98-31489. Community Investment Cash Advance Programs

[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Rules and Regulations]
[Pages 65536-65548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31489]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932, 935, 936 and 970

[No. 98-48]
RIN 3069-AA75


Community Investment Cash Advance Programs

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is adopting 
a final rule establishing a general framework under which the Federal 
Home Loan Banks (Banks) may offer Community Investment Cash Advance 
(CICA) programs in addition to their Affordable Housing Programs (AHP) 
and Community Investment Programs (CIP). CICA programs other than AHP 
and CIP are entirely optional on the part of the Banks. The final rule 
is intended to provide the Banks with an array of specific standards 
for projects, targeted beneficiaries and targeted income levels that 
the Finance Board has determined support community lending under all 
CICA programs, including CIP. The final rule, however, does not apply 
to a Bank's AHP, which is governed specifically by part 960 of the 
Finance Board's regulations. A Bank may offer CICA programs, called 
Rural Development Advance (RDA) and Urban Development Advance (UDA) 
programs, for community lending using the specified standards for 
targeted beneficiaries or targeted income levels, without prior Finance 
Board approval. A Bank also may offer other CICA programs for projects, 
targeted beneficiaries and targeted income levels established by the 
Bank with prior Finance Board approval.

EFFECTIVE DATE: December 28, 1998.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Deputy Director, 
Market Research, [phone], Stanley Newman, Associate Director, 
Market Research, [phone], or Diane E. Dorius, Associate 
Director, Program Development, [phone], Office of Policy; or Roy 
S. Turner, Jr., Attorney-Advisor, [phone], Sharon B. Like, 
Senior Attorney-Advisor, [phone], or Deborah F. Silberman, 
General Counsel, [phone], Office of General Counsel, Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    The Banks currently have broad authority under section 10(a) of the 
Federal Home Loan Bank Act (Bank Act) and part 935 of the Finance 
Board's regulations to make advances in support of housing finance, 
including housing for very low-, low- and moderate-income families. See 
12 U.S.C. 1430(a); 12 CFR part 935. In the Financial Institutions 
Reform, Recovery and Enforcement Act of 1989 (FIRREA), Congress 
required the Banks to offer two programs, the AHP and the CIP, to 
provide advances in support of unmet housing finance and economic 
development credit needs. See Pub. L. 101-73, Sec. 721, 103 Stat. 183 
(Aug. 9, 1989).
    The AHP is a subsidy program through which the Banks support the 
finance of affordable owner-occupied and rental housing. See 12 U.S.C. 
1430(j). The Finance Board first issued implementing regulations for 
the AHP in 1990. See 12 CFR part 960.
    The CIP is a program through which the Banks provide advances to 
members at cost to support the financing of housing benefiting families 
with incomes at or below 115 percent of the area median income, and 
economic development activities benefiting families with incomes at or 
below 80 percent of the area median income. See 12 U.S.C. 1430(i)(2). 
The Finance Board previously has not promulgated regulations 
implementing the CIP.
    Section 10(j)(10) of the Bank Act authorizes the Banks to establish 
CICA programs in addition to the CIP and the AHP to support ``community 
investment.'' See id. section 1430(j)(10). The Finance Board has not 
previously promulgated regulations or other specific guidance on what 
kinds of Bank lending are permitted under this authority.
    Since the enactment of the Banks' statutory authority to make 
advances for community investment under FIRREA, the Banks have provided 
relatively less long-term credit for economic development projects than 
for housing, and all of the verifiable targeted economic development 
lending by the Banks has been done under their CIP authority, as 
opposed to their authority to establish other CICA programs. In the 
past eight years, the Banks have provided $18.1 billion in CIP advances 
to finance 368,359 housing units. Only 25 percent of those units have 
been rental units that often provide housing for lower-income families 
and are usually more difficult to finance than single-family owner-
occupied housing. In addition, only $751 million or 4 percent of CIP 
advances have financed economic development projects. Furthermore, CIP 
advances are not available to the Banks' nonmember borrowers. See id. 
section 1430(i)(1).
    The Finance Board believes there is a need for long-term financing 
for economic development that is not being met by the financial 
community generally, nor by members using the CIP specifically. The 
Banks can help to meet this need through the establishment of other 
CICA programs to provide long-term financing for economic development. 
In order to facilitate and encourage such community lending, the 
Finance Board issued a proposed rule to establish uniform standards for 
all CICA programs defining the kinds of housing and economic 
development projects and activities, targeted beneficiaries and 
targeted income levels that would constitute ``community investment'' 
eligible to be financed by advances under section 10(j)(10) of the Bank 
Act. This proposed rule was published in the Federal Register on May 8, 
1998, with a 90-day period for public comment that closed on August 6, 
1998. See 63 FR 25718 (May 8, 1998).

[[Page 65537]]

    The Finance Board received 31 comment letters on the proposed rule. 
Commenters included: eleven Banks, a Bank board of directors, a Bank 
member thrift, three Bank Advisory Councils, five government entities, 
an organization representing government entities, five trade 
associations, and an investment advisor.
    In the proposed rule, the Finance Board requested comment on 
whether it should establish CICA standards, in whole or in part, in the 
form of a regulation or a policy statement or guidelines. See 63 FR 
25718. The Finance Board asked whether a policy statement or guidelines 
would be a more effective means of achieving the goal of promoting the 
Bank's support of community investment financing. Commenters supporting 
issuance of CICA standards via a regulation stated that the proposed 
rule contained sufficient flexibility and discretion to enable the 
Banks to promote community investment in response to the needs of their 
individual districts. Commenters noted that the establishment of clear 
and specific CICA standards would be more likely to increase economic 
development activities in targeted communities, and would make CICA 
programs easier to implement and monitor. The Finance Board agrees with 
these commenters and has determined to issue a final rule.
    Commenters preferring issuance of a policy statement or guidelines 
stated that regulatory standards and reporting requirements would 
increase the cost of implementing CICA programs and might discourage 
members and others from participating in such programs. Commenters also 
suggested that policy guidelines could be modified more quickly than a 
regulation to respond to changing markets and project needs. There 
appears to be little merit in these arguments. First, the standards and 
reporting requirements would exist regardless of the form of the 
guidance. This argument implies that such standards and requirements 
could be more easily ignored if the guidance existed in the form of a 
policy statement, since a policy statement is not legally enforceable 
by the agency. Such arguments only serve to demonstrate why a 
regulation is preferable to a policy statement. Second, changing a 
policy statement requires action by the Board of Directors of the 
Finance Board, as does changing a regulation. The only real difference 
in timing is the public comment process required for a rulemaking 
procedure. Once again, this only serves to demonstrate why the 
regulatory route is preferable.
    Under the Administrative Procedures Act (APA), regulations are 
subject to a wide-ranging notice and public comment process, which 
enables the regulatory agency to obtain the broadest possible input 
from the regulated industry, program users, and the public in 
developing the standards and other requirements to be incorporated into 
such regulations. See 5 U.S.C. 553. In addition, as noted above, unlike 
policy statements and guidelines which do not have the force of law and 
therefore are not legally binding, regulations are legally enforceable 
by the agency. In order to provide the most certainty for the agency, 
the Banks and their members, the Finance Board has determined that it 
is most appropriate to issue the CICA program standards in a regulation 
rather than as a policy statement or guidelines.

II. Analysis of Final Rule

    The final rule adds a new part 970 to the Finance Board's 
regulations. Part 970 establishes a general framework whereby the Banks 
may offer CICA programs to provide advances to members and nonmember 
borrowers, who in turn can use the advances to provide financing for 
housing and economic development projects or activities for targeted 
beneficiaries with incomes at or below a targeted income level, to 
address unmet economic development credit needs. Projects with unmet 
credit needs are those for which financing is not generally available, 
or is available at lower levels or under less attractive terms. The 
final rule does not require a Bank to establish a CICA program (other 
than AHP and CIP, which are required by statute). The final rule is 
intended to provide the Banks with the parameters for what the Finance 
Board has determined will meet the statutory requirement for 
``community investment'' under section 10(j)(10). See 12 U.S.C. 
1430(j)(10).
    As further described below, the final rule has been substantially 
reorganized from the proposed rule to provide greater clarity.

A. Scope--Sec. 970.1

    Section 970.1 of the final rule states that part 970 establishes 
requirements for all CICA programs offered by a Bank, except for a 
Bank's AHP, which is governed specifically by part 960 of the Finance 
Board's regulations (Affordable Housing Program Regulation, 12 CFR part 
960).

B. Purpose--Sec. 970.2

    Section 970.2 of the final rule states that the purpose of part 970 
is to identify community lending projects or activities (as defined in 
Sec. 970.3 and discussed further below) that the Banks may support 
through the establishment of CICA programs. A Bank may offer the 
following CICA programs in support of community lending: Rural 
Development Advance (RDA) programs; Urban Development Advance (UDA) 
programs; and any other CICA programs that meet the requirements of 
part 970. In addition, a Bank is required to offer CICA programs under 
section 10(i) of the Bank Act (CIP) (12 U.S.C. 1430(i)), and under 
section 10(j) of the Bank Act (AHP) (12 U.S.C. 1430(j)).

