2010-2677. Minimum Capital

AGENCY:

Federal Housing Finance Agency.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Federal Housing Finance Agency (FHFA) is issuing and seeking comment on a proposed rule to effect a provision of the Federal Housing Enterprises Financial Safety and Soundness Act that provides for a temporary increase in the minimum capital level for entities regulated by FHFA—Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or the Federal Home Loan Banks. The proposed rule provides clarity regarding standards for imposing a temporary increase, for rescinding such an increase and a time frame for review of such an increase.

DATES:

Comments on the proposed rule must be received on or before April 9, 2010. For additional information, see SUPPLEMENTARY INFORMATION.

ADDRESSES:

You may submit your comments on the proposed rulemaking, identified by “[RIN 2590-AA01],” by any one of the following methods:

• E-mail: Comments to Alfred M. Pollard, General Counsel, may be sent by e-mail to [e-mail]. Please include “[RIN 2590-AA01]” in the subject line of the message.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by e-mail to FHFA at [e-mail] to ensure timely receipt by the agency. Include the following information in the subject line of your submission: “Minimum Capital Proposed Rule, [RIN 2590-AA01].”
• U.S. Mail, United Parcel Post, Federal Express, or Other Mail Service: The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/[RIN 2590-AA01], Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552.
• Hand Delivery/Courier: The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/[RIN 2590-AA01], Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The package should be logged at the Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT:

Christopher T. Curtis, Senior Deputy General Counsel, [e-mail], [phone] or Jamie Schwing, Associate General Counsel, [e-mail], [phone], (not toll-free numbers), Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Deaf is [phone].

SUPPLEMENTARY INFORMATION:

I. Comments

The Federal Housing Finance Agency (FHFA) invites comment on all aspects of the proposed rule, and will take all relevant comments into consideration before issuing the final regulation. Copies of all comments will be posted without change, including any personal information you provide, such as your name and address, on the FHFA Internet Web site at http://www.fhfa.gov. In addition, copies of all comments received will be available for examination by the public on business days between the hours of 10 a.m. and 3 p.m. at the Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an appointment to inspect comments, please call the Office of General Counsel at [phone].

II. Background

The Housing and Economic Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 2654, amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) (Safety and Soundness Act) to establish FHFA as an independent agency of the Federal Government. FHFA was established to oversee the prudential operations of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation (collectively, Enterprises), and the Federal Home Loan Banks (Banks) (collectively, regulated entities) and to ensure they operate in a safe and sound manner including being capitalized adequately; foster liquid, efficient, competitive and resilient national housing finance markets; comply with the Safety and Soundness Act and other authorizing statutes, and with rules, regulations, guidelines and orders issued under these statutes and the charters of the Enterprises and the Banks; carry out their missions through activities authorized and consistent with the Safety and Soundness Act and their charters; and, that the activities and operations of the entities are consistent with the public interest.^[1] The regulated entities continue to operate under regulations promulgated by the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board until such time as the existing regulations are supplanted by regulations promulgated by the FHFA.^[2]

Section 1111 of HERA amended section 1362 of the Safety and Soundness Act to provide additional authorities for FHFA regarding minimum capital requirements. Section 1362(a) establishes a minimum capital level for the Enterprises, while section 1362(b) incorporates the minimum capital level for the Federal Home Loan Banks established by the Federal Home Loan Bank Act (Bank Act).^[3] The section explicitly authorizes the Director, by regulation, to provide for capital levels higher than the minimum levels specified for the Enterprises or the Banks or for both to promote safe and sound operations.^[4] Also, section 1362(e) provides for additional capital and reserve requirements to be issued by order or regulation with respect to a product or activity.^[5] Section 1362(f) provides for a periodic review of core capital maintained by an Enterprise, the amount of capital retained by the Banks and the minimum capital levels set forth for the regulated entities required under this section.^[6]

In addition, section 1362(d) provides that the Director, by order, may temporarily increase an established minimum capital level, when the director determines “that such an increase is necessary and consistent with the prudential regulation and the safe and sound operations of a regulated entity.” ^[7] The section also provides that the Director shall rescind the temporary minimum capital level when the Director determines circumstances no longer justify the temporary level.^[8] To effect the higher temporary minimum capital level, the Director must issue regulations setting forth standards for the imposition of a temporary increase, standards and procedures that will be used to make the determination regarding rescission and a time frame for periodic review of any temporary increase in the minimum capital level to make a determination regarding rescission.^[9]

Especially in times of economic stress such as the present, it is important that the Director be able to respond when necessary to conditions affecting a regulated entity by imposing an appropriately higher capital requirement in an expeditious manner. Section 1362(d) recognizes that need, and the proposed rule would implement that authority. The proposed rule sets forth procedures and standards as required in the Safety and Soundness Act for a temporary increase in the minimum capital levels of the Enterprises or the Banks, including a determination to order an increase, to rescind all or part of the increase and the time for periodic review of an increase as provided in section 1362(d). The standards that the Director would apply in determining whether to impose a temporary capital increase, and its amount, are those that experience has shown are indicators of the financial health of an institution and, in the worst case, of its risk of failure.

