being used by ineligible entities to circumvent the statutory 
membership eligibility requirements and, aside from this illegitimate 
use, have little or no reason to be Bank members, FHFA is not required 
to treat those types of captives as ``insurance companies'' for 
membership purposes simply because they are chartered or licensed under 
state insurance statutes. The Agency has sufficient legal authority, 
through its mandate to ensure that the purposes of the statute are 
carried out, to consider the economic realities of these arrangements--
i.e., that the parent companies are the true parties in interest, while 
the captives act merely as conduits--and to take appropriate regulatory 
action.
    FHFA has determined that the most effective and appropriate way to 
prevent the use of captives as vehicles to provide de facto membership 
for ineligible entities is to adopt a regulation defining the 
heretofore undefined term ``insurance company'' to exclude from 
membership all captives that may feasibly be used for that purpose. As 
discussed in part III of this SUPPLEMENTARY INFORMATION, FHFA has taken 
special care to define ``insurance company'' so that captives having 
the characteristics that give rise to the Agency's concerns will be 
excluded, while those institutions that do not engender such concerns 
and that would be regarded as carrying out the business of insurance as 
traditionally understood (even if they are denominated as ``captives'' 
under their states' insurance laws) will continue to be considered as 
insurance companies for purposes of determining eligibility for Bank 
membership.
5. Viewed in the Context of Today's Marketplace, in Contrast to That of 
1932, the Meaning of ``Insurance Company'' Is Ambiguous and, Therefore, 
FHFA May Adopt a Reasonable Interpretation of That Term To Effect the 
Purposes of the Bank Act
    An administrative agency has authority to interpret and define the 
terms of the statutes that it administers, especially terms that are 
undefined.\62\ Among the specific types of entities that are eligible 
for Bank membership, Congress has defined only ``insured depository 
institution.'' \63\ Congress did not define the term ``insurance 
company'' or provide any other guidance about its meaning. This leaves 
the term open to FHFA to define, provided that the definition is 
reasonable given the provisions and purposes of the Bank Act.
---------------------------------------------------------------------------

    \62\ See Astrue v. Capato, 132 S.Ct. 2021, 2026 (2012); Chevron 
U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 
843-44 (1984); Securities Industry Association v. Clarke, 885 F.2d 
1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990).
    \63\ See 12 U.S.C. 1422(9) (defining ``insured depository 
institution'' to include banks and savings associations the deposits 
of which are insured by the FDIC and credit unions the share 
accounts of which are insured by the NCUA). In addition, although 
Congress did not define the term ``community development financial 
institution,'' it did provide that only those CDFIs that have been 
certified by the Treasury Department are eligible for membership. 
See 12 U.S.C. 1424(a)(1)(B).
---------------------------------------------------------------------------

    Many commenters expressed the opinion that defining ``insurance 
company'' to exclude captives would be in contradiction to the 
unambiguously expressed intent of Congress as embodied in the plain 
language of the Bank Act, which provides that ``any . . . insurance 
company'' may be eligible for membership. By basing their assertions as 
to the plain meaning of section 4(a)(1) on the fact that the term 
``insurance company'' is preceded by the word ``any'' in that paragraph 
(as are all the other terms used to describe the types of institutions 
that may be eligible for membership), many commenters begged the 
essential question of what constitutes an ``insurance company'' for 
purposes of the Bank Act in the first place. A few commenters asserted 
or implied that the statutory membership provisions must be read as 
including captives because captives are ``organized, licensed and 
regulated'' under state insurance statutes or ``meet[] the definition 
of an insurance company under state law.'' \64\ FHFA does not believe 
that such a reading is required, particularly where, as here, it would 
result in an interpretation that allows circumvention of specific 
provisions of the Bank Act and subverts the scheme of the statute as a 
whole. In other contexts, the Supreme Court has held that a federal 
regulator may reasonably define an activity or a transaction as not 
insurance under federal law even if state law would treat it as 
such.\65\
---------------------------------------------------------------------------

    \64\ In support of this argument, several commenters 
specifically cited the federal McCarran-Ferguson Act, which 
provides, in pertinent part, that ``[n]o Act of Congress shall be 
construed to invalidate, impair, or supersede any law enacted by any 
State for the purpose of regulating the business of insurance, or 
which imposes a fee or tax upon such business, unless such Act 
specifically relates to the business of insurance.'' See 15 U.S.C. 
1012(b). However, nothing in this final rule relates in any way to 
the regulation of the business of insurance or to the taxation or 
imposition of fees on any captive or commercial insurance company.
    \65\ In Nationsbank v. Variable Annuity Life Ins. Co., 513 U.S. 
251 (1995) (``VALIC''), the U.S. Supreme Court declined to apply a 
state law-based definition of ``insurance'' to a federal banking 
statute. There, the Court upheld the Comptroller of the Currency's 
classification of annuities as investments, rather than as 
insurance, under the National Bank Act (NBA), despite respondent's 
assertions that Congress intended to define ``insurance'' under the 
NBA by reference to state law, under which annuities are typically 
regulated as insurance. In upholding the Comptroller's 
classification, the Court stated, among other things, ``the federal 
banking law does not plainly require automatic reference to state 
law here. The Comptroller has concluded that the federal regime is 
best served by classifying annuities according to their functional 
characteristics. Congress has not ruled out that course . . .; 
courts, therefore, have no cause to dictate to the Comptroller the 
state-law constraint VALIC espouses.'' 513 U.S. at 261-262. See also 
Helvering v. LeGierse, 312 U.S. 531 (1941) (holding that a 
transaction was not an insurance transaction for federal tax 
purposes despite its comprising a set of insurance policies under 
state law).
---------------------------------------------------------------------------

    Sometimes a statutory term that appears on its face to have a 
commonly understood meaning may be shown to

[[Page 3261]]

be ambiguous when it is considered in light of the statute's overall 
structure, purpose, and history.\66\ Construing the term ``insurance 
company'' to include any type of entity organized under a state's 
insurance statutes would allow companies that are not eligible for Bank 
membership to continue to use captives--or any entities having similar 
characteristics that might be developed under a different moniker--as a 
means of providing them with de facto membership. In this case, an 
ambiguity arises because an unconstrained reading of ``insurance 
company'' would result in a situation that is contrary to Congress's 
clear intent to limit the benefits of Bank membership to the several 
types of institutions listed in section 4(a)(1) of the Bank Act. In 
contrast, a reading of the term that encompasses insurance companies as 
they were understood when the Bank Act was enacted, not including 
captives, would be fully consistent with that provision and with the 
statutory scheme as a whole.
---------------------------------------------------------------------------

    \66\ See King v. Burwell, 135 S. Ct. 2480 (2015); FDA v. Brown & 
Williamson Tobacco Corp., 529 U.S. 120, 132-133 (2000).
---------------------------------------------------------------------------

    The ambiguity also arises because it is highly unlikely that 
Congress considered in 1932 whether captives, which did not then exist, 
or any class of entity having similar characteristics that would allow 
the entities to be readily used to circumvent the statutory 
requirements, should be deemed to be included within the term 
``insurance company.'' It is most likely that the term ``insurance 
company'' would have been understood by Congress and others in 1932 to 
refer to a company that was in the business of insurance as it was then 
understood--that is, the shifting of risk by the insured to a larger 
class of policyholders through the intermediation of the insurance 
company--and not to a mechanism for the administration of self-
insurance.\67\ The current phenomenon of captives as a legal vehicle 
for managing the parent company's self-insurance did not exist in 1932 
and cannot have been within the contemplation of Congress. Captives in 
the modern sense began to appear only in the late 1950s and early 
1960s. Even for many years after U.S. companies first began to form 
captive subsidiaries, those captives had to be domiciled off-shore, 
because the state insurance laws that existed at the time made it 
prohibitively expensive to form and operate a captive in the United 
States.\68\ Colorado became the first U.S. jurisdiction to adopt 
legislation authorizing the chartering and licensing of captives in 
1972,\69\ and the captive trend did not begin to gain any real momentum 
until the mid-1980s.
---------------------------------------------------------------------------

    \67\ See Helvering v. LeGierse, 312 U.S. 531, 539-40 (1941) 
(stating that ``[h]istorically and commonly insurance involves risk-
shifting and risk-distributing'' and finding that the transaction at 
issue did not involve those features and therefore was not insurance 
under the federal income tax laws); Spring Canyon Coal Co. v. 
Commissioner of Internal Revenue, 43 F.2d 78, 80 (10th Cir. 1930) 
(holding that a company's contribution to a self-insurance reserve 
was not deductible as an insurance premium under the federal income 
tax laws because there was no shifting of risk). In 1932, life 
insurance companies originated and invested in large numbers of 
residential mortgage loans; these longer-term assets were well 
matched in duration to their life insurance liabilities. Captives do 
not share that business model.
    \68\ See Shanique Hall, Recent Developments in the Captive 
Insurance Industry, NAIC Center for Insurance Policy and Research 
Newsletter (Jan. 2012), http://www.naic.org/cipr_newsletter_archive/vol2_captive.htm (last visited Dec. 8, 2015).
    \69\ Maureen A. Sanders, Risk Retention Groups: Who's Sorry 
Now?, 17 S. Ill. U.L.J. 531, 542, n. 76 (1993).
---------------------------------------------------------------------------

    Although some commenters asserted that early forms of captives 
existed in 1932 and that Congress must therefore have intended to 
include them as eligible for membership, those commenters did not 
identify any example of a captive as it is defined in FHFA's final 
regulation,\70\ nor did they cite anything in the legislative history 
of the Bank Act that addresses self-insurance by any name. There is 
scant mention of insurance companies in the legislative history of the 
Bank Act, although it is logical to infer that Congress specifically 
included insurance companies among the types of institutions eligible 
for membership because life insurance companies were actively involved 
in originating and investing in residential mortgage loans at that 
time. Life insurance companies, among other classes of insurance 
companies, would have fit within the traditional view of an insurance 
company as being an institution that underwrites insurance for entities 
that are not its affiliates.
---------------------------------------------------------------------------

    \70\ Some commenters referred to the Church Properties Fire 
Insurance Corporation, which was formed by lay leaders of the 
Episcopal Church in 1929 in order to ``reduce costs by selling 
direct to churches and their affiliated organizations.'' See 
Episcopalians Form Fire Insurance Concern To Reduce the Cost of 
Policies on Churches, New York Times (May 23, 1929) at 1. To the 
extent that this entity could be characterized as an equivalent of a 
modern captive, it appears to have been most similar to either an 
association captive or a group captive, most of which would likely 
qualify as an ``insurance company'' under the final rule definition. 
Although the terms used vary from state to state, an ``association 
captive'' is generally understood to be a captive that it is 
sponsored or owned by a group of entities within a particular trade, 
industry, or service organization and that insures only the risks of 
its owners or their affiliates. See Hall, supra.
---------------------------------------------------------------------------

    Because the types of captives that are now, and recently have been, 
seeking Bank membership did not come into existence until well after 
Congress enacted the Bank Act, FHFA does not believe that it is 
possible to conclude, as some commenters have asserted, that Congress 
would have intended to include such entities among those eligible for 
Bank membership. Reasonably assuming that Congress viewed the term 
``insurance company'' in its traditional sense, it would not have had 
any reason to consider the possibility that another type of business 
entity could have organized an insurance company and then used it as a 
vehicle for obtaining advances from a Bank to fund its own investments 
or business operations.
    Thus, changing factual circumstances have generated an ambiguity in 
the term ``insurance company.'' The definition of that term contained 
in the final rule is consistent with its historical use in the statute 
and with the purposes of the statute, but necessarily results in a 
definition that would exclude some modern entities licensed or 
chartered under a state's insurance statutes. Because Congress has not 
defined the term and because it is ambiguous for the reasons discussed, 
FHFA has the legal authority to define ``insurance company'' in a 
manner that is reasonable in light of the provisions and purposes of 
the Bank Act.
6. It Is Reasonable To Define ``Insurance Company'' To Exclude Captives
    Defining ``insurance company'' to exclude captives is reasonable 
for three fundamental reasons, all of which have been thoroughly 
addressed above. First, doing so is consistent with section 4(a)(1) of 
the Bank Act, which is reflective of a congressionally created 
statutory scheme to limit the benefits of Bank membership to the types 
of institutions specifically listed therein. Second, captives are 
uniquely suited to serve as vehicles for the circumvention of that 
statutory provision and its underlying purposes and are being actively 
promoted for that use, and there is no countervailing public policy 
reason for them to be Bank members on the basis of their own functions, 
separate from their parents'. Third, defining ``insurance company'' in 
this manner is consistent with the likely intent of Congress, which 
would have viewed an insurance company as being a company in the 
business of ``risk-shifting and risk-distributing,'' as the Supreme 
Court described insurance less than a decade after the enactment of the 
Bank Act.\71\ In addition, it is highly unlikely that Congress 
contemplated the existence of any class of eligible

[[Page 3262]]

financial institution having the characteristics of modern captives 
(which, as discussed, did not then exist) that make captives feasible 
to use as funding conduits for entities Congress did not deem eligible 
for Bank membership, and even less likely that Congress would have 
approved of such use, which effectively circumvents the very membership 
restrictions it imposed.
---------------------------------------------------------------------------

    \71\ Helvering v. LeGierse, 312 U.S. at 539.
---------------------------------------------------------------------------

    Several commenters asserted that the Agency's proposal to address 
that concern by focusing only on captives was ``arbitrary'' (and 
therefore not within the Agency's authority to adopt) because it 
disregarded the possibility that other types of members had passed 
advance proceeds on to non-members through intercompany transfers and 
could continue to do so in the future. The majority of members that are 
not captives are owned by holding companies that are not themselves 
eligible for membership and there is little question that advance 
proceeds may flow through to the parent companies in many cases. Given 
the fungibility of money and the typically complex structures of modern 
financial institutions, it would be extremely difficult for FHFA, or 
any agency, to develop a workable means of preventing all such 
transfers. However, even assuming that a small number of non-captive 
members could be acting effectively as conduits for their parent 
companies, no evidence suggests that any type of member institution 
other than captives is, as a class, being used to any material degree 
for such purposes. In contrast, there is abundant evidence, detailed 
above, that almost all members that are captives as defined in the 
final rule were established and sought to become Bank members for the 
primary purpose of acting as conduits for their ineligible parents. 
Given this, as well as their unique suitability for such purposes and 
the general absence of any other compelling rationale for them to be 
members, FHFA's exclusion of captives in this final rule is reasonable.
7. FHFA Has the Authority To Require the Termination of Captives That 
Were Previously Admitted to Bank Membership
    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 any of the statutory grounds for termination exist. 
Those grounds include a failure to comply with any provision of the 
Bank Act or FHFA regulations.\72\ A number of commenters asserted that 
this provision vests discretionary termination authority in each Bank 
and that, consequently, FHFA does not have the authority to require a 
Bank to terminate the membership of captives that were admitted under 
the regulations in force at the time of admission. In support of that 
assertion, several of those commenters also noted that the Bank Act had 
previously contained a provision explicitly authorizing the Bank System 
regulator to remove a member for cause (including failure to comply 
with statutory or regulatory provision) after a hearing, but that 
Congress removed that explicit authorization in 1999 when it adopted 
the current termination provision.\73\
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 1426(d)(2)(A).
    \73\ See Financial Services Modernization Act of 1999, Pub. L. 
106-102, sec. 608, 113 Stat. 1338, 1461 (1999).
---------------------------------------------------------------------------