C. Community Lending Plan--Sec. 970.4

    Section 970.4 of the final rule requires each Bank to develop and 
adopt an annual Community Lending Plan pursuant to Sec. 936.6 of the 
Finance Board's Community Support Regulation (12 CFR 936.6). As further 
discussed below, a Bank's Community Lending Plan shall contain 
quantitative community lending performance goals, and the initiatives 
and incentives the Bank intends to offer to promote community lending 
and affordable housing finance by the Bank's borrowers.
1. Proposed Budget and Strategy Process
    The final rule does not adopt the budget and strategy process for 
establishing community lending goals that was set forth in the proposed 
rule. Proposed Sec. 970.3 would have authorized the Banks to establish 
an annual budget for the cumulative discount the Bank intended to make 
available under its CIP and other CICA programs (excluding AHP) the 
Bank established. The budget was to be based on the Bank's projected 
annual totals of CIP advances and other CICA advances that the Bank 
intended to make, and the extent to which the Bank intended to provide 
a pricing discount, if any, for such other CICA advances. If a Bank 
chose to establish a budget, the Bank was urged to establish standards 
for allocating the discount among specific types of eligible community 
lending activities. In the absence of such a budget, the Bank was 
required to fund requests from qualified borrowers for any advances 
that otherwise met the requirements of the Bank's CIP or any other CICA 
program the Bank offered. The proposed rule also would have required 
each Bank to establish a strategy, after consultation with the Bank's 
Advisory Council and economic development organizations in the Bank's 
district, for providing CIP advances to support financing for community 
lending that is otherwise not generally available, or is available at

[[Page 65538]]

lower levels or under less attractive terms.
    The proposal was meant to encourage the Banks to engage in a 
deliberate decisionmaking process about how much community lending 
credit they intended to make available each year, through their CIP and 
other CICA programs, and the kinds of projects to which that credit 
should be directed. As discussed above, the Banks' community lending 
efforts to date have been through volume lending under the CIP in 
support of home mortgage loans, to the relative exclusion of economic 
development financing. The Banks' concentration on volume funding of 
CIP-eligible home mortgage loans may have been encouraged by the CIP 
target system established in the past by the Finance Board, which was 
based on a Bank's average annual outstanding CIP advances. The Finance 
Board wishes to reverse this trend and to shift the Banks' focus from 
volume of CIP lending to maximizing the impact of individual advances. 
The proposed rule made clear that each Bank had authority to determine 
the appropriate amount of CIP credit to make available on an annual 
basis. However, the Finance Board believed that the authority to limit 
the amount of available CIP credit imposed an obligation for the Bank 
to target how the opportunity cost associated with CIP advances is to 
be used most effectively in relation to the kinds of CIP projects the 
Bank funds.
    One Bank commenter specifically supported the necessity of having a 
Bank System-wide basis for determining the dollar value of the discount 
for specific advances, in order to ensure that all of the Banks budget 
their cumulative discounts consistently, regardless of the actual CICA 
programs and discounts offered. The commenter stated that capital 
limitations should be included as a factor which Banks could consider 
in the cumulative discount budgeting process, since CIP and other CICA 
advances must be funded under the statutory 20-to-1 capital leverage 
limits, just as regular advances are funded. See id. section 
1426(b)(2). One Bank commenter added that it should be clarified that 
the Banks are dependent on lenders to decide whether to originate 
specific types of loans and to finance them with Bank advances and, 
therefore, the Banks should have flexibility to adjust their budgets in 
response to changing market realities.
    Other commenters stated that the budget dollar amount selected by 
the Bank would be an inaccurate and unrelated measure of a Bank's 
commitment to community lending and should not be used by the Finance 
Board as a proxy for such lending. Commenters claimed that it would be 
nearly impossible for the Banks to demonstrate that a CICA advance to 
support projects is ``otherwise not generally available or is available 
at lower levels or under less attractive terms.'' A Bank commenter 
questioned how the Finance Board would treat Banks that do not 
``spend'' all of their annual CICA budget, or spend more or budget less 
than the Finance Board desires. Another commenter expressed concern 
that the proposed annual budget requirement could result in a Bank 
having to make all of its advances at cost, without any profit, which 
would be burdensome and unworkable. One commenter also noted that the 
proposed budget requirement could create uncertainty rather than a 
stable source of discounted funding for eligible projects. For example, 
if the volume of CICA advances were to decline, discounts offered near 
the end of the budget period may be more significant that those offered 
earlier in the year in order for the Banks to fulfill their volume or 
discount quota under the proposed rule. Conversely, in order to meet 
volume or discount quota, Banks may offer aggressive discounts early in 
the year, to the detriment of worthy projects needing funding later in 
the year that may not receive as favorable terms.
    A Bank commenter recommended deletion of the proposed provision 
that in determining projected annual totals for CIP and other CICA 
program advances, a Bank should take into account its earnings, fearing 
that this would become the primary measure for establishing a CICA 
budget, rather than taking into account market conditions, product 
demand, and other variables that typically are considered in developing 
budget projections.
    Several Bank commenters suggested that the proposed requirement 
that the Bank must fund CICA advance requests in the absence of a CICA 
budget adopted by the Bank be deleted as inconsistent with safe and 
sound business practices, and contrary to the statutory language 
granting the Banks' boards of directors discretionary authority to deny 
or condition approval of an advance. See id. section 1429.
    Several commenters suggested instead that each Bank's board of 
directors, in consultation with its Advisory Council, should be 
required to establish specific annual measurable goals or performance 
standards for CIP and CICA advances, such as volume targets or dollar 
targets, based on assessment of critical community lending needs in the 
Bank's district. One Bank commenter suggested evaluating a Bank's CICA 
performance taking into account its marketing efforts, technical 
assistance activities and other information on CICA programs.
    A commenter suggested that the Banks be encouraged to adopt one 
CICA plan covering the AHP, CIP, Community Support and other CICA 
programs, rather than separate plans for each program.
    A commenter suggested clarification of the need for a CIP strategy 
statement where the Bank will not be establishing a budget but intends 
to fund all qualified requests for CIP advances. Several commenters 
supported requiring consultation with economic development 
organizations, in addition to Advisory Councils, in developing CIP 
strategies. Other commenters suggested that consultation with such 
organizations should be encouraged but not required, as the Advisory 
Councils are very capable of providing input in the development of CICA 
programs, and representatives of such organizations often are members 
of the Advisory Councils.
    The Finance Board believes that many of these comments have merit, 
and has sought in the final rule to address the concerns expressed by 
the commenters while maintaining the essence of the proposal in a less 
burdensome manner. Accordingly, the budget and strategy provisions of 
proposed Sec. 970.3 have not been adopted in the final rule. Instead, a 
number of the comments have been incorporated into the final rule 
through amendment of Sec. 936.6 of the Finance Board's Community 
Support Regulation, as further discussed below.
2. Community Lending Plan
    There is already established in the Finance Board's Community 
Support Regulation (12 CFR 936) a requirement that the Banks provide 
technical assistance and engage in outreach to their members for 
affordable housing and certain community lending. See id. Sec. 936.6. 
The final rule amends Sec. 936.6 to require the Banks to expand the 
scope of the existing marketing activities required under their 
Community Support Programs to encourage community lending by their 
borrowers, and include in their Community Support Programs an annual 
Community Lending Plan containing quantitative community lending 
performance goals. As further discussed below, ``community lending'' is 
defined in the final rule as ``providing financing for economic 
development projects for targeted beneficiaries.'' See Sec. 970.3.
    Specifically, the final rule amends Sec. Sec. 936.6(a) and (b) of 
the Community Support Regulation (to be codified in

[[Page 65539]]

Sec. 936.6(a)), to provide that a Bank's Community Support Program 
should:
    (1) Promote and expand affordable housing finance;
    (2) Encourage members to increase their community lending and 
affordable housing finance activities by providing incentives, as 
provided therein;
    (3) Include an annual Community Lending Plan, approved by the 
Bank's board of directors and subject to modification, which shall 
require the Bank to:
    (i) Conduct market research in the Bank's district;
    (ii) Describe how the Bank will address the identified credit needs 
and market opportunities in the Bank's district for community lending;
    (iii) Consult with its Advisory Council and with members, nonmember 
borrowers, and public and private economic development organizations in 
the Bank's district in developing and implementing its Community 
Lending Plan; and
    (iv) Establish quantitative community lending performance goals.
    The Community Lending Plan is intended not as a burden, but as a 
tool to assist the Banks in identifying credit needs and business 
opportunities within the Bank's district and in crafting viable 
business responses to those needs and opportunities. Market research is 
the methodology through which the Banks may discover the opportunities 
available and thereby may develop an informed Community Lending Plan. 
No formal methodology is required by the final rule; each Bank, 
therefore, is responsible for determining what market research activity 
will be sufficient to enable the Bank to identify the community lending 
credit needs and market opportunities in its district and develop 
programs to address those needs and opportunities.
3. CICA Program Information Dissemination
    In the proposed rule, the Finance Board requested comment on how 
information about a Bank's CIP and other CICA programs could best be 
disseminated to Bank members and nonmember borrowers, as well as to 
other interested members of the public. See 63 FR 25719. Several 
commenters stated that existing Bank information dissemination 
procedures under the Banks' other affordable housing and community 
lending programs are adequate for CICA purposes. The Finance Board 
agrees with these commenters and has included in the final rule a CICA 
information dissemination requirement as a part of the existing 
Community Support information dissemination process. Specifically, the 
final rule amends Sec. 936.6(c) of the Finance Board's Community 
Support Regulation (to be codified in Sec. 936.6(b)) to require that 
the Banks provide annually to each of their members a written notice:
    (1) Identifying CICA programs and other Bank activities that may 
provide opportunities for a member to meet the community support 
requirements and to engage in community lending; and
    (2) Summarizing community lending and affordable housing activities 
undertaken by members, nonmember borrowers, nonprofit housing 
developers, community groups, or other entities in the Bank's district, 
that may provide opportunities for a member to meet the community 
support requirements and to engage in community lending.

D. Community Investment Cash Advance Programs--Sec. 970.5

1. Types of CICA Programs
    The final rule defines a ``CICA program'' as a Bank's AHP, CIP, RDA 
or UDA program using any combination of the standards specified in 
Sec. 970.3, and any other program for community lending offered by a 
Bank using standards other than those specified in Sec. 970.3, with 
prior Finance Board approval. See Sec. 970.3.
2. ``Community Lending''
    Section 970.5 of the final rule provides that Bank advances offered 
under CICA programs must be made for ``community lending'' and eligible 
housing projects at the appropriate ``targeted income levels.'' See 
also 12 CFR 935.1 (as amended by the final rule) (definition of 
``community investment cash advance''). ``Community lending'' is a new 
term in the final rule, which is defined as ``providing financing'' for 
``economic development projects'' for ``targeted beneficiaries.'' See 
Sec. 970.3.
    In response to a commenter, the Finance Board wishes to clarify 
that CICA loans may be used for affordable housing, but that only the 
CIP and AHP CICA programs have targeting requirements for affordable 
housing under CICA. The fact that CICA loans may be made for targeted 
economic development financing does not negate the fact that CICA loans 
also may be made for affordable housing. CICA loans also may be used 
for mixed-use projects involving both community lending and affordable 
housing, although only the community lending portion of the project 
would be subject to targeting under CICA (except for CIP projects). See 
Sec. 970.5(b). Nothing in this final rule diminishes the Banks' 
authority to provide advances to fund loans for affordable housing 
projects pursuant to their regular advances authority under section 
10(a) of the Bank Act. See 12 U.S.C. 1430(a).
    In the proposed rule, the Finance Board requested comment on 
defining targeted income levels for CICA programs based upon area 
median income data other than that published annually by HUD. See 63 FR 
25720. A number of commenters favored allowing the Banks to choose 
among the median income standards identified in the Finance Board's AHP 
regulation (12 CFR 960.1). Accordingly, targeted income levels in the 
final rule are based on the ``median income for the area,'' as defined 
in Sec. 970.3, consistent with the definition in the AHP regulation, 
which will provide uniformity between the AHP and other CICA programs. 
In addition, in response to commenters, the median income for the area 
may be adjusted for family size, rather than just for a family of four.
    The final rule specifically defines the component terms of 
``community lending,'' as further discussed below.
a. ``Providing financing''
    ``Providing financing'' means:
    (1) Originating loans;
    (2) Purchasing a participation interest, or providing financing to 
participate, in a loan consortium for CICA-eligible housing or economic 
development projects;
    (3) Making loans to entities that, in turn, make loans for CICA-
eligible housing or economic development projects;
    (4) Purchasing mortgage revenue bonds or mortgage-backed 
securities, where all of the loans financed by such bonds and all of 
the loans backing such securities, respectively, meet the eligibility 
requirements of the CICA program under which the member or nonmember 
borrower receives an advance;
    (5) Creating or maintaining a secondary market for loans, where all 
such loans are mortgage loans meeting the eligibility requirements of 
the CICA program under which the member or nonmember borrower receives 
an advance;
    (6) Originating CICA-eligible loans within 3 months prior to 
receiving the CICA advance; or
    (7) purchasing low-income housing tax credits. See Sec. 970.3.
    Bank commenters specifically supported the inclusion of purchasing 
qualifying mortgage revenue bonds and mortgage-backed securities, and 
creating

[[Page 65540]]

or maintaining a secondary market for qualifying loans. The financing 
techniques listed in paragraphs (2), (3), (6) and (7) were added in 
response to commenters' suggestions, in order to provide additional 
flexibility for the Banks to use various financing strategies to 
support community lending.
    A Bank commenter recommended that the proposed list of eligible 
financing techniques be revised to permit other appropriate activities 
as determined by the Bank, which the Bank may submit to the Finance 
Board for approval. The Finance Board believes that the list of 
eligible activities in the final rule, which has been expanded to 
include commenters' suggestions, is sufficiently inclusive to take into 
account anticipated community lending financing.
b. ``Economic development projects''
    ``Economic development projects'' are:
    (1) Commercial, industrial, manufacturing, social service, and 
public facility projects and activities; and
    (2) Public or private infrastructure projects, such as roads, 
utilities, and sewers. See Sec. 970.3.
    In response to a Bank comment, the final rule adds industrial 
projects, which were not included in the proposed rule.
c. ``Targeted beneficiaries''
    ``Targeted beneficiaries'' are beneficiaries determined by the 
geographical area in which a project is located (Geographically Defined 
Beneficiaries), by the individuals who benefit from a project as 
employees or service recipients (Individual Beneficiaries), or by the 
nature of the project itself (Activity Beneficiaries). See Sec. 970.3. 
A list of targeted beneficiaries appeared under the definition of 
``benefit'' in Sec. 970.4 of the proposed rule. Targeted beneficiaries 
as defined in the final rule are composed of three groups:
    (1) Geographically Defined Beneficiaries:
    (i) The project is located in a neighborhood with a median income 
at or below the targeted income level. Thus, for CIP-funded projects, 
the targeted income level must be 80 percent of area median income; for 
RDA-funded projects (defined in Sec. 970.3), the targeted income level 
is 115 percent of area median income; and for UDA-funded projects 
(defined in Sec. 970.3), the targeted income level is 100 percent of 
area median income;
    (ii) The project is located in a rural Champion Community, or a 
rural Empowerment Zone or rural Enterprise Community, as designated by 
the Secretary of the U.S. Department of Agriculture (USDA);
    (iii) The project is located in an urban Champion Community, or an 
urban Empowerment Zone or urban Enterprise Community, as designated by 
the Secretary of the Department of Housing and Urban Development (HUD);
    (iv) The project is located in an Indian area, as defined by the 
Native American Housing Assistance and Self-Determination Act of 1996 
(25 U.S.C. 4101 et seq.), Alaskan Native Village, or Native Hawaiian 
Home Land;
    (v) The project is located in an area and involves a property 
eligible for a Brownfield Tax Credit;
    (vi) The project is located in an area affected by a military base 
closing and is a ``community in the vicinity of the installation'' as 
defined by the Department of Defense at 32 CFR part 176;
    (vii) The project is located in a designated community under the 
Community Adjustment and Investment Program as defined under 22 U.S.C. 
290m-2;
    (viii) The project is located in a Federally declared disaster 
area; or (ix) the project is located in a state declared disaster area, 
or qualifies for assistance under another Federal or state targeted 
economic development program, approved by the Finance Board.
    One Bank commenter suggested that projects located in state 
declared disaster areas be included as eligible for CICA advances. 
Another Bank commenter recommended including state-designated 
Empowerment and Enterprise Zones in order to provide greater 
flexibility in addressing local needs of the targeted income group. 
Other commenters suggested allowing the Banks the discretion to select 
other areas not listed in the rule that are designated for targeted 
economic development. In response to these comments, paragraph (ix) was 
added to enable the Banks to fund projects located in state declared 
disaster areas, or qualifying for assistance under another Federal or 
state targeted economic development program not specifically listed in 
the final rule, with prior approval of the Finance Board. This will 
enable the Finance Board to determine, on a case-by-case basis, whether 
specific state declared disaster areas or economic development programs 
are defined by specific standards and are sufficiently targeted to be 
considered a CICA program.
    (2) Individual Beneficiaries:
    (i) The annual salaries for at least 51 percent of the permanent 
full-and part-time jobs, computed on a full-time equivalent basis, 
created or retained by the project, other than construction jobs, are 
at or below the targeted income level (job creation or retention 
project); or
    (ii) At least 51 percent of the families who otherwise benefit from 
(other than through employment), or are provided services by, the 
project have incomes at or below the targeted income level.
    The Finance Board requested comment in the proposed rule on whether 
measuring the salaries of jobs created by a project is an effective way 
to determine whether the project benefits families with incomes at or 
below a targeted income level. See 63 FR 25720. Several Bank commenters 
supported measuring such salaries as a reasonable method of determining 
whether a project benefits households with incomes at or below a 
targeted income level. A Bank commenter noted that jobs with modest 
salaries are typically entry level or for people with limited job 
skills, and are an important link in upward mobility of low-income 
people. Other commenters stated that the proposed job salary measure 
gives the appearance of promoting lower-paying jobs when it would be 
preferable to promote an increase in the number and quality of 
employment opportunities, and could prevent worthy projects that could 
not meet the standard from being eligible for CICA funds.
    Some commenters recommended lowering the target for eligible job 
creation or retention projects from 75 percent in the proposed rule 
(see 63 FR 25724 (definition of ``benefit'')) to 50 or 51 percent. 
Commenters stated that projects meeting the lower standard still would 
be creating or retaining a significant number of jobs in the community, 
and would provide more career and income potential and may be more 
viable, given the mix of incomes, than projects with a higher 
percentage of the jobs at or below the targeted income level. 
Commenters stated that a 50 percent standard would maintain consistency 
with other targets in the proposed rule, as well as with targets used 
by other Federal housing and economic development programs. One 
commenter suggested changing the target to a ``significant number'' of 
jobs created or retained by the project, with the threshold number 
determined by each Bank in its community investment-affordable housing 
plan. Another Bank commenter recommended that the Banks have the 
discretion to set the target for the number of jobs created or retained 
by the project, taking into account the individual needs of the Bank's 
district.