    Although the 1999 amendments did transfer the mechanism of 
termination from the Bank System regulator to the Banks themselves, it 
is not plausible to suggest, as do the commenters, that Congress 
thereby stripped the regulator of its authority to require the removal 
of a member when doing so is necessary to halt a violation of the 
statute or regulations. The use of the words ``may terminate'' 
indicates that Congress intended to permit a Bank's board of directors 
some degree of discretion in deciding whether and when to terminate an 
institution's membership, but that discretion is limited by the 
statutory language subjecting the exercise of that termination 
authority to the regulations of the Director.\74\ In this case, the 
Director has adopted regulatory amendments implementing a provision of 
the Bank Act in a way that makes captives--including those that were 
previously admitted--ineligible for membership. When effective, the 
amended regulation will be binding on the Banks, which will be obliged 
to comply with its provisions to the same extent that they are obliged 
to comply with any other statutory or regulatory requirement.
---------------------------------------------------------------------------

    \74\ In addition, as the Court of Appeals for the D.C. 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).
---------------------------------------------------------------------------

    Section 6(d)(2)(A) may permit a Bank to exercise its discretion, 
for example, in deciding whether and when to terminate the membership 
of an institution that has committed a statutory or regulatory 
violation for which no particular sanction is specified. The express 
caveat in section 6(d)(2)(A) making a Bank's termination authority 
subject to FHFA regulations, as well as FHFA's broad powers as 
supervisor and regulator of the Banks and its statutory duty to 
administer the Bank Act in a manner that promotes the Act's purposes 
and protects the public interest, provide the Agency with sufficient 
authority to adopt a regulation that, as the final rule does, specifies 
the circumstances in which a violation of the law requires a Bank to 
exercise its termination authority. The exercise of this regulatory 
authority is appropriate where, as here, the violation is not one of 
technical noncompliance with a minor requirement, but of the 
fundamental principles defining eligibility for membership and access 
to the Bank System, the purposes of which would be undermined if 
membership were allowed to continue. For these reasons, when a member 
is in violation of a lawfully adopted regulation for which the required 
sanction is termination of membership, a Bank does not have the 
discretion to refuse to terminate the member when and as required by 
the regulation.
    Apart from questioning FHFA's power to regulate the Banks' 
termination authority under section 6(d)(2)(A), a few commenters 
offered other reasons that they believed the Agency cannot require a 
Bank to terminate the membership of its existing captive members. One 
asserted that requiring the termination of existing captive members 
would give rise to a ``takings'' claim against the United States in 
that it would deprive former captive members of their right to a pro 
rata share of the retained earnings of their former Banks and of access 
to Bank advances and other products and services, without adequate 
compensation. Citing a ruling by the U.S. Court of Appeals for the D.C. 
Circuit that no federal agency may adopt a regulation that would give 
rise to a ``takings'' claim unless it is expressly authorized it to do 
so by statute,\75\ the commenter further argued that FHFA may not adopt 
a regulation requiring termination because such an express statutory 
authorization does not exist.
---------------------------------------------------------------------------

    \75\ See Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441, 1445-46 
(D.C. Cir 1994).
---------------------------------------------------------------------------

    Bank members--even those that are in compliance with all statutory 
and regulatory eligibility requirements--have no constitutionally 
protected property interest in continuing Bank membership. Although the 
Bank Act specifies that the holders of a Bank's the

[[Page 3263]]

Class B stock ``shall own the retained earnings, surplus, undivided 
profits, and equity reserves, if any, of the [Bank],'' it also makes 
clear that, ``[e]xcept as specifically provided in [section 6 of the 
Bank Act] or through the declaration of a dividend or a capital 
distribution by a [Bank], or in the event of liquidation of the [Bank], 
a member shall have no right to withdraw or otherwise receive 
distribution of any portion of the retained earnings of the [Bank].'' 
\76\ But even if members did have a constitutionally protected property 
interest in Bank membership, FHFA's regulation effects neither a per se 
taking nor a regulatory taking as courts have developed those concepts.
---------------------------------------------------------------------------

    \76\ 12 U.S.C. 1426(h). See also Fahey v. O'Melveny & Myers, 200 
F.2d 420, 467 (9th Cir. 1952) (holding that the ``purchase of [Bank] 
stock is a condition of [Bank] membership and does not confer 
proprietary interest or a property right of any kind in any [Bank] 
itself'').
---------------------------------------------------------------------------

    A per se taking occurs when the government physically appropriates 
real or personal property for its own use without just 
compensation.\77\ A captive terminated as required under the final rule 
will be fully compensated when the Bank redeems its Bank stock for par 
value (the same amount paid by the captive when it acquired the stock) 
in the manner provided under the Bank's capital plan. Regardless of 
compensation, the captive's Bank stock will not have been physically 
appropriated by the government for its own use. Thus, there will have 
been no per se taking.
---------------------------------------------------------------------------

    \77\ See Horne v. Dep't of Agriculture, 135 S. Ct. 2419, 2426-27 
(2015).
---------------------------------------------------------------------------

    Neither will there be a regulatory taking, which occurs when the 
government imposes a restriction on the use of property that results a 
severe and unwarranted diminution in the property's value.\78\ The 
terminated member will not only receive the par value of its Bank stock 
when the stock is redeemed, but will also continue to receive any 
dividends declared up to the time its stock is redeemed. Thus, there 
can be no claim that the economic value of the stock will have been 
destroyed. In addition, because the Banks have independent power to 
terminate membership, members have a reasonable expectation that their 
membership may be terminated at some point. Because dividend payments 
are at all times subject to the approval of the Bank's board of 
directors, there is no reasonable investment expectation that dividends 
will continue to be paid. Finally, because the captives became Bank 
members with full knowledge that all Bank activities are heavily 
regulated, they cannot claim to have had a reasonable investment-backed 
expectation that the regulatory regime would remain forever static. 
This is especially true in the case of entities that became members for 
the purpose of circumventing the statutory membership requirements.
---------------------------------------------------------------------------

    \78\ See Horne, 135 S. Ct. at 2427.
---------------------------------------------------------------------------

    Another commenter, who focused on FHFA's comments in the proposed 
rule SUPPLEMENTARY INFORMATION regarding the possibility that captive 
membership may pose unique safety and soundness issues, asserted that 
those concerns could not serve as a basis for requiring the termination 
of captive members until the Agency had taken the steps required by 
section 8 of the Bank Act. Section 8 requires that FHFA keep abreast of 
the state laws under which Bank members are chartered and regulated, 
and states that if FHFA concludes that the laws of any state provide 
inadequate protection to a Bank in making or collecting advances, the 
Agency may ``withhold or limit the operation'' of any Bank in that 
state until satisfactory conditions are established.\79\ The commenter 
asserted that this statutory provision prohibits FHFA from taking any 
action with respect to captive members until it has first undertaken a 
study of all of the state laws under which they operate, and only after 
concluding that a particular state's laws fail to provide adequate 
protection to a Bank.
---------------------------------------------------------------------------

    \79\ See 12 U.S.C. 1428.
---------------------------------------------------------------------------

    FHFA rejects the assertion that section 8 may be read to limit in 
any way the steps the Agency may take in fulfilling its statutory duty 
to ensure the safe and sound operation of the Banks. Even if section 8 
could be so construed, it would not limit the Agency's ability to 
require the termination of captive members. Although the proposed rule 
discussed some safety and soundness concerns to which captive 
membership gives rise, the Agency's proposal and its ultimate decision 
to exclude captives from Bank membership and to require the termination 
of existing captives stems from its conclusion that they are being used 
to circumvent the statutory requirements governing the types of 
institutions that may become Bank members, and not primarily from 
safety and soundness concerns regarding captive insurers.\80\ FHFA re-
emphasizes that point in this final rule.
---------------------------------------------------------------------------

    \80\ After describing the proposed captives provisions in the 
SUPPLEMENTARY INFORMATION to the proposed rule, FHFA stated that it 
was proposing to take those 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.'' 
See 79 FR 54848, 54853 (Sept. 12, 2014).
---------------------------------------------------------------------------

C. Discussion of Other Arguments Raised by Commenters

    Most of the arguments made by commenters in opposition to the 
proposed captives provisions have been addressed in the discussion 
above regarding the legal and policy bases for FHFA's adoption of the 
final captives provisions. However, some commenters made other 
arguments that are not addressed above and that warrant discussion.
    Many commenters stressed that mortgage REITs' substantial 
commitment to the residential mortgage market in the U.S. is consistent 
with the mission of the Banks, and argued that allowing them to access 
the low-cost funding that the Banks are able to provide will increase 
the level of private capital in the residential mortgage market, 
benefiting existing and potential homeowners and the public. Others 
similarly argued that preventing REITs from accessing Bank funding 
through their captive subsidiaries could increase instability in the 
residential mortgage market by reducing liquidity and curtailing the 
availability of long-term funding. FHFA acknowledges that mortgage 
REITs play a large role in the residential mortgage market and does not 
question the legitimacy of their activities. However, while FHFA has 
the duty to ensure that the operations and activities of the Banks 
``foster liquid, efficient, competitive, and resilient national housing 
finance markets,'' it also has a duty to ensure that the Banks carry 
out that mission ``only through activities that are authorized under 
and consistent with'' the Bank Act and the Safety and Soundness 
Act.\81\ Having concluded that the channeling of low-cost Bank funding 
to REITs and other ineligible entities through captive members is not 
authorized by or consistent with the Bank Act, the Agency is compelled 
to take action to put an end to that practice until such time, and on 
such terms, as Congress authorizes that access. Similarly, it is not 
appropriate for FHFA to expand Bank membership beyond the framework 
established by Congress in order to provide greater macroeconomic 
stability in times of financial stress, as urged by some commenters.
---------------------------------------------------------------------------

    \81\ 12 U.S.C. 4513(a)(1)(B).
---------------------------------------------------------------------------

    A number of other commenters argued that FHFA offered no analysis 
of the financial impact the proposed exclusion of captives would have 
on the Banks and their members, and asserted that excluding captives 
from membership would result in reduced

[[Page 3264]]

income for the Banks in the short run and lost opportunities for income 
growth in the future. Any projection the Agency might attempt to make 
regarding the exclusion of captives would be speculative. Despite the 
fact that the number of captive members has increased dramatically 
since 2012, they still constitute a very small percentage of the Banks' 
membership base, and the number that would have been approved for 
membership in future years cannot be estimated. Similarly, while the 
amount of advances currently outstanding to captives is known, it is 
not possible to project what future levels would have been because of 
the difficulty of estimating not only the number of potential captive 
members forgone, but also what their level of demand for advances would 
have been.
    Regardless of the financial impact, which is unknown, FHFA cannot 
allow the Banks to continue to engage in activities that it has 
concluded are not authorized under the law. Congress mandated the 
establishment of the Banks in order to advance public policy goals and, 
in order to ensure that they could fulfill those goals, provided them 
with initial funding from the Treasury Department and granted them tax 
and other advantages not generally enjoyed by ordinary for-profit 
corporations. Accordingly, unlike ordinary corporations, the Banks are 
not free to undertake any and all activities that they judge to be 
profitable from a business perspective without regard to the 
limitations imposed by their authorizing statute. Against the uncertain 
financial impact on the Banks of this regulation must be 
counterbalanced the equally uncertain financial effects of expanded 
government exposure and possible economic distortions from supporting 
expanded categories of businesses.
    Many commenters pointed out that any action that might reduce the 
income of any Bank to any extent would necessarily reduce the amount of 
funds available for those Banks' Affordable Housing Programs (AHP), 
because the statute requires 10 percent of a Bank's earnings to be 
dedicated to its AHP. But increasing AHP contributions is not a 
legitimate reason to enhance Banks' earnings by allowing access to Bank 
advances by ineligible entities. In any event, expanding Banks' income 
through the admission of members who should be regarded as ineligible 
under the Bank Act is a very low-leverage way of increasing the 
availability of AHP funds, because the statute requires only 10 percent 
of Bank earnings to be dedicated to the AHP.
    Finally, some commenters questioned why FHFA cannot address its 
concerns regarding the use of captives as funding conduits by adopting 
more narrowly tailored restrictions, such as by excluding from 
membership only captives that are owned by ineligible entities or, even 
more narrowly, only those that FHFA has determined are actually being 
used as a funding conduit for an ineligible parent. In developing the 
final rule, FHFA fully considered a number of narrower options, but 
ultimately concluded that each those options either raised legal 
concerns, would not adequately address the Agency's policy concerns, or 
were not workable from a practical perspective.
    For example, the Agency considered whether it would be possible to 
adopt a final rule allowing captives to be members, but including 
provisions restricting the extent to which the captive could pass 
advance proceeds on to an ineligible parent such as by establishing a 
specified percentage of a captive's assets that may be funded by 
advances or by requiring that all collateral be kept on the books of 
the captive. FHFA concluded that, while either of these options could 
be justified from a legal perspective, neither would be likely to be 
effective, given the fungibility of advance proceeds and the legal and 
other expert resources available to the captive's parent companies that 
would enable them to develop methods of effectively circumventing any 
such restrictions.\82\
---------------------------------------------------------------------------

    \82\ Some representatives of captive members represented to FHFA 
that their captive subsidiaries directly support residential housing 
finance and do not act as conduits to ineligible parents. However, 
as stated above, FHFA has been unable to develop an administratively 
feasible way to assure that this is the case or remains so, and in 
the great majority of instances that FHFA has reviewed, it is not. 
Also, in these cases, the captive is not engaged primarily in the 
business of insurance, meaning the business of shifting and 
spreading risk to unaffiliated parties, and, therefore, would not be 
an insurance company as Congress would have understood that concept 
in 1932.
---------------------------------------------------------------------------

    FHFA also considered adopting a final rule that would have 
continued to allow membership for captives owned by entities eligible 
to become members. This option raises a legal question whether the 
statutory membership framework contemplates conditioning eligibility 
for membership on the activities or investments of a particular 
institution's parent company. Apart from that, however, this option 
would still allow institutions that are themselves eligible for 
membership to use captive subsidiaries to enable inexpensive access to 
multiple Banks. Like the use of captives by ineligible parents, this 
potential use by eligible parents raises substantial questions of 
policy and legitimacy under the Bank Act, in light of the statute's 
provision that a member may join only the Bank in the district in which 
its principal place of business is located.\83\
---------------------------------------------------------------------------