[[Page 65541]]

    The final rule retains the proposed measure of salaries of jobs 
created or retained by a project which, as noted by a number of 
commenters, should be an effective method to determine whether the 
project benefits families with incomes at or below a targeted income 
level. However, in response to the comments, the final rule changes the 
target for job creation or retention projects in the proposed rule from 
75 percent to 51 percent of the total number of jobs created or 
retained. The 51 percent standard should ensure that projects eligible 
for CICA funding have a substantial number of jobs at the targeted 
salary level, while not excluding a large number of worthy projects in 
credit needy areas. The 51 percent standard also is consistent with the 
targeting requirements of other Federal housing and economic 
development programs.
    (3) Activity Beneficiaries:
    Projects that qualify as small businesses, as defined in 
Sec. 970.3.
    (4) Other Targeted Beneficiaries:
    A Bank may designate, with the prior approval of the Finance Board, 
other targeted beneficiaries for its community lending.
    A number of commenters were concerned that the list of CICA-
eligible projects in the definition of ``benefit'' in the proposed rule 
was too limited and did not allow the Banks flexibility to fund other 
types of worthy projects, thereby limiting innovation by the Banks. The 
final rule addresses this concern by allowing the Banks, with the prior 
approval of the Finance Board, to designate other types of projects as 
eligible for CICA funding.
    Section 970.3 of the final rule further provides that only targeted 
beneficiaries identified in paragraphs (1)(i) through (iv), and (2)(i) 
and (ii) are eligible for CIP advances. This is necessary in order to 
ensure satisfaction of the statutory CIP targeting requirements. See 12 
U.S.C. 1430(i)(2).
3. AHP
    Section 970.5(a)(1) of the final rule reiterates the statutory 
requirement that each Bank shall offer an AHP, in accordance with part 
960 of the Finance Board's regulations. See 12 U.S.C. 1430(j); 12 CFR 
part 960.
4. CIP
    Section 970.5(a)(2) of the final rule provides that each Bank shall 
offer a CIP, as required by statute (see 12 U.S.C. 1430(i)), to 
``provide financing'' for ``housing projects'' and for eligible 
``community lending'' at the appropriate ``targeted income levels.'' 
Under the statute, the Banks are required to provide funding for 
members who, in turn, ``provide loans'' to finance CIP-eligible 
activities. See id. Most of the Banks have implemented this statutory 
requirement by providing advances to members to fund the origination of 
loans financing CIP-eligible activities. Consistent with the proposed 
rule, the final rule adopts a more expansive reading of the meaning of 
the statutory language authorizing CIP advances to be used by members 
to ``provide loans.'' See id. section 1430(i)(2). Specifically, the 
final rule authorizes CIP advances and other CICA advances to be used 
not only to fund CICA-eligible loan originations, but also for other 
types of financing activities as set forth in the definition of 
``providing financing'' in Sec. 970.3. The Finance Board believes that 
these are additional means of providing loans for the financing of CIP- 
and other CICA-eligible activities, in accordance with the intent of 
the statute, because they create liquidity in the market for CIP- and 
other CICA-eligible loans.
    Section 970.3 of the final rule defines ``housing projects'' to 
mean projects or activities that involve the purchase, construction or 
rehabilitation of, or predevelopment financing for:
    (1) Individual owner-occupied housing units, each of which is 
purchased or owned by a family with an income at or below the targeted 
income level;
    (2) Projects involving multiple units of owner-occupied housing in 
which at least 51 percent of the units are owned or are intended to be 
purchased by families with incomes at or below the targeted income 
level;
    (3) Rental housing where at least 51 percent of the units in the 
project are occupied by, or the rents are affordable to, families with 
incomes at or below the targeted income level; or
    (4) Manufactured housing parks where:
    (i) At least 51 percent of the units in the project are occupied 
by, or the rents are affordable to, families with incomes at or below 
the targeted income level; or
    (ii) The project is located in a neighborhood with a median income 
at or below the targeted income level.
    In response to comments, the final rule adds as eligible CIP 
projects any projects involving rehabilitation of owner-occupied 
housing units, construction of rental housing and manufactured housing 
parks, or predevelopment financing for housing projects, which were 
omitted from the proposed rule.
    The final rule clarifies in paragraph (2) that projects involving 
multiple units of owner-occupied housing, i.e., condominium, 
cooperative and single-family detached housing projects, that meet the 
51 percent test are eligible for CIP funding. Thus, single-family 
detached owner-occupied housing projects with a mix of incomes, Planned 
Unit Developments, and other mixed income projects, would be eligible 
for CIP advances.
    In response to comments, the final rule changes the requirement in 
the proposed rule that ``substantially all'' of the resident families 
in a manufactured housing park have incomes at or below the targeted 
incomes, to a requirement that at least 51 percent of the units in the 
project are occupied by, or the rents are affordable to, families 
meeting the targeted income level. This makes the occupancy/
affordability standard for manufactured housing parks consistent with 
the 51 percent standard for rental housing projects, and is a clearer 
standard to meet than the proposed standard.
    Most occupants of manufactured housing parks own their homes but 
rent the space on which their homes are located. Verification of income 
is not a usual practice in the course of renting space to the owner of 
a manufactured home. Therefore, it is difficult to verify that the 
resident families in a manufactured housing park are income-eligible. 
The criterion in the final rule that the manufactured housing park be 
located in a neighborhood with a median income at or below the targeted 
income level is intended as a proxy for the requirement that each 
resident family be income-eligible.
    The ``targeted income level'' for CICA advances provided under CIP 
for housing projects and economic development projects is incomes at or 
below 115 percent and 80 percent of the median income for the area, 
respectively, both as adjusted for family size in accordance with the 
methodology of the applicable area median income standard or, at the 
option of the Bank, for a family of four. See id.
5. RDA and UDA Programs
    Section 970.5(a)(3) of the final rule provides that each Bank may 
offer RDA or UDA programs, or both, for community lending using the 
targeted beneficiaries or targeted income levels specified in 
Sec. 970.3, without prior Finance Board approval. ``RDA programs'' and 
``UDA programs'' are programs offered by a Bank for community lending 
in ``rural'' or ``urban'' areas, respectively. See Sec. 970.3. 
``Targeted income levels'' for RDA and UDA programs, where applicable, 
are incomes at or below 115 percent and 100 percent of the median 
income for

[[Page 65542]]

the area, respectively, both as adjusted for family size in accordance 
with the methodology of the applicable area median income standard or, 
at the option of the Bank, for a family of four. See Sec. 970.3. These 
income limits are higher than those required under CIP or AHP, and are 
intended to benefit families not targeted by those programs. Due to 
generally higher median incomes in urban areas, the UDA income 
eligibility limit, although numerically lower than the RDA income 
eligibility limit, reaches families with higher incomes.
    A number of commenters specifically supported the income limits 
established for RDA and UDA programs. Several Bank commenters stated 
that these income limits do not go far enough to address the income 
level imbalances between rural and urban areas. Several commenters 
suggested that the RDA and UDA programs both should have the same 
income limit of 115 percent, on the basis that while income ranges are 
lower in rural areas, urban areas have higher costs of living. A trade 
association commenter supported the establishment of such programs 
generally, but expressed concern that the higher income limits of these 
programs would divert financing from lower income and minority 
neighborhoods to neighborhoods where residents are either mostly 
middle-income or in the upper range of moderate-income. If a Bank 
determines that the higher income limits of the RDA or UDA programs are 
not appropriate for a particular CICA program it wishes to offer in its 
district, under the final rule the Bank may adopt other income limits 
upon prior Finance Board approval. See Sec. 970.3 (definition of 
``targeted income level'').
    Section 970.3 of the final rule defines ``urban area'' as: (1) a 
unit of general local government with a population of more than 25,000; 
or (2) an unincorporated area within a Metropolitan Statistical Area 
(MSA) that does not qualify for housing or economic development 
assistance from the USDA.
    A Bank commenter recommended that ``rural area'' be defined as any 
town with a population of 30,000 that is not attached to a central 
city. Another Bank commenter suggested deletion of the proposed 30,000 
reference, recommending instead that ``rural area'' be defined as any 
county located outside an MSA, consistent with the definition in other 
Federal housing programs. In response to these comments, ``rural area'' 
is defined in Sec. 970.3 as: (1) a unit of general local government 
with a population of 25,000 or less; (2) an unincorporated area outside 
an MSA; or (3) an unincorporated area within an MSA that qualifies for 
housing or economic development assistance from the USDA. The 
population number of 30,000 was changed to 25,000 in order to be 
consistent with the definition of rural used in USDA housing programs. 
Paragraph (3) of the definition takes into account a comment that the 
proposed definition should not have excluded large areas within MSAs 
that are predominantly rural in nature.
6. Other CICA Programs Requiring Finance Board Approval
    Section 970.5(a)(4) of the final rule provides that each Bank may 
offer CICA programs for community lending using targeted beneficiaries 
and targeted income levels other than those specified in Sec. 970.3, 
established by the Bank with the prior approval of the Finance Board. 
In response to comments, this provision is intended to give the Banks 
greater flexibility, in response to market needs and demands, to offer 
CICA programs that may not use one of the enumerated targeted 
beneficiaries or targeted income levels included in the final rule, to 
better reflect the needs of the individual Bank's district.
7. Mixed-Use Projects
a. CICA programs other than CIP
    Section 970.5(b)(1) of the final rule provides that for projects 
funded under CICA programs other than CIP, involving a combination of 
housing projects and economic development projects, only the economic 
development components of the project must meet the appropriate 
targeted income level for the respective CICA program.
b. CIP programs
    Section 970.5(b)(2) of the final rule provides that for projects 
funded under CIP, both the housing and economic development components 
of the project must meet the appropriate targeted income levels. This 
is necessary to ensure satisfaction of the statutory CIP targeting 
requirements for housing and economic development projects. See 12 
U.S.C. 1430(i)(2).
8. Refinancing
    Section 970.5(c) of the final rule provides that CICA advances 
other than AHP may be used to refinance economic development and 
housing projects, provided that any equity proceeds of the refinancing 
of rental housing and manufactured housing park projects are used to 
rehabilitate the projects or to preserve affordability for current 
residents.
    A trade association commenter specifically supported allowing the 
use of CICA advances for refinancing of economic development projects. 
Several commenters opposed the proposed restriction on the use of CICA 
advances for refinancing as unnecessary and difficult to enforce from a 
compliance standpoint. One commenter stated that the restriction in 
proposed Secs. 970.5(d)(2) and 970.7(d) on owner-occupied refinancing 
would penalize low-income families vis a vis upper-income families who 
face no such limitations on their right to refinance their homes. The 
Finance Board agrees that targeted homeowners should be able to take 
advantage of all the incidents of home ownership, including accessing 
any equity that has accumulated, that other homeowners may use. 
Accordingly, the proposed refinancing restriction for owner-occupied 
housing has been omitted from the final rule. In response to a 
commenter's request for clarification, the final rule's reference to 
``any'' equity proceeds makes clear that there is no restriction on 
refinancing that results in no ``equity proceeds,'' i.e., refinancing 
with no cash out to achieve a lower debt service. The Finance Board 
believes that the restriction on refinancing of rental housing and 
manufactured housing park projects is necessary to ensure that 
occupants of such projects are not adversely affected by a refinancing, 
such as taking equity out of a project resulting in an increase in 
rents to cover the repayment of the financing.
9. Pricing and Availability of CICA Advances
a. Advances to members
    Consistent with proposed Sec. 970.7(f)(1), Sec. 970.5(d)(1) of the 
final rule provides that for CICA programs other than AHP and CIP, a 
Bank shall price advances to members as provided in Sec. 935.6 of the 
Finance Board's Advances Regulation (12 CFR 935.6), and may price such 
advances at rates below the price of advances of similar amounts, 
maturities and terms made pursuant to section 10(a) of the Bank Act (12 
U.S.C. 1430(a)). Permitting the Banks to price such CICA advances as 
regular advances may provide the Banks with a financial incentive to 
make such advances. Banks still have the option to provide reduced 
pricing for such advances in order to provide borrowers with a 
financial incentive to undertake community lending.

[[Page 65543]]

b. Pricing of CIP advances
    Consistent with the statutory requirement, Sec. 970.5(d)(2) of the 
final rule provides that the price of CICA advances made under CIP 
shall not exceed the Bank's cost of issuing consolidated obligations of 
comparable maturity, taking into account reasonable administrative 
costs. See id. section 1430(i)(1). The CIP pricing provision formerly 
appeared at Sec. 935.7 of the Finance Board's Advances Regulation (12 
CFR 935.7).
    Section 970.5(f)(1) of the proposed rule would have allowed the 
Banks, in pricing CIP advances, to take into account only those 
administrative costs necessary for the operation of the CIP. A trade 
association commenter specifically supported this pricing restriction, 
stating that it would ensure that the prices of CIP advances are lower 
than prices of other similar regular advances. A Bank commenter pointed 
out that it currently prices CIP advances by adding a minimal markup 
based on the overall cost of putting advances on its books, not based 
on unique CIP costs. The commenter noted that if unique CIP costs are 
singled out and spread only over the relatively small CIP advances 
portfolio, the resulting price markup may actually be greater than the 
current CIP markup. In response to the latter comment, the final rule 
does not include the pricing restriction of the proposed rule.
    In the proposed rule, the Finance Board requested comment on 
whether the rule should contain a list of factors that could be the 
basis for deeper CIP discounts by the Banks. See 63 FR 25721. The 
proposed rule noted that several Banks vary CIP pricing based on the 
kinds of projects being financed and the income levels of the 
households benefiting from the project, such as projects that benefit 
families with incomes at or below 80 percent of the area median income. 
One Bank provided lower pricing for members that have been assigned a 
rating of outstanding under the Community Reinvestment Act. See 12 
U.S.C. 2901 et seq. A Bank commenter supported inclusion of such a list 
in the rule in order to provide special incentives for borrowers to use 
CIP advances for projects that are difficult to develop. A trade 
association commenter and Bank commenter supported inclusion of a list 
of such factors in the rule as long as adoption of the factors was 
optional for the Banks. A number of Bank commenters opposed inclusion 
of a list of such factors, stating that the adoption of such pricing 
factors should be left to the discretion of the Banks in order to 
ensure greater flexibility and creativity on the part of the Banks.
    The Finance Board found these comments to be extremely useful. In 
response to these comments, Sec. 970.5(d)(6) of the final rule 
authorizes each Bank to establish a fund (Discount Fund), as discussed 
further below, which the Bank may use to reduce the price of CIP or 
CICA advances below the advance prices provided by part 970. The 
Finance Board believes the Discount Fund authorized by the final rule 
will be a more productive method of addressing the points raised by the 
commenters than the inclusion of a list of factors for a Bank to 
consider contained in the proposal.
c. Pricing of AHP advances
    Section 970.5(d)(3) of the final rule provides that a Bank shall 
price CICA advances made under AHP in accordance with parts 935 and 960 
of the Finance Board's regulations (12 CFR parts 935, 960).
d. Advances to nonmember borrowers
    Section 970.5(d)(4)(i) of the final rule provides that a Bank may 
offer advances under CICA programs to nonmember borrowers at the Bank's 
option, except for AHP and CIP, which are available only to members.
    Consistent with proposed Sec. 970.7(f)(2), Sec. 970.5(d)(4)(ii) of 
the final rule provides that a Bank shall price advances to nonmember 
borrowers as provided in Sec. 935.24 of the Finance Board's Advances 
Regulation (12 CFR 935.24), and may price such advances at rates below 
the price of advances of similar amounts, maturities and terms made 
pursuant to section 10b of the Bank Act (12 U.S.C. 1430b).
    A consumer mortgage trade association and a member thrift expressed 
their opinion that the Banks do not have authority to provide advances 
to nonmembers under section 10(j)(10) of the Bank Act. The trade 
association also stated that the rule would allow the Banks to compete 
with well-functioning private markets, thereby destabilizing those 
markets. The Finance Board disagrees.
    Section 10(j)(10) of the Bank Act provides that ``[n]o provision of 
this subsection or subsection (i) of this section shall preclude any 
Bank from establishing additional community investment cash advance 
programs or contributing additional sums to the Affordable Housing 
Reserve Fund.'' See id. section 1430(j)(10) (emphasis added). While 
advances under AHP and CIP are restricted by statute to members, 
section 10(j)(10) states that the Banks may establish ``additional'' 
community investment cash programs, i.e., programs in addition to those 
specified in the Bank Act. There is nothing in the plain language of 
section 10(j)(10) to suggest or require that Bank advances under 
``additional'' CICA programs be restricted solely to members. The 
Finance Board has determined that the statutory language is 
sufficiently broad to be reasonably interpreted to allow Bank lending 
to nonmembers, especially since the Banks already are authorized to 
lend to nonmember borrowers pursuant to section 10b of the Bank Act. 
See id. section 1430b. The final rule does not require that the Banks 
offer CICA programs to nonmember borrowers, but merely provides for 
such an option, if a Bank should choose to do so.
e. Pricing pass-through
    Section 970.5(d)(5) of the final rule provides that a Bank may 
require that borrowers receiving CICA advances pass through the benefit 
of any price reduction from regular advance pricing to their borrowers. 
This provision extends the pricing pass-through option for CIP advances 
in proposed Sec. 970.5(g) to all CICA advances, which was recommended 
by a trade association commenter. As suggested by commenters, the 
benefit of a price reduction may be passed through in a number of ways 
other than as a reduction in the interest rate on the end loan, such as 
through reduced fees or downpayment requirements on the end loan.
    The statutory provisions governing CIP do not require members that 
obtain CIP advances to pass on the benefit of the pricing differential 
between CIP advances and regular Bank advances to the owners or 
occupants of CIP-financed projects. See 12 U.S.C. 1430(i)(1). A 1996 
survey of the Banks' CIP pricing policies indicated that two Banks 
specifically required such a pass-through and four Banks encouraged a 
pass-through.
f. Discount Fund
    As discussed above, the Finance Board in the proposed rule 
requested comment on whether the rule should contain a list of factors 
that could be the basis for deeper CIP discounts by the Banks. See 63 
FR 25721. A number of commenters opposed including an exclusive list of 
such factors in the rule. In lieu of that approach, Sec. 970.5(d)(6) of 
the final rule provides that a Bank may establish a Discount Fund which 
the Bank may use to reduce the price of CIP or other CICA advances 
below the advance prices provided for by part 970. Price reductions 
made through the