    \83\ See 12 U.S.C. 1424(b). If a depository institution were to 
establish a captive insurer in a state in another Bank district, 
structured so that its books, records, and personnel were located 
there, the regulation, as revised by the final rule, would recognize 
that other state as the principal place of business of the captive 
for Bank membership purposes.
---------------------------------------------------------------------------

III. Section-by-Section Analysis of the Final Rule

A. Definitions--Sec.  1263.1

    The final rule adds several new definitions to Sec.  1263.1, as 
well as revises or deletes the definitions of a number of terms that 
appear in the existing regulation. Although most of these changes are 
non-substantive, newly added definitions for the terms ``insurance 
company'' and ``captive'' are intended to implement the main policy 
goal of the final rule--preventing circumvention of the Bank Act's 
membership categories by excluding captive insurers from Bank 
membership. The final rule defines ``insurance company'' as ``an entity 
that holds an insurance license or charter under the laws of a State 
and whose primary business is the underwriting of insurance for persons 
or entities that are not its affiliates.'' The rule defines ``captive'' 
as ``an entity that holds an insurance license or charter under the 
laws of a State, but that does not meet the definition of `insurance 
company' set forth in this section or fall within any other category of 
institution that may be eligible for membership.'' The purpose of 
defining those terms is to distinguish, as among entities that are 
deemed to be an insurance company under state law, between those that 
may be eligible for Bank membership as an ``insurance company'' and 
those that are not eligible. An entity that is chartered or licensed 
under a state's insurance statutes but that neither meets the 
definition of ``insurance company'' nor falls within any of the other 
categories of institutions that may be eligible for membership under 
the statute or regulations, is ineligible for membership.
    Both the terms ``insurance company'' and ``captive'' were defined 
in the proposed rule and the final definitions are similar to those 
that were proposed. The proposed rule would have defined ``insurance 
company'' to mean ``a company whose primary business is the 
underwriting of insurance for nonaffiliated persons or entities.'' It

[[Page 3265]]

would have defined ``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.'' In the final 
rule, the latter part of the definition of ``captive'' remains as 
proposed, while the initial phrase has been revised to refer more 
precisely to ``an entity that holds an insurance license or charter 
under the laws of a State.'' The final rule adds that same initial 
phrase to the definition of ``insurance company,'' substituting it for 
the generic term ``a company'' that was used in the proposed 
definition. This was done to make clearer that these two definitions 
are meant to be read in conjunction with each other. In addition, in 
the final rule, the definition of ``insurance company'' now refers to 
an entity ``whose primary business is the underwriting of insurance for 
persons or entities that are not its affiliates,'' instead of one 
``whose primary business is the underwriting of insurance for 
nonaffiliated persons or entities.'' The sole reason for this change in 
nomenclature is because, in response to the requests of a number of 
commenters, FHFA has added a definition of the word ``affiliate'' to 
the final rule.
    Several commenters asserted that the term ``nonaffiliated persons 
or entities'' was too vague and could be read in a way that would 
exclude from the definition of ``insurance company'' (and therefore 
from eligibility for Bank membership) entities that, because of diffuse 
ownership or other factors, cannot be easily used as financing 
conduits. The types of entities identified were: Mutual insurance 
companies, which are owned by their policyholders; ``association 
captives,'' which may be incorporated as a mutual insurer under state 
captive statutes to insure a group of policyholders engaged in a 
related trade; and risk retention groups (RRGs), which are liability 
insurance companies that may be chartered as either captives or as 
traditional insurers under state law and that are authorized as RRGs 
under federal law.\84\ FHFA has concluded that these types of insurance 
companies would in almost all cases be within the definition of 
``insurance company'' adopted in the final rule and therefore would 
remain eligible for membership.
---------------------------------------------------------------------------

    \84\ See Federal Liability Risk Retention Act, 15 U.S.C. 3901, 
et seq.
---------------------------------------------------------------------------

    Two commenters provided specific recommendations as to how the term 
``nonaffiliated persons or entities'' could be clarified so as to 
preclude the possibility that the definition of ``insurance company'' 
could be read to exclude entities that are not the intended targets of 
the proposal. One commenter, a Bank, suggested that FHFA define the 
term ``nonaffiliated persons or entities'' in the final rule to mean 
``one or more persons or entities holding less than 50% equity 
ownership or voting control of the insurance company.''
    Another commenter suggested that FHFA take an approach similar to 
that reflected in the Bank Holding Company Act (``BHCA''), which 
defines ``affiliate'' to mean ``any company that controls, is 
controlled by, or is under common control with another company.'' \85\ 
In turn, the BHCA states that one company is considered to have 
``control'' over another thereunder if it: (A) ``directly or indirectly 
or acting through one or more other persons owns, controls, or has 
power to vote 25 per centum or more of any class of voting securities 
of the bank or company''; (B) ``controls in any manner the election of 
a majority of the directors or trustees of the bank or company''; or 
(C) the Board of Governors of the Federal Reserve System (FRB) 
``determines, after notice and opportunity for hearing, that the 
company directly or indirectly exercises a controlling influence over 
the management or policies of the bank or company.'' \86\ The commenter 
suggested that FHFA also adopt a ``safe harbor'' provision similar to 
one that applies to determinations made by the FRB under clause (C) of 
the foregoing which establishes a presumption that ``any company which 
directly or indirectly owns, controls, or has power to vote less than 5 
per centum of any class of voting securities of a given . . . company 
does not have control over that . . . company.'' \87\
---------------------------------------------------------------------------

    \85\ 12 U.S.C. 1841(k).
    \86\ 12 U.S.C. 1841(a)(2).
    \87\ 12 U.S.C. 1841(a)(3).
---------------------------------------------------------------------------

    FHFA has decided to follow that commenter's basic suggestion by 
adopting the concepts of ``affiliate'' and ``control'' that are 
reflected in the BHCA because those terms have well established 
meanings, as illustrated by their being used also in the Safety and 
Soundness Act with respect to affiliates of Fannie Mae and Freddie 
Mac.\88\ While the final definition of ``affiliate'' is taken from the 
BHCA, the text defining the scope of the word ``control'' (which in the 
final rule appears within the definition of ``affiliate'') is based not 
on the language of the BHCA itself, but on the somewhat more specific 
definition of that word that the FRB used in its implementing 
regulations.\89\
---------------------------------------------------------------------------

    \88\ See 12 U.S.C. 4502(1).
    \89\ See 12 CFR 225.2(e).
---------------------------------------------------------------------------

    The final rule defines ``affiliate'' to mean ``any entity that 
controls, is controlled by, or is under common control with another 
entity.'' The new definition of ``affiliate'' also specifies that, for 
purposes of that definition, one entity ``controls'' another if it: (1) 
Owns or controls 25 percent or more of the outstanding voting stock, 
limited partnership shares, or similar interests of the other entity; 
(2) controls in any manner the election of a majority of the directors, 
trustees, or general partners of the other entity; or (3) has the power 
to exercise a controlling influence over the management or policies of 
the other entity through a management agreement, common directors or 
management officials, or by any other means.
    The final rule definition of ``control'' does not include an 
equivalent of clause (C) in the BHCA definition of that term, which 
contemplates the possibility that the FRB may be required to hold 
hearings to determine whether one company exercises a controlling 
influence over another company. In other words, the rule does not 
contemplate that FHFA will under any circumstances hold a hearing to 
determine whether one entity ``controls'' another or to determine 
whether an entity falls within the definition of ``insurance company.'' 
Instead, a Bank may need to inquire into the facts of a particular case 
and apply its reasoned judgment in some circumstances. In applying the 
definition of ``control,'' a Bank should first make the relatively 
straightforward determination as to whether one entity exerts a 
controlling influence over another in the manner described in 
paragraphs (1) or (2) of the definition. If the answer to that question 
is ``yes,'' then the inquiry need go no further--one entity 
``controls'' the other, and they are thus considered to be affiliates 
under the rule. If the answer to that question is ``no,'' then the Bank 
must consider, under paragraph (3), whether one entity has the power to 
exercise a controlling influence over the management or policies of the 
other entity by any other means, such as through a management 
agreement, common directors, or common management officials.
    FHFA has also declined to include in the definition of ``control'' 
an equivalent to the BHCA provision establishing a presumption of non-
control in cases where one company controls less than 5 percent of the 
voting stock of another.

[[Page 3266]]

FHFA believes that including such a provision will only further 
complicate the definition by appearing to require extensive inquiry 
into arrangements where one entity may control more than 5 percent, but 
less than 25 percent of the voting stock of another entity. To be 
clear, if a Bank determines that control does not exist in the manner 
described in paragraphs (1) or (2) and determines after reasonable 
inquiry that no alternative means of control exist as provided in 
paragraph (3), then it may presume that one entity does not control the 
other and, therefore, that they need not be considered affiliates under 
the rule.
    Several commenters argued that the proposed rule also left unclear 
how a Bank would determine whether the ``underwriting of insurance for 
nonaffiliated persons or entities'' constitutes a company's ``primary 
business,'' in determining whether a particular entity fell within the 
definition of ``insurance company.'' One Bank suggested that FHFA 
define ``primary business'' to mean ``a business line (such as selling 
policies, including reinsurance policies or contracts of reinsurance) 
that constitutes more than half of the insurance company's business.'' 
However, the concept of half of a company's business invokes 
measurement questions more complex and protean than are easily 
susceptible of being addressed in regulation language of general 
applicability. FHFA believes that close interpretive questions are 
unlikely to arise with any frequency, but is prepared to provide 
interpretive guidance as needed in any appropriate cases.
    Determinations regarding whether an institution meets the 
definition of ``insurance company,'' including determinations about 
what constitutes an ``affiliate'' and ``control,'' as well as the 
manner in which Banks should memorialize their conclusions with respect 
to those determinations in an applicant's membership application file, 
are addressed further in the discussion of final Sec.  1263.2(b) below.
    The one other substantive definitional change is to finalize the 
proposed expansion of the definition of ``home mortgage loan'' to 
include all types of MBS backed by qualifying loans and securities. 
Existing Sec.  1263.1 generally defines ``home mortgage loan'' to 
include a loan that is secured by a first lien mortgage on one-to-four- 
or multi-family property, as well as a mortgage pass-through security 
that represents an undivided ownership interest in the underlying pool 
of mortgage loans. As proposed, the final rule replaces the existing 
reference to a pass-through security 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 both 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 revision is 
intended to bring within the definition of ``home mortgage loan'' all 
types of MBS--including pass-through securities, 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.
    FHFA is making this revision in recognition of the fact that the 
capital markets do not distinguish between MBS structured as pass-
through vehicles and those structured as debt instruments. In adopting 
the existing definition in 1993, the Finance Board codified the 
approach of its predecessor agency, the Federal Home Loan Bank Board 
(FHLBB), which had held that a mortgage-backed security must provide 
its holder with a pro rata ownership interest in each of the loans in 
the underlying pool of mortgage loans in order for the purchase of that 
MBS to constitute the equivalent of making or purchasing those 
underlying loans. Thus, while the Finance Board permitted mortgage 
pass-through securities, which are structured to give the holder a 
theoretical undivided ownership interest in each of the underlying 
loans, to be counted toward satisfaction of the ``makes long-term home 
mortgage loans'' requirement, it did not permit other types of MBS to 
be used for that purpose.
    However, as explained in the SUPPLEMENTARY INFORMATION to the 
proposed rule, investors in today's financial markets recognize that 
the economic interest in the loans underlying such instruments is 
essentially the same for all types of MBS, regardless of their legal 
structure. 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 whole loans and eliminate 
the distinction that the regulations have historically drawn between 
pass-through securities and other types of MBS.
    This revision was originally proposed in connection with FHFA's 
proposal to require an institution to hold at least one percent of its 
total assets in home mortgage loans in order to be deemed to comply 
with the ``makes long-term home mortgage loans'' eligibility 
requirement. The change was intended in part to ease the burden on 
members that would have been imposed by that new quantitative 
requirement by allowing them to satisfy the requirement with a wider 
range of first lien mortgage-related assets than would have been the 
case if the existing definition were retained. It was also intended in 
part to make it easier for the Banks to obtain the information 
necessary to confirm members' compliance with the one percent 
requirement from their regulatory financial reports. Notwithstanding 
that FHFA will not be finalizing the one percent requirement at this 
time, the Agency has decided to include the revised definition in the 
final rule for the reasons stated above.
    In conjunction with the revision of the definition of ``home 
mortgage loan,'' the final rule also revises 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), which is 
intended to include both types of securities. The new provision is 
similar to paragraph (2) of the 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 whole ``residential 
mortgage loans''; 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 revisions to the definition of ``home mortgage loan'' make it 
unnecessary to distinguish between pass-through securities and other 
types of MBS in the definition of ``residential mortgage loan.''
    Each of the remaining revisions to the definitions within Sec.  
1263.1 is intended either to remove a duplicative definition or to 
shorten or otherwise clarify the

[[Page 3267]]

definition itself or the regulatory text in which the defined term 
appears. Each of these revisions appeared in the proposed rule and each 
is being finalized essentially as proposed. None of the revisions is 
intended to alter the meaning of any defined term or substantive 
provision.