[[Page 65544]]

Discount Fund must be made in accordance with a fair distribution 
scheme. This authority is intended to encourage the Banks to find 
sources of income both from within the Bank and from third party 
partners to be used to reduce the cost of financing for community 
lending. One Bank currently has established such a fund with monies 
received from a third party partner which the Bank uses to reduce the 
cost of CIP advances, with discounts below the CIP rate ranging from 50 
to 300 basis points for maturities up to 20 years.

E. Reporting--Sec. 970.6

    Section 970.6(a) of the final rule requires each Bank, by July 1, 
1999, to provide to the Finance Board an initial assessment of the 
credit needs and market opportunities in a Bank's district for 
community lending.
    Section 970.6(b) provides that, effective in 2000, each Bank 
annually shall provide to the Finance Board, on or before January 31, a 
Community Lending Plan (as outlined in Sec. 936.6(a) (as amended by 
this final rule)).
    Section 970.6(c) requires each Bank to provide such other reports 
concerning its CICA programs as the Finance Board may request from time 
to time.

F. Documentation--Sec. 970.7

    Section 970.7(a) of the final rule provides that each Bank shall 
require the borrower to certify to the Bank that each project funded by 
a CICA advance (other than AHP) meets the respective targeting 
requirements of the CICA program. Such certification shall include a 
description of how the project meets the requirements, and where 
appropriate, a statistical summary or list of incomes of the borrowers, 
rents for the project, or salaries of jobs created or retained. The 
certification requirement is based on current documentation practices 
employed by the Banks for their CIPs.
    Section 970.7(b) provides that for those CICA-funded projects that 
also receive funds from another targeted Federal economic development 
program that has income targeting requirements that are the same as, or 
more restrictive than, the targeting requirements of the applicable 
CICA program, the Bank shall permit the borrower to certify that 
compliance with the criteria of such Federal economic development 
program will meet the requirements of the respective CICA program.
    Section 970.7(c) provides that such certifications shall satisfy 
the Bank's obligations to document compliance with the CICA lending 
provisions of part 970. Finance Board examination of the Banks for 
compliance with part 970 will be satisfied by demonstration of 
compliance with the documentation requirements of Sec. 970.7. 
Examination as to whether any Bank's level of community lending is 
consistent with the carrying out of such Bank's mission would be 
undertaken pursuant to separate regulatory standards to be developed by 
the Finance Board in the future.
    Several commenters recommended that the rule include specific CICA 
documentation and monitoring requirements in order to avoid 
discouraging member participation due to lack of clear requirements as 
to any reporting and monitoring burdens. Another Bank commenter stated 
that the proposed rule contained reporting requirements that would 
discourage program users from participating in CICA programs. The 
documentation requirements contained in the final rule should provide 
the clarity requested by the commenter without being so burdensome as 
to discourage participation by borrowers in CICA programs.

G. Conforming Amendments to the Finance Board's Advances Regulation and 
Incentive Compensation Regulation

    The final rule makes several conforming amendments to other 
regulations. First, the final rule amends the Finance Board's Advances 
Regulation in order to make clear that a Bank may make long-term 
advances for the purpose of financing community lending and affordable 
housing finance activities that meet the requirements of a CICA 
program. Specifically, the final rule amends the existing definition of 
``residential housing finance assets'' in Sec. 935.1 of the Advances 
Regulation to include loans or investments financed by CICA advances. 
See 12 CFR 935.1 (as amended). The final rule also revises certain 
provisions of the Advances Regulation regarding the use of long-term 
advances under the CIP in order to make clear that these provisions 
apply to all CICA programs, not just the CIP. See id. 
Secs. 935.13(a)(5), 935.14(b)(2) (as amended). In addition, the final 
rule replaces the definition of ``Community Investment Program'' in the 
Advances Regulation with a new definition of ``Community Investment 
Cash Advance,'' which, as discussed above, includes advances made under 
CICA programs, including the CIP. See id. Sec. 935.1.
    Second, the final rule replaces a reference to CIP with a reference 
to CICA in Sec. 932.41(c)(2)(ii) of the Finance Board's Compensation 
Regulation, see id. Sec. 932.41(c)(2)(ii) (as amended by the final 
rule), and deletes references to ``growth'' in the activities to be 
considered to encourage quality over volume as the appropriate 
standard.

III. Regulatory Flexibility Act

    The final rule applies only to the Banks, which do not come within 
the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, see id. Sec. 605(b), the Finance Board 
hereby certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities.

List of Subjects

12 CFR Part 932

    Banks, Banking, Conflicts of interest, Elections, Ethical conduct, 
Federal home loan banks, Financial disclosure, Reporting and 
recordkeeping requirements.

12 CFR Part 935

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.

12 CFR Part 936

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

12 CFR Part 970

    Credit, Federal home loan banks, Housing, Reporting and 
recordkeeping requirements.
    Accordingly, chapter IX, title 12, Code of Federal Regulations, is 
hereby amended as set forth below:

SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

    1. The authority citation for part 932 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C. 
8101 et seq.

    2. Amend Sec. 932.41 by revising the first sentence of paragraph 
(c)(2)(ii) to read as follows:


Sec. 932.41  Compensation.

* * * * *
    (c) Incentive payments for Bank employees.
* * * * *
    (2) * * *
    (ii) At least fifty percent of the Bank President's incentive 
payment shall be based on the extent to which the Bank meets reasonable 
numerical performance targets established by the Bank's board of 
directors related to the

[[Page 65545]]

Bank's achievement of its housing finance mission, which shall include 
substantial consideration of innovative products directed at unmet 
credit needs, Community Investment Cash Advances (including Community 
Investment Program advances) as defined in Sec. 935.1 of this chapter, 
non-advance credit support and risk management products for members, as 
well as advances, including long-term advances. * * *
* * * * *

PART 935--ADVANCES

    1. The authority citation for part 935 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430, 
1430b, and 1431.

    2. Section 935.1 is amended by adding in alphabetical order the 
following definition of Community Investment Cash Advance, by removing 
the definition of Community Investment Program, and in the definition 
of Residential housing finance assets by republishing the introductory 
text and revising paragraph (4) to read as follows:


Sec. 935.1  Definitions.

* * * * *
    Community Investment Cash Advance or CICA means any advance made 
through a program offered by a Bank under section 1430 of the Act and 
parts 960 and 970 of this chapter to provide advances for community 
lending and affordable housing, including advances made under: a Bank's 
Rural Development Advance (RDA) program, offered under section 
1430(j)(10) of the Act; a Bank's Urban Development Advance (UDA) 
program, offered under section 1430(j)(10) of the Act; a Bank's 
Affordable Housing Program (AHP), offered under section 1430(j) of the 
Act; a Bank's Community Investment Program (CIP), offered under section 
1430(i) of the Act; or any other program offered by a Bank that meets 
the requirements of part 970 of this chapter.
* * * * *
    Residential housing finance assets means any of the following:
* * * * *
    (4) Loans or investments financed by advances made pursuant to a 
CICA program;
* * * * *


Sec. 935.7  [Removed and reserved]

    3. Section 935.7 is removed and reserved.
    4. Section 935.13 is amended by revising paragraph (a)(5) to read 
as follows:


Sec. 935.13  Restrictions on advances to members that are not qualified 
thrift lenders.

    (a) * * *
    (5) The requirements of paragraph (a)(2) of this section shall not 
apply to applications from non-savings association members for CICA 
advances.
* * * * *
    5. Section 935.14 is amended by revising paragraph (b)(2) to read 
as follows:


Sec. 935.14  Limitations on long-term advances.

* * * * *
    (b) * * *
    (2) Applications for CICA advances are exempt from the requirements 
of paragraph (b)(1) of this section.

PART 936--COMMUNITY SUPPORT REQUIREMENTS

    1. The authority citation for part 936 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3)(B), 1422b(a)(1), 1429, and 
1430.

    2. Amend Sec. 936.1 by revising paragraphs (g) and (h) to read as 
follows:


Sec. 936.1  Definitions.

* * * * *
    (g) CICA or Community Investment Cash Advance has the same meaning 
as in Sec. 935.1 of this chapter.
    (h) Community lending has the same meaning as in Sec. 970.3 of this 
chapter.
* * * * *
    3. Amend Sec. 936.5 by revising paragraph (e) to read as follows:


Sec. 936.5  Restrictions on access to long-term advances.

* * * * *
    (e) CICA. A member that is subject to a restriction on access to 
long-term advances under this part shall not be eligible to participate 
in a CICA program offered under parts 960 and 970 of this chapter. The 
restriction in this paragraph (e) shall not apply to CICA applications 
or funding approved before the date the restriction is imposed.
* * * * *
    4. Amend Sec. 936.6 by revising paragraphs (a) introductory text, 
(a)(2) and (a)(4), removing paragraph (b), redesignating paragraph (c) 
as paragraph (b) and revising it, and adding paragraph (a)(5) to read 
as follows:


Sec. 936.6  Bank community support programs.

    (a) Requirement. Consistent with the safe and sound operation of 
the Bank, each Bank shall establish and maintain a community support 
program. A Bank's community support program shall:
* * * * *
    (2) Promote and expand affordable housing finance;
* * * * *
    (4) Encourage members to increase their community lending and 
affordable housing finance activities by providing incentives such as 
awards or technical assistance to nonprofit housing developers or 
community groups with outstanding records of participation in community 
lending or affordable housing finance partnerships with members;
    (5) Include an annual Community Lending Plan, approved by the 
Bank's board of directors and subject to modification, which shall 
require the Bank to:
    (i) Conduct market research in the Bank's district;
    (ii) Describe how the Bank will address identified credit needs and 
market opportunities in the Bank's district for community lending;
    (iii) Consult with its Advisory Council and with members, nonmember 
borrowers, and public and private economic development organizations in 
the Bank's district in developing and implementing its Community 
Lending Plan; and
    (iv) Establish quantitative community lending performance goals.
    (b) Notice. A Bank shall provide annually to each of its members a 
written notice:
    (1) Identifying CICA programs and other Bank activities that may 
provide opportunities for a member to meet the community support 
requirements and to engage in community lending; and
    (2) Summarizing community lending and affordable housing activities 
undertaken by members, nonmember borrowers, nonprofit housing 
developers, community groups, or other entities in the Bank's district, 
that may provide opportunities for a member to meet the community 
support requirements and to engage in community lending.
    5. Revise Sec. 936.7 to read as follows:


Sec. 936.7  Reports.

    Each Advisory Council annual report required to be submitted to the 
Finance Board pursuant to section 10(j)(11) of the Act shall include an 
analysis of the Bank's community lending and affordable housing 
activities.
    6. Subchapter F, consisting of part 970, is added to chapter IX to 
read as follows:

[[Page 65546]]

SUBCHAPTER F--COMMUNITY INVESTMENT

PART 970--Community Investment Cash Advance Programs

Sec.
970.1  Scope.
970.2  Purpose.
970.3  Definitions.
970.4  Community Lending Plan.
970.5  Community Investment Cash Advance Programs.
970.6  Reporting.
970.7  Documentation.

    Authority: 12 U.S.C. 1422b(a)(1) and 1430.


Sec. 970.1  Scope.

    Section 10(j)(10) of the Act authorizes the Banks to offer 
Community Investment Cash Advance (CICA) programs. (See 12 U.S.C. 
1430(j)(10)). This part establishes requirements for all CICA programs 
offered by a Bank, except for a Bank's Affordable Housing Program 
(AHP), which is governed specifically by part 960 of this chapter.


Sec. 970.2  Purpose.

    The purpose of this part is to identify community lending projects 
that the Banks may support through the establishment of CICA programs 
under section 10(j)(10) of the Act. (12 U.S.C. 1430(j)(10)). Pursuant 
to this part, a Bank may offer Rural Development Advance (RDA) or Urban 
Development Advance (UDA) programs, or both, for community lending 
using the targeted beneficiaries or targeted income levels specified in 
Sec. 970.3 of this part, without prior Finance Board approval. A Bank 
also may offer other CICA programs for community lending using targeted 
beneficiaries and targeted income levels other than those specified in 
Sec. 970.3 of this part, established by the Bank with the prior 
approval of the Finance Board. In addition, a Bank shall offer CICA 
programs under section 10(i) of the Act (Community Investment Program 
(CIP), 12 U.S.C. 1430(i)), and section 10(j) of the Act (Affordable 
Housing Program (AHP), 12 U.S.C. 1430(j)).


Sec. 970.3  Definitions.

    As used in this part:
    Act means the Federal Home Loan Bank Act, as amended (12 U.S.C. 
1421 et seq.).
    Advance has the same meaning as in Sec. 935.1 of this chapter.
    AHP means the Affordable Housing Program, the CICA program required 
to be offered pursuant to section 10(j) of the Act (12 U.S.C. 1430(j)) 
and part 960 of this chapter.
    Bank means a Federal Home Loan Bank established under the authority 
of the Act.
    Board of Directors means the Board of Directors of the Finance 
Board.
    Champion Community means a community which developed a strategic 
plan and applied for designation by either the Secretary of HUD or the 
Secretary of the USDA as an Empowerment Zone or Enterprise Community, 
but was designated a Champion Community.
    CICA or Community Investment Cash Advance has the same meaning as 
in Sec. 935.1 of this chapter.
    CICA program or Community Investment Cash Advance program means:
    (1) A Bank's AHP;
    (2) A Bank's CIP;
    (3) REA Bank's RDA program or UDA program using any combination of 
the targeted beneficiaries and targeted income levels specified in 
Sec. 970.3 of this part; and
    (4) Any other program offered by a Bank using targeted 
beneficiaries and targeted income levels other than those specified in 
Sec. 970.3 of this part, established by the Bank with the prior 
approval of the Finance Board.
    CIP means the Community Investment Program, a CICA program required 
to be offered pursuant to section 10(i) of the Act (12 U.S.C. 1430(i)).
    Community lending means providing financing for economic 
development projects for targeted beneficiaries.
    Economic development projects means:
    (1) Commercial, industrial, manufacturing, social service, and 
public facility projects and activities; and
    (2) Public or private infrastructure projects, such as roads, 
utilities, and sewers.
    Family means one or more persons living in the same dwelling unit.
    Finance Board means the agency established as the Federal Housing 
Finance Board.
    Housing projects means projects or activities that involve the 
purchase, construction or rehabilitation of, or predevelopment 
financing for:
    (1) Individual owner-occupied housing units, each of which is 
purchased or owned by a family with an income at or below the targeted 
income level;
    (2) Projects involving multiple units of owner-occupied housing in 
which at least 51% of the units are owned or are intended to be 
purchased by families with incomes at or below the targeted income 
level;
    (3) Rental housing where at least 51% of the units in the project 
are occupied by, or the rents are affordable to, families with incomes 
at or below the targeted income level; or
    (4) Manufactured housing parks where:
    (i) At least 51% of the units in the project are occupied by, or 
the rents are affordable to, families with incomes at or below the 
targeted income level; or
    (ii) The project is located in a neighborhood with a median income 
at or below the targeted income level.
    HUD means the United States Department of Housing and Urban 
Development.
    Median income for the area. (1) Owner-occupied housing projects and 
economic development projects. For purposes of owner-occupied housing 
projects and economic development projects, median income for the area 
means one or more of the following, as determined by the Bank:
    (i) The median income for the area, as published annually by HUD;
    (ii) The applicable median family income, as determined under 26 
U.S.C. 143(f) (Mortgage Revenue Bonds) and published by a State agency 
or instrumentality;
    (iii) The median income for the area, as published by the USDA; or
    (iv) The median income for any definable geographic area, as 
published by a Federal, state, or local government entity for purposes 
of that entity's housing and economic development programs, and 
approved by the Board of Directors, at the request of a Bank, for use 
under the Bank's CICA programs.
    (2) Rental housing projects. For purposes of rental housing 
projects, median income for the area means one or more of the 
following, as determined by the Bank:
    (i) The median income for the area, as published annually by HUD; 
or
    (ii) The median income for any definable geographic area, as 
published by a Federal, state, or local government entity for purposes 
of that entity's housing programs, and approved by the Board of 
Directors, at the request of a Bank, for use under the Bank's CICA 
programs.
    Member means an institution that has been approved for membership 
in a Bank and has purchased capital stock in the Bank in accordance 
with Sec. Sec. 933.20 and 933.25 of this chapter.
    MSA means a Metropolitan Statistical Area as designated by the 
Office of Management and Budget.
    Neighborhood means:
    (1) A census tract or block numbering area;
    (2) A unit of local government with a population of 25,000 or less;
    (3) A rural county; or
    (4) A geographic location designated in comprehensive plans, 
ordinances, or other local documents as a