B. Membership Application Process--Sec. Sec.  1263.2-1263.5

    The final rule makes several revisions to subpart B of part 1263, 
which governs the membership application process.
    As proposed, the final rule relocates to Sec.  1263.2(a) from Sec.  
1263.6(a) language prohibiting any institution from becoming a member 
of a Bank unless it has submitted to that Bank a membership application 
that satisfies the requirements of part 1263, except as otherwise 
specified in part 1263 (such as in the case of transfers or certain 
consolidations). While existing Sec.  1263.2(a) requires that an 
applicant submit an application that complies with the requirements of 
part 1263, it does not state explicitly that an institution may not 
become a member unless it has done so. FHFA believes that this 
statement is more appropriately situated in its new location, which 
addresses the membership application process, rather than its current 
location, which addresses the substantive membership eligibility 
requirements.
    Existing Sec.  1263.2(b) requires a Bank to prepare a written 
digest for each applicant stating whether or not the applicant meets 
each of the applicable membership eligibility requirements and 
providing support for its conclusions with respect to each requirement. 
The final rule revises this subsection to add a specific requirement 
that, in any digest prepared for an applicant whose eligibility for 
membership is contingent upon its meeting the new definition of 
``insurance company,'' the Bank must state whether the applicant meets 
that definition and summarize the facts and identify the sources on 
which it relied in reaching that conclusion. In such cases, the digest 
should support the Bank's determination that an applicant qualifies as 
an ``insurance company'' by summarizing the bases for the Bank's 
conclusion that the applicant's primary business is the underwriting of 
insurance for persons or entities that are not its affiliates. In the 
case of a traditional life or casualty insurance company, for example, 
it may be sufficient to indicate that a majority of the company's 
premium income is derived from policies sold to unaffiliated parties. 
In the case of a mutual insurance company, for example, it may be 
sufficient to indicate that the company is organized in mutual form and 
that none of its policyholders has the power to control the election of 
persons to its board of directors. For a risk retention group, a Bank 
may be required to obtain additional information establishing that none 
of the owners control more than 25 percent of its voting shares. In a 
very few cases, a Bank may be required to conduct a more detailed 
analysis about whether any one or more policy holders can be said to 
have ``control'' over the applicant or related companies that may cause 
it to be considered an ``affiliate,'' as defined in Sec.  1263.1.
    Section 1263.2(c) of the existing regulation requires that a Bank 
create and maintain a membership file for each applicant. Paragraph (2) 
of that subsection requires that the Bank include in that file, as an 
attachment to the application digest, all materials required to 
document the applicant's eligibility for membership. Paragraph (2) 
further provides that the Bank ``may retain in the file only the 
relevant portions of the regulatory financial reports required by [part 
1263].'' This provision is intended merely to allow a Bank the option 
of omitting from an applicant's file the portions of the applicant's 
regulatory financial report that are not relevant to its eligibility 
for membership. However, as currently phrased, the provision could be 
read as prohibiting the Bank from including the non-relevant portions. 
To eliminate the possibility of such a misreading, the final rule 
revises this provision to state, instead, that the Bank ``is not 
required to retain in the file'' portions of the reports ``that are not 
relevant to its decision on the membership application.''
    Section 1263.3(c) of the existing regulation also addresses the 
timing and notice requirements applicable to a Bank's decision on an 
institution's application for membership. As proposed, the final rule 
makes a number of non-substantive revisions to that provision to state 
the requirements as to the timing of the Bank's decision 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 apply for 
membership. As proposed, the rule makes 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.
    Existing Sec.  1263.4(b) 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. However, while the cross-
referenced provision--existing Sec.  1263.18(d)--requires that the 
Banks involved agree on a ``method of orderly transfer'' before a 
``transfer of membership'' takes effect, neither that provision nor 
Sec.  1263.4(b) specifies the types of events that constitute a 
``transfer'' of membership. As a result, FHFA has occasionally received 
questions about how Sec.  1263.4(b) is to be applied.
    FHFA proposed to revise Sec.  1263.4(b) to remove the reference to 
a ``transfer'' and, instead, specify that a new membership application 
is not required when a member either physically relocates its principal 
place of business to another Bank district (such as through a 
consolidation) or redesignates its principal place of business to 
another Bank district as provided under Sec.  1263.18(c). FHFA believes 
that both of these situations should be treated in the same manner 
because they are simply different means of bringing about the same 
result--i.e., a change in the location of a member's principal place of 
business from one Bank district to another. No commenters objected to 
the proposed revisions, and FHFA is adopting them as proposed. FHFA has 
also added language to clarify 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.
    Section 1263.5 of the existing regulation gives an institution 
whose membership application has been denied by a Bank the right to 
appeal the denial to FHFA. FHFA did not propose any substantive 
revisions to this section, but requested comments on whether the 
regulations needed to continue to afford applicants this right of 
appeal, given that no applicants have ever requested an appeal. The 
Agency received relatively few comments in response to this request, 
but those that did respond--mostly CDFIs and credit unions, but also a 
few of the Banks--were uniformly opposed to removal of the appeal 
provision. One representative letter from a CDFI cited the right of a 
CDFI applicant under existing Sec.  1263.16(b)(1)(iii) to present to a 
Bank as part of its application any information it believes 
demonstrates that is satisfies the ``financial condition'' eligibility 
requirement. The commenter stated that the adoption of that provision, 
as well as FHFA's discussion of the provision in the SUPPLEMENTARY

[[Page 3268]]

INFORMATION to the final rule in which it was included, demonstrates 
that the Agency understands that Banks ``make judgments in their 
assessment of CDFI eligibility that could require additional review.'' 
The commenter concluded that, in light of ``the inconsistent experience 
with CDFI membership across the System . . . the option for an appeal 
process should be maintained.'' Because of the concerns expressed by 
commenters, FHFA has decided to retain the appeal provision in the 
regulation.

C. Membership Eligibility Requirements--Sec. Sec.  1263.6-1263.18

    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 
sets forth all of the eligibility requirements, while the remaining 
sections of subpart C address more specifically the manner in which a 
Bank is to determine compliance with those requirements for the 
different types of institutions that may be eligible for membership.
    The proposed rule would have revised Sec. Sec.  1263.6, 1263.9 and 
1263.10, and would have added a new Sec.  1263.11 (thereby requiring 
the re-numbering of existing Sec. Sec.  1263.11-1263.18), to require 
that an institution hold at least one percent of its assets in ``home 
mortgage loans'' to be deemed to satisfy the statutory eligibility 
requirement that it make long-term home mortgage loans, and that each 
member comply on an ongoing basis with that one percent requirement 
and, where applicable, with the statutory eligibility requirement that 
it have at least 10 percent of its total assets in ``residential 
mortgage loans'' as a condition of remaining a Bank member. Because, as 
discussed above, FHFA has decided not to implement those proposed 
ongoing asset ratio requirements at this time, the proposed revisions 
to subpart C that were meant to implement the new requirements are not 
included in the final rule. Nonetheless, the final rule makes some 
fairly extensive changes to subpart C in that it: Adds to Sec.  1263.6 
a provision addressing the treatment of captive insurers that were 
admitted to Bank membership prior to the effective date of the rule; 
finalizes a proposed new provision in Sec.  1263.16 requiring insurance 
companies to provide audited financial statements as part of the 
membership application process; finalizes a proposed new provision in 
Sec.  1263.18 addressing the manner in which a Bank is to determine the 
``principal place of business'' for insurance companies and CDFIs; and 
makes non-substantive clarifying revisions to the texts of Sec. Sec.  
1263.14, 1263.15, 1263.17 and 1263.18.
1. General Eligibility Requirements--Sec.  1263.6
    Section 1263.6 sets forth the general eligibility requirements for 
Bank membership and provides that entities that do not meet the 
requirements of part 1263 shall be ineligible for Bank membership. With 
respect to the manner in which this section is to be applied, the most 
significant change the final rule makes is in defining ``insurance 
company,'' as discussed in detail above. The introductory paragraph to 
Sec.  1263.6(a) enumerates the types of institutions that are eligible 
under the Bank Act for membership. Entities of a type not listed in 
Sec.  1263.6(a) and those, regardless of type, that do not meet the 
applicable requirements of part 1263, are not eligible for Bank 
membership. By defining the term ``insurance company'' in Sec.  1263.1 
to include only those entities ``whose primary business is the 
underwriting of insurance for persons or entities that are not its 
affiliates,'' the final rule makes clear that a captive, as defined in 
the regulation, is not an ``insurance company'' for purposes of section 
4(a) of the Bank Act and Sec.  1263.6(a) of the membership regulation. 
Thus, captives are not eligible for Bank membership, and those that the 
Bank had previously admitted to membership must wind down their 
relationships with the Banks in accordance with this final rule.
    With respect to the text of Sec.  1263.6(a) itself, the rule 
finalizes one proposed revision to the introductory paragraph. As 
discussed above, the final rule removes from this section and relocates 
to Sec.  1263.2(a) language requiring all applicants to submit an 
application meeting all of the requirements of the Bank Act and FHFA 
regulations before it may become a member. FHFA believes that it is 
more appropriate for that requirement to be included with other 
material addressing the membership application process than in Sec.  
1263.6, which addresses the substantive membership eligibility 
requirements.
    In conjunction with the implementation of the ongoing asset ratio 
requirements, the proposed rule also would have revised the 
introductory paragraph, which currently states that an institution 
meeting the requirements of paragraphs (a)(1) through (a)(6) of that 
subsection shall be ``eligible to become a member'' of a Bank, to 
provide that an institution shall be ``eligible to be a member'' if it 
meets those requirements. The final rule makes a slightly different 
change, by revising that paragraph to provide that an institution shall 
be ``eligible for Bank membership'' if it meets the listed 
requirements. Despite the fact that the final rule does not require the 
Banks to determine members' compliance with the ``makes long-term home 
mortgage loans'' and ``10 percent'' requirements on an ongoing periodic 
basis as would have been required under the proposed rule, FHFA is 
nonetheless making this revision to dispel any notion that the 
eligibility requirements of Sec.  1263.6(a) are no longer of any 
relevance to a member once it has been approved for membership.\90\
---------------------------------------------------------------------------

    \90\ As explained in the proposed rule, the existing regulations 
already reflect the necessarily ongoing nature of several of the 
eligibility requirements, although they employ various enforcement 
mechanisms short of the ultimate sanction of termination to ensure 
continuing compliance with those requirements. 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. See 12 CFR 1290.5(b). FHFA's advances regulation effectively 
enforces the ``financial condition'' requirement by permitting a 
Bank to limit a member's access to advances if its credit 
underwriting indicates that it is advisable to do so and 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. See 12 CFR 1266.4. 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.
---------------------------------------------------------------------------

    The final rule makes one additional change to Sec.  1263.6(a) that 
was not reflected in the proposed rule by adding a new paragraph (7) 
providing that, in addition to meeting the requirements listed in 
paragraphs (1) through (6), an institution must have complied with any 
applicable requirement of Sec.  1263.6(b) or Sec.  1263.6(c) to be 
eligible for membership. This revision is not meant to effect any 
substantive change, but is intended merely to provide clarity by 
ensuring that Sec.  1263.6(a) contains a comprehensive list of all of 
the requirements an institution is, or may be, required to meet to be 
eligible for membership. Section 1263.6(b) refers to the ``10 percent'' 
requirement that applies to insured depository institutions that are 
not CFIs, while Sec.  1263.6(c) refers to the requirement that an 
applicant that is not an insured depository institution have a level of 
mortgage-related assets that reflect a commitment to housing finance. 
The

[[Page 3269]]

final rule makes no changes to subsections (b) or (c), which both refer 
to what an ``applicant'' must do to ``become'' a member. To make clear 
that compliance with those requirements will continue to be assessed 
only at the time of application, new Sec.  1263.6(a)(7) states that an 
institution to which either of those requirements apply shall be 
eligible for Bank membership if it ``has complied'' with the applicable 
requirement.
    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 have redesignated this provision 
as Sec.  1263.6(c)(1) and revised it to read, ``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.'' In the final rule, the provision remains as Sec.  1263.6(d), 
but is revised to read, ``Except as provided in paragraph (e) of this 
section, an institution that does not satisfy the requirements of this 
part shall be ineligible for membership.'' This revised language is 
similar to that which was proposed. As proposed, the final rule removes 
the initial qualifier ``[e]xcept as otherwise provided in this part,'' 
which is redundant in that the reference to satisfying the 
``requirements of this part'' is most logically read to take into 
account any exceptions to the general requirements. At the same time, 
the final rule adds a new qualifier--``[e]xcept as provided in 
paragraph (e)''--which is a new provision, described immediately below, 
that specifies the manner in which the Banks are to wind down their 
business with existing captive members before terminating the 
membership of those captives.
    Because FHFA has amended the regulation to make captives ineligible 
for membership, the final rule adds a new provision, Sec.  1263.6(e), 
to govern the treatment of captives that were admitted to membership 
prior to the effective date of the final rule. Like the proposed rule, 
the final rule treats captives that had been admitted to membership 
before the date of publication of the proposed rule (September 12, 
2014) (hereinafter referred to as ``pre-NPR captives'') differently 
from those that were admitted to membership on or after that date 
(hereinafter referred to as ``post-NPR captives'').
    The final rule treats pre-NPR captives in essentially the same 
manner as would have been the case under the proposed rule. Section 
1263.6(e)(1)(i) of the final rule permits a Bank five years from the 
effective date of the final rule to wind down its relationship with a 
pre-NPR captive. As proposed, the final rule also permits a Bank to 
continue to make or renew advances to such captives during that five 
year transition period, but only if: (A) After making or renewing an 
advance, the Bank's total outstanding advances to that captive would 
not exceed 40 percent of the captive's total assets; and (B) the 
maturity date of any new or renewed advance does not extend beyond the 
end of the five-year transition period. In the case of a captive that 
already has advances that exceed 40 percent of its assets, the final 
rule does not require a Bank to call those advances prior to their 
maturity date, but it does prevent the Bank from making or renewing any 
further advances to that captive until total outstanding advances have 
been reduced to below 40 percent of the captive's assets. Similarly, a 
Bank that already has made advances to captives that mature beyond five 
years from the effective date of the final rule may allow those to roll 
off in accordance with their terms, but may not renew them.
    Section 1263.6(e)(1)(ii) of the final rule requires a Bank to 
terminate the membership of any pre-NPR captive no later than five 
years after the effective date of the rule. The Bank is to carry out 
the terminations as provided under Sec.  1263.27, which is not amended 
by this final rule and which provides each Bank's board with the 
necessary authority to terminate the membership of any captive for 
failing to comply with a requirement of the Bank Act, as implemented by 
a regulation adopted by FHFA. The requirements of Sec.  1263.27(b), 
regarding stock redemption periods, and Sec.  1263.27(c), regarding 
post-termination membership rights, shall apply without exception to 
any terminated captive.
    Final Sec.  1263.6(e)(1)(ii) further requires a Bank, after 
terminating the membership of a pre-NPR captive, to liquidate 
outstanding advances to, settle other business transactions with, and 
repurchase or redeem Bank stock held by that captive in accordance with 
Sec.  1263.29, which also is not revised by the final rule. This 
provision also makes clear that in terminating a pre-NPR captive's 
membership a Bank may nonetheless allow the captive to repay any 
existing advances in accordance with their contractual terms, 
regardless of whether their maturity dates occur after the date of the 
termination of membership, so long as the advances had been made in 
conformity with the regulations in effect at the time the advance was 
made. In such cases, the Bank would also delay the repurchase of Bank 
stock held by the captive in support of any such advance until after 
the advance has been repaid, in accordance with the Bank's capital 
plan. The five-year transition period for these pre-NPR captives is 
intended to mitigate to a reasonable extent the burden that the 
termination of membership might otherwise have on any such captive that 
became a Bank member in reliance on the previous membership 
regulations. The limitations on advances that may be made during this 
period are intended to permit a pre-NPR captive to continue to borrow 
at its existing levels for a reasonable period of time, while also 
limiting its ability to provide increased financing to affiliates that 
are ineligible for Bank membership.
    The text of the proposed rule did not explicitly address the 
treatment of post-NPR captives, but, in the SUPPLEMENTARY INFORMATION, 
FHFA stated that it would interpret the rule to require the immediate 
termination of such captives' membership and the prompt liquidation of 
any outstanding advances, and that it would consider making those 
requirements explicit in the final rule if any Bank were to admit a 
captive to membership subsequent to the date of publication of the 
proposed rule. Notwithstanding that notice of the proposed consequences 
to captives admitted to membership after the date of the proposed rule, 
several Banks have continued to admit captives to membership, although 
at least some have obtained from such captives written acknowledgements 
of the possible immediate termination of their memberships. Because of 
those developments, FHFA has decided that it should address the 
treatment of those post-NPR captives explicitly in the final rule. In 
order to avoid the disruption to the Banks and those captives that 
could result from an immediate termination of membership and repayment 
of all advances, FHFA has reconsidered the position it took in the 
proposed rule and has decided to provide the Banks with a one-year 
transition period within which to wind down their affairs with any 
post-NPR captives they have admitted.
    Accordingly, Sec.  1263.6(e)(2)(i) of the final rule provides the 
Banks with a one-year transition period from the effective date of the 
final rule within which to wind down its relationships with any 
captives that had been admitted to membership on or after September 12, 
2014. The final rule prohibits a Bank from making or renewing an 
advance to a post-NPR captive during that transition period, but does 
not require the immediate liquidation of any advances that may