[[Page 65547]]

neighborhood, village, or similar geographic designation that is within 
the boundary of but does not encompass the entire area of a unit of 
general local government.
    Nonmember borrower means an entity that has been approved as a 
nonmember mortgagee pursuant to Subpart B of part 935 of this chapter.
    Provide financing means:
    (1) Originating loans;
    (2) Purchasing a participation interest, or providing financing to 
participate, in a loan consortium for CICA-eligible housing or economic 
development projects;
    (3) Making loans to entities that, in turn, make loans for CICA-
eligible housing or economic development projects;
    (4) Purchasing mortgage revenue bonds or mortgage-backed 
securities, where all of the loans financed by such bonds and all of 
the loans backing such securities, respectively, meet the eligibility 
requirements of the CICA program under which the member or nonmember 
borrower receives an advance;
    (5) Creating or maintaining a secondary market for loans, where all 
such loans are mortgage loans meeting the eligibility requirements of 
the CICA program under which the member or nonmember borrower receives 
an advance;
    (6) Originating CICA-eligible loans within 3 months prior to 
receiving the CICA advance; and
    (7) Purchasing low-income housing tax credits.
    RDA or Rural Development Advance means an advance made pursuant to 
an RDA program.
    RDA program or Rural Development Advance program means a program 
offered by a Bank for community lending in rural areas.
    Rural area means:
    (1) A unit of general local government with a population of 25,000 
or less;
    (2) An unincorporated area outside an MSA; or
    (3) An unincorporated area within an MSA that qualifies for housing 
or economic development assistance from the USDA.
    Small business means a ``small business concern,'' as that term is 
defined by section 3(a) of the Small Business Act (15 U.S.C. 632(a)) 
and implemented by the Small Business Administration under 13 CFR part 
121, or any successor provisions.
    Targeted beneficiaries means beneficiaries determined by the 
geographical area in which a project is located (Geographically Defined 
Beneficiaries), by the individuals who benefit from a project as 
employees or service recipients (Individual Beneficiaries), or by the 
nature of the project itself (Activity Beneficiaries), as follows:
    (1) Geographically Defined Beneficiaries:
    (i) The project is located in a neighborhood with a median income 
at or below the targeted income level;
    (ii) The project is located in a rural Champion Community, or a 
rural Empowerment Zone or rural Enterprise Community, as designated by 
the Secretary of the USDA;
    (iii) The project is located in an urban Champion Community, or an 
urban Empowerment Zone or urban Enterprise Community, as designated by 
the Secretary of HUD;
    (iv) The project is located in an Indian area, as defined by the 
Native American Housing Assistance and Self-Determination Act of 1996 
(25 U.S.C. 4101 et seq.), Alaskan Native Village, or Native Hawaiian 
Home Land;
    (v) The project is located in an area and involves a property 
eligible for a Brownfield Tax Credit;
    (vi) The project is located in an area affected by a military base 
closing and is a ``community in the vicinity of the installation'' as 
defined by the Department of Defense at 32 CFR part 176;
    (vii) The project is located in a designated community under the 
Community Adjustment and Investment Program as defined under 22 U.S.C. 
290m-2;
    (viii) The project is located in a Federally declared disaster 
area; or
    (ix) The project is located in a state declared disaster area, or 
qualifies for assistance under another Federal or state targeted 
economic development program, approved by the Finance Board.
    (2) Individual Beneficiaries:
    (i) The annual salaries for at least 51% of the permanent full- and 
part-time jobs, computed on a full-time equivalent basis, created or 
retained by the project, other than construction jobs, are at or below 
the targeted income level; or
    (ii) At least 51% of the families who otherwise benefit from (other 
than through employment), or are provided services by, the project have 
incomes at or below the targeted income level.
    (3) Activity Beneficiaries: Projects that qualify as small 
businesses.
    (4) Other Targeted Beneficiaries. A Bank may designate, with the 
prior approval of the Finance Board, other targeted beneficiaries for 
its community lending.
    (5) Only targeted beneficiaries identified in paragraphs (1)(i) 
through (1)(iv), and (2)(i) and (2)(ii) of this definition are eligible 
for CIP advances.
    Targeted income level means:
    (1) For rural areas, incomes at or below 115 percent of the median 
income for the area, as adjusted for family size in accordance with the 
methodology of the applicable area median income standard or, at the 
option of the Bank, for a family of four;
    (2) For urban areas, incomes at or below 100 percent of the median 
income for the area, as adjusted for family size in accordance with the 
methodology of the applicable area median income standard or, at the 
option of the Bank, for a family of four;
    (3) For CICA advances provided under CIP:
    (i) For economic development projects, incomes at or below 80 
percent of the median income for the area; or
    (ii) For housing projects, incomes at or below 115 percent of the 
median income for the area, both as adjusted for family size in 
accordance with the methodology of the applicable area median income 
standard or, at the option of the Bank, for a family of four; or
    (4) For CICA advances provided under any other CICA program offered 
by a Bank, a targeted income level established by the Bank with the 
prior approval of the Finance Board.
    UDA or Urban Development Advance means an advance made pursuant to 
a UDA program.
    UDA program or Urban Development Advance program means a program 
offered by a Bank for community lending in urban areas.
    Urban area means:
    (1) A unit of general local government with a population of more 
than 25,000; or
    (2) An unincorporated area within an MSA that does not qualify for 
housing or economic development assistance from the USDA.
    USDA means the United States Department of Agriculture.


Sec. 970.4  Community Lending Plan

    Each Bank shall develop and adopt an annual Community Lending Plan 
pursuant to Sec. 936.6 of this chapter.


Sec. 970.5  Community Investment Cash Advance Programs.

    (a) In general.
    (1) Each Bank shall offer an AHP in accordance with part 960 of 
this chapter.
    (2) Each Bank shall offer a CIP to provide financing for housing 
projects and for eligible community lending at the appropriate targeted 
income levels.
    (3) Each Bank may offer RDA programs or UDA programs, or both, for

[[Page 65548]]

community lending using the targeted beneficiaries or targeted income 
levels specified in Sec. 970.3 of this part, without prior Finance 
Board approval.
    (4) Each Bank may offer CICA programs for community lending using 
targeted beneficiaries and targeted income levels other than those 
specified in Sec. 970.3 of this part, established by the Bank with the 
prior approval of the Finance Board.
    (b) Mixed-use projects. (1) For projects funded under CICA programs 
other than CIP, involving a combination of housing projects and 
economic development projects, only the economic development components 
of the project must meet the appropriate targeted income level for the 
respective CICA program.
    (2) For projects funded under CIP, both the housing and economic 
development components of the project must meet the appropriate 
targeted income levels.
    (c) Refinancing. CICA advances other than AHP may be used to 
refinance economic development projects and housing projects, provided 
that any equity proceeds of the refinancing of rental housing and 
manufactured housing parks are used to rehabilitate the projects or to 
preserve affordability for current residents.
    (d) Pricing and Availability of CICA advances.
    (1) Advances to members. For CICA programs other than AHP and CIP, 
a Bank shall price advances to members as provided in Sec. 935.6 of 
this chapter, and may price such advances at rates below the price of 
advances of similar amounts, maturities and terms made pursuant to 
section 10(a) of the Act. (12 U.S.C. 1430(a)).
    (2) Pricing of CIP advances. The price of CICA advances made under 
CIP shall not exceed the Bank's cost of issuing consolidated 
obligations of comparable maturity, taking into account reasonable 
administrative costs.
    (3) Pricing of AHP advances. A Bank shall price CICA advances made 
under AHP in accordance with parts 935 and 960 of this chapter.
    (4) Advances to nonmember borrowers. (i) A Bank may offer advances 
under CICA programs to nonmember borrowers at the Bank's option, except 
for AHP and CIP, which are available only to members.
    (ii) A Bank shall price advances to nonmember borrowers as provided 
in Sec. 935.24 of this chapter, and may price such advances at rates 
below the price of advances of similar amounts, maturities and terms 
made pursuant to section 10b of the Act. (12 U.S.C. 1430b).
    (5) Pricing pass-through. A Bank may require that borrowers 
receiving CICA advances pass through the benefit of any price reduction 
from regular advance pricing to their borrowers.
    (6) Discount Fund. (i) A Bank may establish a fund which the Bank 
may use to reduce the price of CIP or other CICA advances below the 
advance prices provided for by this part.
    (ii) Price reductions made through the Discount Fund shall be made 
in accordance with a fair distribution scheme.


Sec. 970.6  Reporting.

    (a) By July 1, 1999, each Bank shall provide to the Finance Board 
an initial assessment of the credit needs and market opportunities in a 
Bank's district for community lending.
    (b) Effective in 2000, each Bank annually shall provide to the 
Finance Board, on or before January 31, a Community Lending Plan.
    (c) Each Bank shall provide such other reports concerning its CICA 
programs as the Finance Board may request from time to time.


Sec. 970.7  Documentation.

    (a) A Bank shall require the borrower to certify to the Bank that 
each project funded by a CICA advance (other than AHP) meets the 
respective targeting requirements of the CICA program. Such 
certification shall include a description of how the project meets the 
requirements, and where appropriate, a statistical summary or list of 
incomes of the borrowers, rents for the project, or salaries of jobs 
created or retained.
    (b) For those CICA-funded projects that also receive funds from 
another targeted Federal economic development program that has income 
targeting requirements that are the same as, or more restrictive than, 
the targeting requirements of the applicable CICA program, the Bank 
shall permit the borrower to certify that compliance with the criteria 
of such Federal economic development program will meet the requirements 
of the respective CICA program.
    (c) Such certifications shall satisfy the Bank's obligations to 
document compliance with the CICA lending provisions of this part.

    Dated: October 28, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-31489 Filed 11-25-98; 8:45 am]
BILLING CODE 6725-01-P