[[Page 3270]]

already be outstanding on the effective date of the rule.
    Section 1263.6(e)(2)(ii) of the final rule requires a Bank to 
terminate the membership of any post-NPR captive as provided under 
Sec.  1263.27 no later than one year from the effective date of the 
final rule. It also requires generally that upon the termination of 
membership the Bank must liquidate all outstanding advances to the 
post-NPR captives, settle all other business transactions, and 
repurchase or redeem all Bank stock held by the terminated captive in 
accordance with Sec.  1263.29. Thus, in contrast to pre-NPR captives, 
post-NPR captives must completely wind down all business relationships 
with the Banks, including the full repayment of all outstanding 
advances, prior to or simultaneously with the termination of 
membership.
2. Treatment of De Novo Insured Depository Institution Applicants--
Sec.  1263.14
    Section 1263.14 of the existing membership regulation sets forth 
special standards by which a Bank is to assess the compliance of a ``de 
novo applicant''--i.e., an insured depository institution chartered 
less than three years prior to the date it applies for Bank 
membership--with the membership eligibility requirements. It 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 and provides an 
alternative means for such an applicant to meet the ``makes long-term 
home mortgage loans requirement'' if it cannot meet the general 
standard set forth in Sec.  1263.9. With respect to both the ``10 
percent'' and ``home financing policy'' requirements, it provides 
standards pursuant to which an applicant may be ``conditionally 
approved'' for membership at the time of application and then achieve 
full membership if additional criteria are met within a certain 
timeframe.
    Although the proposed rule would have made no substantive changes 
to the existing standards, it would have significantly revised the text 
of this section (which would have been redesignated at Sec.  1263.15) 
to provide greater clarity, primarily with respect to the standards for 
conditional approval and subsequent full membership. The proposed rule 
would, however, have added two new paragraphs to provide alternative 
standards by which a member that had been admitted as a de novo 
applicant could be deemed to comply with the proposed ongoing asset 
ratio requirements for a period of time before being required to meet 
the standards that would have applied to all other members.
    Like the proposed rule, the final rule significantly revises the 
text of this section (which remains as Sec.  1263.14 in the final 
rule), but organizes the material differently than was proposed. Again, 
these changes are intended primarily to state the requirements 
regarding conditional approval and subsequent full membership more 
clearly and are not meant to implement any substantive change. Because 
FHFA is not implementing the proposed ongoing asset ratio requirements 
at this time, the proposed provisions relating to those requirements 
are not included in final Sec.  1263.14.
    In the existing regulation, the term ``de novo applicant'' is 
defined in Sec.  1263.14(a) and is used throughout the remainder of 
Sec.  1263.14 to refer to an insured depository institution that was 
chartered less than three years prior to the date it applies for Bank 
membership. As proposed, the final rule substitutes ``de novo insured 
depository institution'' for ``de novo applicant'' to make clear that 
the time-limited exceptions for entities formed within the preceding 
three years apply only to insured depository institutions and not to 
insurance companies or non-depository CDFIs. In addition, the rule 
moves that definition from Sec.  1263.14(a) to Sec.  1263.1, where the 
definitions of other terms that are used in part 1263 are located. As 
is the case with the existing membership regulation, the final rule 
does not provide any special standards for measuring the compliance of 
recently formed insurance company or non-depository CDFI applicants 
with the membership eligibility requirements.
    While the final rule also revises the text of Sec.  1263.14(a) to 
reflect the new nomenclature, it retains the substance of the existing 
subsection by deeming each 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'' eligibility requirements. This 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 institution for deposit insurance.\91\
---------------------------------------------------------------------------

    \91\ See 61 FR 42531, 42538 (Aug. 16, 1996) (discussing 
reasoning behind adoption of streamlined requirements for de novo 
insured depository institutions).
---------------------------------------------------------------------------

    Existing Sec.  1263.14(b) allows a de novo insured depository 
institution 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. The 
final rule makes minor revisions to the text of this subsection, but 
retains the substance of the existing provision.
    Existing Sec.  1263.14(c) deems a de novo insured depository 
institution to which the ``10 percent'' requirement applies and that 
has been in operation for less than one year to be ``conditionally . . 
. in compliance'' with that requirement at the time of application, and 
grants the institution ``conditional membership approval'' 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 deemed to be ``in compliance'' 
with the ``10 percent'' requirement. If the institution is unable to 
provide such evidence within that time frame, it is deemed to be ``in 
noncompliance'' with the ``10 percent'' requirement, its ``conditional 
membership approval is deemed null and void,'' is terminated, and its 
membership stock must be redeemed in accordance with Sec.  1263.29.
    The final rule revises the structure of Sec.  1263.14(c) 
(condensing it from five paragraphs to three) and to its nomenclature, 
but makes only one minor change to the substance of that subsection. 
That substantive change is reflected in final Sec.  1263.14(c)(1). As 
currently written, that paragraph appears to deem any de novo insured 
depository institution applicant to which it applies to be in mere 
conditional compliance with the ``10 percent'' requirement, without 
allowing for the possibility (perhaps slight) that the applicant may be 
able to demonstrate that it is already in full compliance with that 
requirement as provided in Sec.  1263.10. The final rule remedies this 
oversight by specifying, in Sec.  1263.14(c)(1), that the subsection 
applies to ``a de novo insured depository institution applicant that 
commenced its initial business operations less than one year before 
applying for Bank membership [that] is subject to, but cannot yet meet, 
the 10 percent requirement . . . as provided in Sec.  1263.10.'' If an 
institution already complies with Sec.  1263.10 at the time it applies 
for membership, it is not subject to the procedures set forth in Sec.  
1263.14(c) under the final rule. With respect to applicants to which 
Sec.  1263.14(c) does apply, final

[[Page 3271]]

Sec.  1263.14(c)(1) provides that a Bank shall conditionally approve 
such an applicant for membership if it meets all other applicable 
requirements (which include the other membership eligibility 
requirements as modified for de novo insured depository institutions 
under this section).
    Final Sec.  1263.14(c)(2) provides that if an institution that was 
conditionally approved for membership demonstrates to the satisfaction 
of its Bank that it satisfies the ``10 percent'' requirement as 
provided under Sec.  1263.10 within one year after it begins its 
business operations, its membership approval shall become final--i.e., 
it shall be considered to be fully approved for membership (unless it 
also remains subject to conditional approval under Sec.  1263.14(d)). 
Conversely, final Sec.  1263.14(c)(3) provides that if such an 
institution fails to demonstrate its full compliance with the ``10 
percent'' requirement within one year after it begins its business 
operations, its conditional membership approval shall become void.
    Existing Sec.  1263.14(d) deems any de novo insured depository 
institution that has not yet received its first CRA performance 
evaluation to be in conditional compliance with the ``home financing 
policy'' requirement if it provides 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. The existing 
regulation allows a Bank to conditionally approve an applicant for 
membership on this basis until it 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 and its membership approval shall 
become final (unless it also remains subject to conditional approval 
under Sec.  1263.14(c)). 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 approval becomes void. The final rule 
revises the structure and nomenclature of Sec.  1263.14(d) that 
parallel the revisions made to Sec.  1263.14(c), but makes no 
substantive changes to that subsection.
    The final rule adds a new subsection (e) to Sec.  1263.14 to 
consolidate existing requirements that apply to conditional membership 
approvals under subsections (c) and (d). Final Sec.  1263.14(e) 
provides that a de novo insured depository institution that has been 
conditionally approved for membership under Sec.  1263.14(c)(1) or 
Sec.  1263.14(d)(1) is subject to all regulations applicable to members 
generally, including those relating to stock purchase requirements and 
advances or collateral, notwithstanding that its membership may be 
merely conditional for some period of time. Final Sec.  1263.14(e) also 
provides that if an institution's conditional membership approval 
becomes void as provided in Sec.  1263.14(c)(3) or Sec.  1263.14(d)(3), 
then the Bank must liquidate any outstanding indebtedness and redeem or 
repurchase its capital stock as it would for any other terminated 
member under Sec.  1263.29.
3. Recently Consolidated Applicants--Sec.  1263.15
    Section 1263.15 provides guidance to the Banks about how to assess 
a membership application submitted by an institution that recently has 
undergone a merger or other business combination with another 
institution. The existing provision 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 such applicants. The final rule makes numerous non-
substantive revisions to that section so as to provide greater clarity, 
but makes no substantive changes.
    With respect to the ``financial condition'' requirement, final 
Sec.  1263.15(a) requires a recently consolidated applicant that has 
not filed consolidated financial reports with its regulator for at 
least six quarters or three calendar years to provide the Bank with 
whatever regulatory reports it has filed as a consolidated institution, 
plus pro forma financial statements for any quarters for which actual 
combined financial reports are not available. With respect to the 
``home financing policy'' requirement, final Sec.  1263.15(b) requires 
a recently consolidated applicant that has not yet received its first 
CRA performance evaluation as a consolidated entity to provide 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. With respect to the ``makes long-term home 
mortgage loans'' and ``10 percent'' requirements, final Sec.  
1263.15(c) allows a recently consolidated applicant that has not yet 
filed a regulatory financial report as a consolidated entity to provide 
the Bank instead with the pro forma financial statements that it had 
provided to the regulator that approved the consolidation.
4. Financial Condition of CDFIs and Insurance Companies--Sec.  1263.16
    Existing Sec.  1263.16 governs the application of the ``financial 
condition'' requirement to insurance company and certain CDFI 
applicants. By regulation, in order for such an institution to be 
eligible for membership its financial condition must be ``such that 
advances may be safely made to it.'' \92\ The Bank Act applies this 
``financial condition'' requirement only to certain insured depository 
institutions,\93\ but 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.\94\ The final rule does 
not alter this approach.
---------------------------------------------------------------------------

    \92\ 12 CFR 1263.6(a)(4).
    \93\ See 12 U.S.C. 1424(a)(2)(B).
    \94\ See 58 FR 43522, 43531-34 (1993) (discussion in 
SUPPLEMENTARY INFORMATION to Finance Board's first post-FIRREA final 
rule on Bank Membership of the agency's decision to apply the 
requirements of section 4(a)(2)(B) of the Bank Act to insurance 
companies, as well as insured depository institutions).
---------------------------------------------------------------------------

    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. As proposed, the final rule 
carries forward those requirements, but also adds a new provision that 
requires a Bank to review an insurance company applicant'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. The final rule requires that the Bank make the latter 
determination based upon audited financial statements prepared in 
accordance with generally accepted accounting principles (GAAP), if 
they are available, but allows the use of financial statements prepared 
in accordance with statutory accounting principles if GAAP statements 
are not available.

[[Page 3272]]

5. Determination of Appropriate District for Bank Membership--Sec.  
1263.18
    The Bank Act provides that an eligible institution may become a 
member only of the Bank of the district in which the institution's 
``principal place of business'' (PPOB) is located, but does not define 
that term.\95\ The existing membership regulation includes both a 
general provision for determining the location of an institution's 
PPOB, as well as an alternative provision that allows an institution to 
request that the Bank designate a different state for the PPOB if 
certain requirements are met. Under the general provision, the PPOB is 
deemed to be the state in which an institution ``maintains its home 
office established as such in conformity with the laws under which the 
institution is organized.'' \96\ The alternative provision allows an 
institution to designate a different state as its PPOB if it meets a 
three-part test for establishing that it has a sufficient connection to 
that other state.\97\
---------------------------------------------------------------------------

    \95\ 12 U.S.C. 1424(b). An institution may, in the alternative, 
become a member of the Bank of an adjoining district, if that is 
demanded by convenience and the Director of FHFA approves that 
arrangement. There is no record of this statutory alternative ever 
having been used.
    \96\ See 12 CFR 1263.18(b).
    \97\ The regulation allows an institution to have a state other 
than the one in which it maintains its home office designated as its 
PPOB, provided that: (i) at least 80 percent of the institution's 
accounting books, records, and ledgers are maintained in that state; 
(ii) a majority of the institution's board of director and board 
committee meetings are held in that state; and (iii) a majority of 
the institution's five highest paid officers have their places of 
employment located in that state. See 12 CFR 1263.18(c).
---------------------------------------------------------------------------

a. Proposed PPOB Provisions
    The proposed rule would have redesignated Sec.  1263.18 as Sec.  
1263.19, but retained the basic structure of that section (while adding 
additional paragraphs, as noted below). That section remains as Sec.  
1263.18 under the final rule. In the discussion of the substantive 
revisions to that section below, the existing, proposed, and final 
provisions are all referred to as being located in Sec.  1263.18 in 
order to avoid confusion.
    The proposed rule would have made three substantive revisions to 
Sec.  1263.18 that were intended to address how the Banks designate the 
PPOB for certain insurance company and community development financial 
institution (CDFI) members. As more insurance companies and CDFIs have 
become Bank members, they have revealed shortcomings in the current 
regulation's application to some situations that these institutions can 
present that do not arise with depository institutions, such as being 
domiciled in one state but conducting all business operations from a 
different state. As noted in the SUPPLEMENTARY INFORMATION to the 
proposed rule, FHFA had previously declined a request to allow the 
Banks to look solely to the state of domicile for an insurance company 
or the state of incorporation for a CDFI to identify the PPOB, because 
that approach would allow for the possibility of an institution having 
its ``principal'' place of business for membership purposes at a 
location from which it actually conducts no business activities. Such 
an arrangement is not consistent with the statute.
    To address these issues, FHFA first proposed to amend the general 
PPOB provision by adding a requirement that an institution also must 
actually conduct business activities from its home office location in 
order for the home office to be designated as the PPOB. The intent was 
to make clear that a mere legal presence, such as a statutory home 
office or a registered agent's office at which no business is 
conducted, is not sufficient by itself to constitute a company's PPOB. 
FHFA was prompted to make this revision by learning of instances in 
which insurance companies and CDFIs had sought to become members of the 
Bank whose district included the state under whose laws those entities 
had been domiciled or incorporated, even though they conducted all of 
their business activities elsewhere.
    FHFA also proposed to add a new section that would be specific to 
insurance companies and CDFIs, which would apply only in those cases in 
which an institution could not satisfy the general requirements for 
determining its PPOB. Thus, the new provision would apply only to an 
institution that did not have an actual ``home office'' established 
under the laws of its chartering statute, or that had such a ``home 
office'' but did not conduct business operations from that location, 
and that could not satisfy the existing three-part test for designating 
an alternative location for its PPOB. Under the proposed provision, a 
Bank would be required to designate as the institution's PPOB ``the 
geographic location from which the institution actually conducts the 
predominant portion of its business activities.'' The proposed rule 
further required that a Bank make these PPOB determinations based on 
the totality of the circumstances related to a particular institution 
and using ``objective factors'' for making the decision. The proposal 
included three examples of such objective factors, which were the 
location of the institution's senior executives, the locations of the 
offices from which it conducts business, and the locations from which 
its non-executive officers and employees carry out the institution's 
business activities.
    Lastly, the proposed rule included a separate provision for 
designating the PPOB for those insurance companies that maintain no 
physical business presence in any state. As more insurance companies 
have become Bank members, FHFA has learned that certain insurance 
companies, such as those that are part of a holding company, may not 
maintain any physical office premises of their own that might be 
designated as their PPOB. Moreover, such companies may not have their 
own dedicated officers or employees, but instead may have joint 
employees or officers who are primarily employed by a separate 
affiliated insurance company. Those persons also may be situated at 
different geographic locations, i.e., the locations of the business 
offices of the affiliated companies, rather than at one central 
location. Such companies also may contract with unaffiliated service 
providers to perform the services that ordinarily would be performed by 
a company's employees. For such companies, where it is not possible to 
identify a single physical location from which the insurance company 
can be said to actually conduct the predominant portion of its business 
activities, the proposed rule would have allowed the Banks to designate 
the insurance company's state of domicile as its PPOB.
b. Comment Letters on Proposed PPOB Provisions
    Approximately 80 comment letters addressed some aspect of these 
proposed PPOB amendments. Many of the comment letters were 
substantively identical and contended that using the state of domicile 
or incorporation would be the most logical way to determine the PPOB 
for CDFI and insurance company members. They also noted that the 
existing three-part test for redesignating a member's PPOB already 
provided an adequate alternative means for members to designate a place 
other than the state of domicile or incorporation. These commenters 
also criticized creating a separate PPOB provision for insurance 
company and CDFI members, saying that it would promote district 
shopping by such members and would create an unfair advantage for 
insurance companies over depository institution members.
    Many other comment letters also urged FHFA to look solely to the 
state of domicile as the PPOB for insurance companies. Their principal 
reasons

[[Page 3273]]

included: the simplicity of the approach; it would allow Banks to focus 
only on the insurance laws of the states in their districts; it would 
defer to state regulators on what constitutes a ``home office''; it 
would avoid the inconsistent results that would likely occur if each 
Bank made its own decisions about what constituted the ``predominant 
portion'' of an institution's business; and it would recognize the 
realities of the marketplace, in which the concept of large 
institutions having a single physical location from which they conduct 
their business is no longer the norm.
    Nine Banks submitted separate letters that were nearly identical in 
substance and generally opposed the revisions to the PPOB regulation. 
These letters also suggested certain revisions, one of which FHFA has 
decided to incorporate into the final rule, as described below. The 
Banks also favored using the state of domicile as the PPOB for 
insurance companies, urging FHFA to recognize the central importance of 
the domicile to the operation and regulation of any insurance company, 
and to defer to state insurance regulators' determination of what 
constitutes an insurance company's ``home office.'' The Banks further 
contended that principles of safety and soundness favor using the state 
of domicile, as that would avoid requiring each Bank to become familiar 
with the insurance regulators and laws for states outside of its 
district. A number of commenters other than the Banks also raised these 
same points in favor of using the state of domicile as the PPOB.
    The Banks recommended substantive revisions to the proposed rule. 
For the general PPOB provision--which would allow the home office to be 
designated as the PPOB only if the institution also conducted some 
``business operations'' from that office--the Banks recommended that 
FHFA specify what activities would constitute ``business operations.'' 
Specifically, the Banks asked that FHFA define the term ``business 
operations'' to include an institution having any business, operations, 
or sales office in the domiciliary state, having any officer's place of 
employment located in the domiciliary state, or conducting any business 
in the domiciliary state, including the sale of insurance policies. The 
Banks contended that the addition of such requirements would ensure 
that an institution had more than a ``mere legal presence'' in its 
domiciliary state.
    The Banks recommended similar revisions to the provision that would 
have applied solely to certain insurance companies and CDFI members, 
and which would have required a Bank to identify ``the geographic 
location from which the institution actually conducts the predominant 
portion of its business activities.'' The Banks recommended that FHFA 
add specific metrics to that provision that would provide clear 
guidance about what factors would constitute ``the predominant 
portion'' of a company's business activities. Specifically, the Banks 
recommended that the final rule allow the PPOB to be determined based 
on any two of the following factors: (1) The location of a plurality of 
the institution's employees; (2) the location of the places of 
employment of a plurality of certain specified senior executives; or 
(3) the location of the company's largest office (as measured by number 
of employees). Each of the Banks' proposed metrics is similar to the 
more generally phrased ``objective factors'' that FHFA had included as 
examples in the proposed rule, i.e., ``the location from which the 
institution's senior officers direct, control, and coordinate'' an 
institution's activities, the ``locations of the offices from which the 
institution conducts its business,'' and ``the location from which its 
other officers and employees carry out the business activities.'' As 
discussed below, FHFA is persuaded that the final rule would be 
improved by the addition of the specific metrics suggested by the Banks 
and has incorporated them into the final rule.
    All of the Banks that submitted similar comment letters also 
supported the third substantive revision in the proposed rule, which 
would have allowed the Banks to designate the state of domicile as the 
PPOB for any insurance company that maintains no physical offices of 
its own and has no employees of its own (i.e., they are shared with 
other affiliates or the employee functions are performed by 
contractors), or whose executives may be situated at multiple 
locations. In addition to the matters discussed above, all of the Banks 
submitted supplemental comment letters in July 2015 that expressed 
their views on how to determine the PPOB for a captive insurance 
company. Certain Banks favored using the state of domicile for 
captives, while others favored other approaches, such as the location 
of the parent company or the location of any affiliated company that is 
already a member of a Bank. Several of the Banks expressed concerns 
that allowing captives to use the state of domicile as their PPOB would 
encourage ``district shopping'' among the Banks by the parent companies 
of prospective captive members, which could undermine the cooperative 
nature of the Bank System. Because FHFA has defined the term 
``insurance company'' to exclude captives and has required the 
termination of membership for existing captives members, FHFA has not 
addressed this issue in the final rule.
c. Overview of Final PPOB Provisions
    In the final rule, FHFA has decided to adopt certain of the 
substantive amendments largely as they were proposed, and to modify the 
other provisions by incorporating the revisions recommended by the 
Banks. All of these provisions are to be applied prospectively, and 
thus will not affect current members. In addition, FHFA is adopting as 
proposed clarifying amendments to the ``transfer of membership'' 
provisions of Sec.  1263.18(d)(1), which deals with transfers of 
membership from one Bank to another. The proposed rule would have 
revised this provision to make clear that it applies to instances where 
a member of one Bank either redesignates or relocates its PPOB to a 
state located in another Bank district. A ``redesignation'' of a PPOB 
can occur if a member satisfies the three-part test set out in Sec.  
1263.18(c), which remains unchanged in the final rule. A ``relocation'' 
of a member's PPOB would occur if it were to physically relocate its 
home office, as identified in its charter, to another state, such as in 
connection with a corporate reorganization, merger, or acquisition, and 
continued to conduct business from that new location. This revision is 
intended to reflect the two methods by which transfers of membership 
can occur--which had previously not been described by the regulation--
and is related to revisions made to Sec.  1263.4(b), regarding 
``automatic membership'' that can occur as a result of such changes in 
a member's principal place of business. No commenters opposed these 
revisions to Sec.  1263.18(d)(1).
d. General PPOB/Home Office Test
    The final rule adopts the amendment to the general PPOB provision, 
Sec.  1263.18(b), as it was proposed. Thus, the general approach for 
designating the PPOB for any member is to identify the state within 
which the institution maintains its home office, as the home office is 
established in accordance with the laws under which the institution is 
organized, and to confirm that the institution also conducts business 
operations from that office. As noted previously, as increasing numbers 
of insurance companies and CDFIs have become members, FHFA has learned 
that it is possible for them to conduct all

[[Page 3274]]

of their business activities in states other than those under whose 
laws they are domiciled or incorporated. Moreover, although the law of 
most states may require an insurance company to maintain a ``home 
office'' within the domicile state, FHFA is also aware of instances in 
which the statutory ``home office'' claimed to be the PPOB for 
membership purposes has been nothing more than the address of an in-
state registered agent, such as a law firm, whose sole function may be 
to accept service of process on behalf of the insurance company. FHFA 
has received inquiries from the Banks about how to determine the PPOB 
for such institutions, and is aware of instances in which Banks have 
agreed between themselves that in such cases the appropriate Bank for 
membership purposes is the Bank from whose district the insurance 
company or CDFI actually conducts its business operations, not the 
state of domicile.
    As noted in the proposed rule, FHFA believes that the term 
``principal place of business'' must be read to require that some 
material amount of business activities be conducted at that location, 
and that a mere legal presence--such as being domiciled or incorporated 
under the laws of a particular state, without more--is not sufficient 
to establish an institution's PPOB. Accordingly, in order to be 
consistent with Section 4(b) of the Bank Act, FHFA believes that it 
must amend the existing ``home office'' provision to address the above-
described situations by requiring that the institution also conduct 
some business operations from its home office in order for that home 
office to be designated as its PPOB. The final rule retains the 
requirement of the existing rule, which requires that the ``home 
office'' be established as such under state law. FHFA has not accepted 
the Banks' suggested revisions to this paragraph--which would specify 
certain activities that could constitute conducting business operations 
from the home office--principally because the examples provided were 
too attenuated to be consistent with FHFA's concept of a ``principal'' 
place of business. The amendment made by the final rule should have no 
effect on depository institution applicants. The charters for 
depository institutions typically designate a location within a state 
as the institution's ``home office,'' which location also will be a 
branch office at which the institution conducts some portion of its 
lending and deposit taking business, which is sufficient to meet the 
new standard. The amendment also should not adversely affect insurance 
company applicants because, as was pointed out by some commenters, most 
insurance companies in fact conduct some or all of their business 
operations from offices located within their state of domicile, and 
because the final rule includes a new provision, Sec.  1263.18(f), that 
specifically addresses insurance companies and CDFIs that cannot 
satisfy the general PPOB provision.
    A significant number of commenters urged FHFA not to amend Sec.  
1263.18(b) and to ``retain'' what they believed to be its current 
regulatory approach, which they characterized as a ``state of 
domicile'' test for insurance companies. Neither FHFA nor any of its 
predecessor agencies has ever adopted a regulation that established a 
state of domicile approach for insurance companies or that otherwise 
specifically addressed insurance companies. The most likely reason is 
that the Bank System regulators had not previously seen any need to 
address those issues because insurance companies have, until relatively 
recently, been a very small portion of the membership base. Although 
the Bank Act has authorized insurance companies to become members since 
1932, only in recent years has the number of insurance companies grown 
significantly. For example, as recently as 1996, the Bank System had no 
more than 31 insurance company members, out of a total membership base 
of 6,146.\98\ By the end of 2014, the number of insurance company 
members had grown to 304, out of 7,367 total members.\99\ Also, FHFA 
has become aware of the need to provide more specific guidance for 
identifying the PPOB for insurance companies and to first consider 
whether the state of domicile, by itself, is sufficient under the 
statute to constitute an insurance company's PPOB.
---------------------------------------------------------------------------

    \98\ See Federal Home Loan Bank System, 1996 Financial Report at 
10-11.
    \99\ See Federal Home Loan Banks, 2014 Combined Financial Report 
at 32. The same was true in the early years of the Bank System, as 
the annual reports for the Federal Home Loan Bank Board indicate 
that: as of June 30, 1935, there were three insurance companies 
among 3,324 total members; as of June 30, 1937, there were twelve 
insurance companies among 3,886 total members; and as of December 
31, 1952 there were five insurance companies among 4,056 total 
members.
---------------------------------------------------------------------------

    Moreover, although the language of the current regulation, which 
refers to the ``home office established as such in conformity with the 
laws under which the institution is organized,'' could arguably be read 
as tantamount to a ``state of domicile'' test, neither FHFA nor its 
predecessors has ever adopted that interpretation. Indeed, the history 
of this regulation indicates that it is unlikely that the predecessor 
agencies ever considered the concept of an insurance company's domicile 
when they adopted this language. The current language appears to date 
to 1958, when the FHLBB adopted a definition of ``principal office'' as 
part of its regulations that applied to savings associations that were 
insured by the Federal Savings and Loan Insurance Corporation (FSLIC). 
The 1981 regulations of the FSLIC defined ``principal office'' in much 
the same way as FHFA currently defines ``principal place of business,'' 
\100\ but the context makes clear that the term could not have applied 
to insurance companies because it appeared within the regulations of 
the FSLIC, which applied only to federally insured savings and loan 
associations.\101\ Through the more recent revisions to the membership 
regulations, neither FHFA nor the Finance Board has ever addressed 
whether it intended the term to be synonymous with an insurance 
company's state of domicile or a CDFI's state of incorporation. 
Moreover, although certain commenters contended that the Agency has 
used a ``state of domicile'' test for insurance companies, the fact is 
that some Banks currently have as members insurance companies that are 
domiciled outside of the Bank's district. That suggests that even the 
Banks have not viewed FHFA's regulations as mandating the use of the 
state of domicile for making PPOB determinations.
---------------------------------------------------------------------------

    \100\ See 12 CFR 561.7 (1981). That provision defined 
``principal office'' to mean ``the home office of an institution 
established as such in conformity with the laws under which the 
insured institution is organized.'' The term ``insured institution'' 
was defined to mean a savings and loan association the deposits of 
which were insured by the FSLIC. 12 CFR 561.1 (1981). The 1981 Code 
of Federal Regulation citation indicates that that definition of 
``principal office'' was adopted as part of the FSLIC regulations in 
1958 and had not subsequently been amended.
    \101\ The definition of ``principal office'' at 12 CFR 561.7 
(1981) was located within definitional sections of the regulations 
of the FSLIC, which applied only to federally insured savings and 
loan associations. Thus, there would have been no reason for the 
FSLIC to have considered anything having to do with insurance 
companies because they were not eligible for FSLIC insurance. The 
FHLBB did have separate regulations in 1981 governing the Bank 
System, but those regulations did not define ``principal office'' or 
``principal place of business.'' It was not until 1987 that the 
FHLBB incorporated this long-standing FSLIC definition of 
``principal office'' into its membership regulations, which it did 
by cross-referencing the FSLIC definition. See 12 CFR 523.3-2 (1988) 
(PPOB for membership purposes is the state in which an institution 
maintains its ``principal office'' as defined in 12 CFR 561.7). In 
1993, the Finance Board eliminated the cross-reference and provided 
that for membership purposes an institution's PPOB is the state in 
which it maintains its home office, established as such under the 
laws under which the institution is organized. See 12 CFR 933.5(b) 
(1994).

---------------------------------------------------------------------------

[[Page 3275]]

    The comment letters also raised other reasons for using a state of 
domicile approach, which include: (1) The belief that a separate PPOB 
provision for insurance companies would be unfair to depository 
institution members; (2) the need to recognize the primacy of state law 
with regard to matters of insurance company regulation; and (3) the 
belief that Banks should not be required to become familiar with the 
insurance laws for states outside of their districts. FHFA does not 
believe that any of those arguments are sufficient to overcome the Bank 
Act's requirement of more than a mere legal presence to constitute an 
institution's ``principal'' place of business. As to the unfairness 
issue, FHFA reiterates that it has adopted the amendments to address a 
specific concern--i.e., the possibility that insurance companies and 
CDFIs can conduct business entirely outside of the state in which they 
are domiciled or incorporated, that is not presented by depository 
institutions. Adopting a regulation that addresses specific situations 
that are unique to insurance companies and CDFIs is a proper exercise 
of FHFA's regulatory authority and does not confer any advantage on 
insurance company or CDFI members.
    As to the concern about not recognizing the primacy of state law on 
matters relating to the regulation of insurance companies, FHFA notes 
that the final rule does not purport to regulate in any way the 
operation of insurance companies. Rather, it implements a provision of 
the Bank Act, the interpretation of which Congress has vested solely in 
FHFA. The fact that a state insurance regulator may deem a simple legal 
presence to be sufficient to constitute an institution's ``home 
office'' for purposes of the state insurance code does not mean that 
FHFA must construe the Bank Act in the same manner or that FHFA must 
defer to the interpretations of fifty different state insurance 
commissioners on that point. At its core, the final rule simply 
indicates the Bank to which an insurance company may apply for 
membership; it does not in any way interfere with the ability of a 
state insurance regulator to oversee the operations of the insurance 
companies domiciled in its state.
    A number of the comment letters noted that FHFA has issued guidance 
stressing the importance of the Banks understanding the laws under 
which their insurance company members are chartered and developing 
relationships with the state insurance regulators. These commenters 
also have reasoned that it would be most consistent with that guidance 
for FHFA to adopt a state of domicile PPOB standard because doing so 
would allow the Banks to concentrate their resources on the insurance 
laws and insurance regulators for the states in their own districts. 
They have also contended that requiring them to develop such knowledge 
and relationships with the insurance regulators of other states would 
impose a significant burden. While FHFA acknowledges that developing a 
level of expertise about the insurance laws of any state and developing 
a relationship with the state insurance commissioners does require a 
commitment of time and resources, it does not believe that doing so 
would constitute an undue burden for any Bank. As noted previously, 
some Banks already have insurance company members that are domiciled in 
states outside of their districts. FHFA is not aware of any 
difficulties arising at those Banks from the fact that the state of 
domicile is outside of the Banks' districts. Indeed, FHFA has been told 
in at least one instance that Bank staff was fully committed to 
developing the same level of expertise and communication regarding 
insurance company members domiciled outside of their district as they 
had done for those domiciled within the district.
e. PPOB for Certain Insurance Companies and CDFIs
    As proposed, Sec.  1263.18(f) included two separate components--one 
dealing with certain CDFIs and insurance companies, and one dealing 
with insurance companies lacking any distinct physical presence. The 
first provision would have established a separate PPOB standard for 
insurance companies and CDFIs for which the Banks could not determine 
the PPOB under either the general provision of Sec.  1263.18(b) (either 
because they lack a home office designated as such under state law or 
did not conduct business from their home office) or the alternative 
three-part test provision of Sec.  1263.18(c). For those institutions, 
the proposed rule would have required the Banks to determine the 
geographic location from which the institutions actually conduct the 
predominant portion of their business activities, using ``objective 
factors'' to make that determination. The proposal included three 
examples of such objective factors. The second provision would have 
required the Banks to designate the state of domicile as the PPOB for 
an insurance company that did not have a physical presence in any 
state.
    The Banks and others criticized the first provision, contending 
that the term ``predominant portion of its business activities'' was 
too vague and would result in different Banks reaching different 
conclusions as to what facts constitute the predominant portion of a 
company's business activities. As noted previously, the Banks 
recommended adding specific metrics to this provision, which FHFA 
agrees would make the final rule clearer and easier to administer. 
Accordingly, FHFA has incorporated the Banks' suggested revisions into 
the final rule.
    In the final rule, FHFA has modified proposed Sec.  1263.18(f) in 
two respects, by adding language based on the comment letters from the 
Banks, and by replacing the proposed language that had dealt with 
insurance companies that maintain no physical offices of their own. 
Subsection (f) addresses only those insurance companies and CDFIs for 
which a Bank cannot designate the PPOB under the general provision of 
Sec.  1263.18(b) or the existing three-part test of Sec.  1263.18(c). 
The final rule retains the core concept of the proposed rule, which 
requires the Banks to designate as the PPOB for these institutions the 
geographic location from which the institutions actually conduct the 
predominant portion of their business activities.
    To address the concerns of the commenters, FHFA has deleted the 
language of the proposal that would have required the Banks to make 
these determinations based on the totality of the circumstances and 
objective factors. In place of that language FHFA has added new 
language that closely follows the language recommended by the Banks. 
FHFA agrees that the three factors recommended by the Banks will 
provide a reasonable proxy for ascertaining the location from which an 
institution can be said to conduct the predominant portion of its 
business. Thus, the final rule will allow the Banks to deem an 
institution to conduct the predominant portion of its business in the 
state in which any two of three specified factors are present. The 
three factors are: (i) The state in which the institution's largest 
office (as measured by the number of employees) is located; (ii) the 
state in which a plurality of the institution's employees are located; 
and (iii) the state in which a plurality of the institution's senior 
executives are located. In the event that there is an institution for 
which this test does not work because each of the three factors would 
identify a different state, then the Bank would be required to analyze 
the matter under the general standard of paragraph (f)(1), meaning that 
it should look to these and other factors of the Bank's choosing to 
determine from which of those three possible states the institution 
actually conducts the

[[Page 3276]]

predominant portion of its business activities.
    FHFA expects that there will be very few instances in which an 
institution would be unable to use this test, but because it is 
possible that each of these factors may point to a different state FHFA 
has decided to retain the general ``predominant portion of its business 
activities'' standard in the final rule to address such possibilities. 
The final rule adds new language, located in paragraph (f)(3) providing 
that if a Bank determines that it is unable to determine from which of 
those geographic locations the institution actually conducts the 
predominant portion of its business, then it shall designate the state 
of domicile as the PPOB. In considering the number of employees and 
senior executives for a particular insurance company or CDFI subject to 
this paragraph, the Banks should consider all such persons, regardless 
of whether those persons may also serve as joint employees or senior 
executives for affiliated companies. For purposes of this provision, 
the term ``senior executives'' is defined to include all officers at or 
above the level of senior vice president, and the final rule includes a 
non-exclusive list of examples of titles of the positions that would 
qualify as senior executives for this purpose.
f. PPOB for Insurance Companies With No Physical Offices
    The proposed rule included one provision that dealt with insurance 
companies that have no physical offices of their own--i.e., they 
neither own nor rent any office space. That provision would have 
permitted a Bank to designate the state of domicile as the PPOB for 
such insurance companies, provided that the insurance company also had 
no employees of its own or whose senior officers are situated at 
multiple locations. The intent of this provision was to address 
situations that some Banks have brought to FHFA's attention in the case 
of insurance company applicants that are part of a holding company 
structure and that use employees and executives of their affiliated 
insurance companies as joint employees, or that use third party service 
providers to perform the services that otherwise would be performed by 
an institution's own employees. Most of the Banks supported this 
amendment and no commenters affirmatively opposed it, except to the 
extent that it was thought that it could be used by captives to 
``district shop'' among the Banks.
    In the final rule, however, FHFA has removed this provision because 
the situation that it was designed to address is now adequately covered 
under the revised provisions of the final rule, as described 
immediately above, which allow for the state of domicile to be 
designated as the PPOB if the Bank cannot use the two-factor test or 
otherwise identify a particular geographic location from which the 
predominant portion of the business is conducted. Thus, under this 
provision an insurance company that neither owns nor rents office space 
in its own name can use its state of domicile as its PPOB so long as a 
plurality of its employees and a plurality of its senior executives are 
not located in the same state.
    The final rule also has relocated into a new Sec.  1263.18(g) 
language from the proposed rule pertaining to the Banks' recordkeeping 
obligations with respect to their designation of their members' PPOBs. 
The substance of this provision is unchanged from the proposed rule. 
The final rule also carries over without substantive change the 
amendments to Sec.  1263.18(d), pertaining to transfers of Bank 
membership resulting from the relocation or redesignation of an 
institution's PPOB.

D. 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. As proposed, the 
final rule repeals several provisions within this subpart that relate 
to the purchase and disposition of Bank stock in accordance with the 
law in effect prior to the enactment of the Financial Services 
Modernization Act of 1999 \102\ (hereinafter, the ``GLB Act''). Among 
other things, the GLB Act amended the Bank Act to require each Bank to 
establish and operate under its own capital structure plan.\103\ The 
provisions being repealed no longer have any effect because all of the 
Banks are now operating under GLB Act capital plans. The provisions 
being repealed are: (1) Sec.  1263.19, which generally requires Bank 
capital stock to be sold at par (because this requirement is now 
addressed in FHFA's regulations governing Bank capital); (2) portions 
of Sec.  1263.20 that relate 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 final rule retains the substance of the 
remaining provisions of existing subpart D, although those provisions 
have been reorganized to reflect the GLB Act capital provisions more 
explicitly.
---------------------------------------------------------------------------

    \102\ Pub. L. 106-102, sec. 608, 113 Stat. 1338, 1458-61 (Nov. 
12, 1999).
    \103\ See 12 U.S.C. 1426.
---------------------------------------------------------------------------

    As proposed, Sec.  1263.20(a) of the final rule provides that an 
institution becomes a member only upon the purchase of the amount of 
membership stock required under the Bank's capital plan. This further 
requires an approved applicant to purchase the required stock within 60 
days, or else its membership approval becomes void. This carries over 
much of the substance of existing provisions that now appear, 
respectively, in paragraphs (a)(2) and (d) of existing Sec.  1263.20.
    Final Sec.  1263.20(b) requires a Bank to issue its capital stock 
to a new member only after it has approved the institution for 
membership and received payment in full for the par value of the Bank 
stock. This replaces a similar provision, which had appeared in Sec.  
1263.21(a) of the existing regulation. Section 1263.20(c) of the final 
rule carries over the substance of existing Sec.  1263.20(e), and 
requires that each Bank report to FHFA information regarding each new 
member's minimum investment in Bank capital stock, in accordance with 
the instructions provided in FHFA's Data Reporting Manual.
    The final rule also retains the substance of existing Sec.  
1263.22(b)(1), which requires each Bank to calculate annually each 
member's required minimum stock 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 is 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, is retained without change.

E. Withdrawal, Termination, and Readmission--Sec. Sec.  1263.24-1263.30

    As proposed, the final rule implements a non-substantive structural 
change to part 1263 by consolidating sections that are currently 
dispersed among subparts E through H into subpart E.
    Existing Sec.  1263.24 governs the effects that a merger or other 
consolidation of members has on their membership status. The final rule 
would retain nearly all of the existing text of that section without 
change, but would revise Sec.  1263.24(b)(5) to remove references to 
Banks that have not yet

[[Page 3277]]

converted to a GLB Act capital structure. The final rule also deletes 
existing Sec.  1263.24(d), which addresses FHFA approval for transfers 
of Bank stock that occur in a merger of members, because it too 
implements a provision of the Bank Act that was repealed by the GLB 
Act.
    Section 1263.26 of the existing regulation governs voluntary 
withdrawal from Bank membership. Paragraph (d) of that section 
conditioned the ability of a member to withdraw on FHFA having 
certified that the withdrawal will not cause the Bank system to fail to 
contribute the amounts required to fund the interest payments owed on 
obligations issued by the Resolution Funding Corporation 
(REFCorp).\104\ Because the Banks satisfied their obligation to 
contribute to the debt service on the REFCorp bonds as of July 2011, 
this provision has become moot. The final rule deletes that provision 
but leaves the remainder of Sec.  1263.26 unchanged.
---------------------------------------------------------------------------

    \104\ See 12 U.S.C. 1441b(f)(2)(C).
---------------------------------------------------------------------------

    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 final rule retains that section without change.

F. Other Membership Provisions--Sec. Sec.  1263.31-1263.32

    As proposed, the final rule consolidates sections of part 1263 that 
are currently contained in subparts I and J--Sec. Sec.  1263.31 and 
1263.32--into subpart F. The final rule retains these remaining 
provisions of the existing membership regulation without change, except 
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 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.\105\ The Director also may consider any other differences 
that are deemed appropriate. In preparing this final 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.
---------------------------------------------------------------------------

    \105\ 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.\106\ 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.\107\ 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.
---------------------------------------------------------------------------

    \106\ See 44 U.S.C. 3507(a) and (d).
    \107\ See 44 U.S.C. 3512(a); 5 CFR 1320.8(b)(3)(vi).
---------------------------------------------------------------------------

    The proposed rule would have added a new collection of information 
to part 1263 related to the proposal to require an institution to hold 
at least one percent of its assets in ``home mortgage loans'' in order 
to satisfy the statutory ``makes long-term home mortgage loans'' and to 
require members to meet both that one percent requirement and the 
statutory ``10 percent'' requirement (where applicable) on an ongoing 
basis as a condition of remaining a Bank member. Because these changes 
are not being implemented in the final rule, there will be no new 
collection of information under part 1263; in addition, the existing 
collections under part 1263 will remain the same as those that have 
been approved by OMB under the existing clearance. Therefore, FHFA has 
withdrawn its request to OMB to approve a revision to control number 
2590-0003.

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act \108\ (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.\109\ FHFA has considered the impact of the final rule under 
the RFA. The General Counsel of FHFA certifies that the 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.
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 601, et seq.
    \109\ 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, FHFA 
revises 12 CFR 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 Financial condition requirement for depository institutions 
and CDFI credit unions.
1263.12 Character of management requirement.
1263.13 Home financing policy requirement.
1263.14 De novo insured depository institution applicants.
1263.15 Recently consolidated applicants.
1263.16 Financial condition requirement for insurance company and 
certain CDFI applicants.
1263.17 Rebuttable presumptions.
1263.18 Determination of appropriate Bank district for membership.
Subpart D--Stock Requirements
1263.19 [Reserved]
1263.20 Stock purchase.
1263.21 [Reserved]

[[Page 3278]]

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 [Reserved]
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.
    Affiliate means any entity that controls, is controlled by, or is 
under common control with another entity. For purposes of this 
definition, one entity controls another if it:
    (1) Directly or indirectly, or acting through one or more other 
persons, owns, controls, or has the power to vote twenty-five (25) 
percent or more of the outstanding shares of any class of voting 
securities of the other entity, including shares of common or preferred 
stock, general or limited partnership shares or interests, or similar 
interests that entitle the holder:
    (i) To vote for or to select directors, trustees, or partners (or 
individuals exercising similar functions) of that entity; or
    (ii) To vote on or to direct the conduct of the operations or other 
significant policies of that entity;
    (2) Controls in any manner the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the other entity; or
    (3) Otherwise has the power to exercise, directly or indirectly, a 
controlling influence over the management or policies of the other 
entity through a management agreement, common directors or management 
officials, or by any other means.
    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 an entity that holds an insurance license or charter 
under the laws of a State, but that does not meet the definition of 
``insurance company'' set forth in this section or fall within any 
other category of institution that may be 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 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 means a combination of two or more business entities, 
and includes a consolidation of two or more entities into a new entity, 
a merger of one or more entities into another entity, 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 with a charter approved by its appropriate regulator within 
the three years prior to the date 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.

[[Page 3279]]

    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 fifty 
(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 an entity that holds an insurance license 
or charter under the laws of a State and whose primary business is the 
underwriting of insurance for persons or entities that are not its 
affiliates.
    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 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 
applicant 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 that 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

[[Page 3280]]

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 applicant, the total assets 
contained in the applicant'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. The applicant has reviewed the requirements 
of this part and, as required by this part, has provided to the best of 
its knowledge the most recent, accurate, and complete information 
available; and
    (2) Duty to supplement. The applicant will promptly supplement the 
application with any relevant information that comes to its 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 1263.18, the Bank's findings, and 
the reasons therefor. In preparing a digest for an applicant whose 
satisfaction of the membership eligibility requirements of Sec.  
1263.6(a) is contingent upon its meeting the definition of ``insurance 
company'' set forth in Sec.  1263.1, the Bank shall state its 
conclusion as to whether the applicant meets that definition and 
summarize the bases for that conclusion.
    (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 by Sec. Sec.  1263.6 
to 1263.18, including documents required to establish or rebut a 
presumption under this part, shall be described in and attached to the 
digest. The Bank is not required to retain in the file portions of 
regulatory financial reports that are not relevant to its decision on 
the membership application. 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 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.  1263.18(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

[[Page 3281]]

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 20219, 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.  1263.17.

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 for Bank membership 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;
    (6) Its home financing policy is consistent with sound and 
economical home financing; and
    (7) It has complied with any applicable requirement of paragraphs 
(b) and (c) of this section.
    (b) Additional eligibility requirement for insured depository 
institutions other than community financial institutions. In order to 
be eligible to become a member of a Bank, an insured depository 
institution applicant other than a community financial institution also 
must have at least 10 percent of its total assets in residential 
mortgage loans.
    (c) Additional eligibility requirement for applicants that are not 
insured depository institutions. In order to be eligible to become a 
member of a Bank, an applicant that is not an insured depository 
institution also must have mortgage-related assets that reflect a 
commitment to housing finance, as determined by the Bank in its 
discretion.
    (d) Ineligibility. Except as provided in paragraph (e) of this 
section, an institution that does not satisfy the requirements of this 
part shall be ineligible for membership.
    (e) Treatment of captives previously admitted to membership. A Bank 
that admitted one or more captives to membership prior to February 19, 
2016 shall wind down its relationship with, and terminate the 
membership of, each of those captives as provided in this paragraph 
(e).
    (1) Captives admitted prior to September 12, 2014.--(i) A Bank 
shall have until February 19, 2021 to wind down its business 
transactions with any captive that it had admitted to membership prior 
to September 12, 2014, notwithstanding the captive's ineligibility for 
Bank membership. The Bank may make or renew an advance to such a 
captive only if:
    (A) After making or renewing the advance, its total outstanding 
advances to that captive would not exceed 40 percent of the captive's 
total assets; and
    (B) The new or renewed advance has a maturity date no later than 
February 19, 2021.
    (ii) A Bank shall terminate the membership of any captive described 
in paragraph (e)(1)(i) of this section no later than February 19, 2021, 
as provided under Sec.  1263.27. After termination, the Bank shall 
require the liquidation of any outstanding indebtedness owed by, and 
the settlement of all other outstanding business transactions with, 
such terminated captive, and shall redeem or repurchase the Bank stock 
owned by the captive in accordance with Sec.  1263.29; provided that 
the Bank may allow the captive to repay any outstanding advance made or 
last renewed in accordance with the applicable requirements then in 
effect and having a maturity date later than its date of termination in 
accordance with its terms and delay the repurchase of any Bank stock 
held in support of that advance until after the advance has been 
repaid, in accordance with the Bank's capital plan.
    (2) Captives admitted on or after September 12, 2014.--(i) A Bank 
shall have until February 19, 2017 to wind down its business 
transactions with any captive that it had admitted to membership on or 
after September 12, 2014, notwithstanding the captive's ineligibility 
for Bank membership. The

[[Page 3282]]

Bank shall not make or renew any advance to such a captive.
    (ii) A Bank shall terminate the membership of any captive described 
in paragraph (e)(2)(i) of this section no later than February 19, 2017, 
as provided under Sec.  1263.27. Upon termination, the Bank shall 
require the liquidation of any outstanding indebtedness owed by, and 
the settlement of all other outstanding business transactions with, 
such terminated captive, and shall redeem or repurchase the Bank stock 
owned by the captive in accordance with Sec.  1263.29; provided that 
all advances outstanding to that member must be repaid in full by the 
termination date.


Sec.  1263.7  Duly organized requirement.

    An applicant 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 
applicant, is incorporated under State or tribal law.


Sec.  1263.8  Subject to inspection and regulation requirement.

    An applicant 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 applicant, it is 
subject to inspection and regulation by its appropriate regulator. A 
CDFI applicant that is certified by the CDFI Fund is not subject to 
this requirement.


Sec.  1263.9  Makes long-term home mortgage loans requirement.

    An 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, based on the applicant's 
most recent regulatory financial report filed with its appropriate 
regulator, or other documentation provided to the Bank, in the case of 
a CDFI applicant that does not file such reports, the applicant 
originates or purchases long-term home mortgage loans.


Sec.  1263.10  Ten percent requirement for certain insured depository 
institution applicants.

    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, based on the applicant's most recent regulatory 
financial report filed with its appropriate regulator, the applicant 
has at least 10 percent of its total assets in residential mortgage 
loans, except that 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 used to meet 
this requirement.


Sec.  1263.11  Financial condition requirement for depository 
institutions and CDFI credit unions.

    (a) Review requirement. In determining whether a building and loan 
association, savings and loan 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

[[Page 3283]]

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.  1263.12  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
    (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.  1263.13  Home financing policy requirement.

    (a) Standard. An applicant 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 
applicant 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.  1263.14  De novo insured depository institution applicants.

    (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, 
1263.11 and 1263.12, respectively.
    (b) Makes long-term home mortgage loans requirement. 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.
    (c) 10 percent requirement.--(1) Conditional approval. If a de novo 
insured depository institution applicant that commenced its initial 
business operations less than one year before applying for Bank 
membership is subject to, but cannot yet meet, 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) as provided in Sec.  1263.10, a Bank 
may conditionally approve that applicant for membership if it meets all 
other applicable requirements.
    (2) Approval may become final. If, within one year after 
commencement of its initial business operations, an institution that 
was conditionally approved for membership under paragraph (c)(1) of 
this section supplies evidence acceptable to the Bank that it satisfies 
the 10 percent requirement as provided under Sec.  1263.10, its 
membership approval shall become final.
    (3) Approval may become void. If an institution that was 
conditionally approved for membership under paragraph (c)(1) does not 
satisfy the requirements of paragraph (c)(2) of this section, it shall 
be deemed to be out of compliance with the 10 percent requirement, and 
its conditional membership approval shall become void.
    (d) Home financing policy requirement.--(1) Conditional approval. 
If a de novo insured depository institution applicant cannot meet 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) as provided under 
Sec.  1263.13 because it has not received its first CRA performance 
evaluation, a Bank may conditionally approve that applicant for 
membership if it meets all other applicable requirements and has 
included in its application 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) Approval may become final. If an institution that was 
conditionally approved for membership under paragraph (d)(1) of this 
section supplies evidence acceptable to the Bank that it has satisfied 
the home financing policy requirement as provided under Sec.  1263.13 
by receiving a CRA rating of ``Satisfactory'' or better on its first 
CRA

[[Page 3284]]

performance evaluation, its membership approval shall cease to be 
conditional.
    (3) Approval may become void. If an institution that was 
conditionally approved for membership under paragraph (d)(1) of this 
section 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.  1263.17(f), it shall be deemed to 
be out of compliance with that requirement and its conditional 
membership approval shall become void.
    (e) Other rules. An institution that has been conditionally 
approved for membership under paragraph (c)(1) or (d)(1) of this 
section shall be subject to all regulations applicable to members 
generally, including those relating to stock purchase requirements and 
or collateral, notwithstanding that its membership may be conditional 
for some period of time. If an institution's conditional membership 
approval becomes void as provided in paragraphs (c)(3) or (d)(3) of 
this section, then the Bank shall liquidate any outstanding 
indebtedness owed by the institution to the Bank and redeem or 
repurchase its capital stock in accordance with Sec.  1263.29.


Sec.  1263.15  Recently consolidated applicants.

    An applicant that has recently consolidated with another 
institution is subject to the requirements of Sec. Sec.  1263.7 to 
1263.13 except as provided in this section.
    (a) Financial condition requirement. For purposes of Sec.  
1263.11(a)(1) and 1263.11(b)(3)(i)(A), a recently consolidated 
applicant that has not yet filed regulatory financial reports as a 
consolidated entity for six quarters or three calendar year-ends shall 
provide to the Bank:
    (1) All regulatory financial reports that the applicant has filed 
as a consolidated entity; and
    (2) Pro forma combined financial statements for those quarters for 
which actual combined regulatory financial reports are unavailable.
    (b) Home financing policy requirement. For purposes of Sec.  
1263.13, a recently consolidated applicant that has not yet received 
its first CRA performance evaluation as a consolidated entity 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 compliance with Sec. Sec.  
1263.9 and 1263.10, a Bank may, in its discretion, permit a recently 
consolidated applicant that has not yet filed a regulatory financial 
report as a consolidated entity to provide the pro forma financial 
statement for the consolidated entity that the consolidating entities 
filed with the regulator that approved the consolidation.


Sec.  1263.16  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 the determination required under paragraph (a)(1)(ii) 
of this section, the Bank shall use audited financial statements that 
have been prepared in accordance with generally accepted accounting 
principles, if they are available. If they are not available, the Bank 
may use 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

[[Page 3285]]

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.  1263.17  Rebuttable presumptions.

    (a) Rebutting presumptive compliance. The presumption that an 
applicant meeting the requirements of Sec. Sec.  1263.7 to 1263.16 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, 
1263.11, 1263.12, 1263.13, or 1263.16, 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 and 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 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.  1263.11 and 1263.16--(1) Applicants subject to Sec.  
1263.11. For applicants subject to Sec.  1263.11, in the case of an 
applicant's lack of a composite regulatory examination rating within 
the two-year period required by Sec.  1263.11(b)(1), a variance from 
the rating required by Sec.  1263.11(b)(3)(i), or a variance from a 
performance trend criterion required by Sec.  1263.11(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.  1263.16. For applicants subject to 
Sec.  1263.16, in the case of an insurance company applicant's variance 
from a capital requirement or standard of Sec.  1263.16(a) or, in the 
case of a CDFI applicant's variance from the standards of Sec.  
1263.16(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.  1263.12--(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.  1263.11(b)(2) 
and 1263.16(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.  1263.11(b)(2) or Sec.  1263.16(a), or the net asset 
ratio set forth in Sec.  1263.16(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.  1263.13 and 1263.14(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,

[[Page 3286]]

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.  1263.18  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 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 whose 
principal place of business has been designated as a State located in 
another Bank district in accordance with paragraph (c) of this section, 
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. (1) 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.
    (2) A Bank may deem an institution to conduct the predominant 
portion of its business activities in a particular State if any two of 
the following three factors are present:
    (i) The institution's largest office, as measured by the number of 
employees, is located in that State;
    (ii) A plurality of the institution's employees are located in that 
State; or
    (iii) The places of employment for a plurality of the institution's 
senior executives are located in that State.
    (3) If a Bank cannot designate a State as the principal place of 
business under paragraph (f)(1) of this section, and cannot otherwise 
identify a geographic location from which the institution actually 
conducts the predominant portion of its business activities, it shall 
designate the State of domicile or incorporation as the principal place 
of business for that institution.
    (4) For purposes of paragraph (f)(2) of this section, the term 
``senior executive'' means all officers at or above the level of 
``senior vice president'' and includes the positions of president, 
executive vice president, chief executive officer, chief financial 
officer, chief operating officer, general counsel, as well as any 
individuals who perform functions similar to those positions whether or 
not the individual has an official title.
    (g) Records. A Bank designating the principal place of business for 
a member under this section shall document the bases for its 
determination in writing and shall include that documentation in the 
membership digest and application file for the institution that are 
required under Sec.  1263.2.

Subpart D--Stock Requirements


Sec.  1263.19  [Reserved]


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 
structure 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

[[Page 3287]]

required to be purchased under the Bank's capital structure 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 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 structure 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

[[Page 3288]]

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 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  [Reserved]


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 examination 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.''

     Dated: January 11, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-00761 Filed 1-19-16; 8:45 am]
BILLING CODE 8070-01-P