Regulatory Impacts

Paperwork Reduction Act

The proposed regulation does not contain any information collection requirement that requires the approval of OMB under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation does not have a significant economic impact on a substantial number of small entities 5 U.S.C. 605(b). FHFA has considered the impact of the proposed rule under the Regulatory Flexibility Act. The Director of FHFA certifies that the proposed rule is not likely to have a significant economic impact on a substantial number of small business entities because the rule is applicable only to the regulated entities, which are not small entities for purposes of the Regulatory Flexibility Act.

List of Subjects

• Capital
• Federal Home Loan Banks
• Federal National Mortgage Association
• Federal Home Loan Mortgage Corporation
• Filings
• Minimum Capital
• Procedures
• Standards

Accordingly, for the reasons stated in the preamble, under the authority of 12 U.S.C. 4513, 4526 and 4612, the Federal Housing Finance Agency proposes to amend Chapter XII of title 12 of the Code of Federal Regulations by adding part 1225 to Subchapter B to read as follows:

Subchapter B—Entity Regulations

PART 1225—MINIMUM CAPITAL—TEMPORARY INCREASES

1225.1

Purpose.

1225.2

Definitions.

1225.3

Procedures.

1225.4

Standards and Factors.

Authority: 12 U.S.C. 4513, 4526 and 4612.

§ 1225.1

Purpose.

FHFA is responsible for ensuring the safe and sound operation of regulated entities. In furtherance of that responsibility, this part sets forth standards and procedures FHFA will employ to determine whether to require or rescind a temporary increase in the minimum capital levels for a regulated entity or entities pursuant to 12 U.S.C. 4612(d).

§ 1225.2

Definitions.

For purposes of this part, the term:

Enterprise means the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation; and the term Enterprises means, collectively, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Minimum Capital Level means the lowest amount of capital meeting any regulation or orders issued pursuant to 12 U.S.C. 1426(a)(2) and 12 U.S.C. 4612, or any similar requirement established for a Federal Home Loan Bank by regulation, order or other action.

Regulated Entity means—

(1) The Federal National Mortgage Association and any affiliate thereof;

(2) The Federal Home Loan Mortgage Corporation and any affiliate thereof; and

(3) Any Federal Home Loan Bank.

Rescission means a removal in whole or in part of an increase in the temporary minimum capital level.

§ 1225.3

Procedures.

(a) Information—(1) Information to the Regulated Entity or Entities. If the Director determines, based on standards enunciated in this part, that a temporary increase in the minimum capital level is necessary, the Director will provide notice to the affected regulated entity or entities 30 days in advance of the effective date of such increase, unless the Director determines that an exigency exists that does not permit such notice or the Director determines a longer time period would be appropriate.

(2) Information to the Government. The Director shall inform the Secretary of the Treasury, the Secretary of Housing and Urban Development, and the Chairman of the Securities and Exchange Commission of a temporary increase in the minimum capital level contemporaneously with informing the affected regulated entity or entities.

(b) Comments. The affected regulated entity or entities may provide comments regarding or objections to the temporary increase to FHFA within 15 days or such other period as the Director determines appropriate under the circumstances. The Director may determine to modify, delay, or rescind the announced temporary increase in response to such comments or objection, but no further notice is required for the temporary increase to become effective upon the date originally determined by the Director.

(c) Communication. The Director shall transmit notice of a temporary increase or rescission of a temporary increase in the minimum capital level by written, electronic, or such other means as appropriate. Such communication shall set forth, at a minimum, the bases for the Director's determination, the amount of increase or decrease in the minimum capital level, the duration of such increase, and a description of the procedures for requesting a rescission of the temporary increase in the minimum capital level.

§ 1225.4

Standards and factors.

(a) Standard for Imposing a Temporary Increase. In making a determination to increase temporarily a minimum capital requirement for a regulated entity or entities, the Director will consider the necessity and consistency of such an increase with the prudential regulation and the safe and sound operations of a regulated entity. The Director may impose a temporary minimum-capital increase if consideration of one or more of the following factors leads the Director to the judgment that the current minimum capital requirement for a regulated entity is insufficient to address the entity's risks:

(1) Current or anticipated declines in the value of assets held by a regulated entity; the amounts of a regulated entity's outstanding mortgage backed securities; and, its ability to access liquidity and funding;

(2) Credit (including counterparty), market, operational and other risks facing a regulated entity, especially where a depreciation in the value of its capital or assets, a decline in liquidity, or an increase in risks is foreseeable and consequential;

(3) Current or projected declines in the capital held by a regulated entity;

(4) The state of a regulated entity's compliance with regulations, written orders, or agreements;

(5) Unsafe or unsound operations or practices, or circumstances that reflect unsafe and unsound conduct by a regulated entity;

(6) Housing finance market conditions;

(7) Level of reserves or retained earnings;

(8) Initiatives, operations, products, or practices that entail heightened risk;

(9) With respect to a Bank, the ratio of the market value of its equity to the par value of its capital stock; or

(10) Other conditions as detailed by the Director in the notice provided under § 1225.3.

(11) In making a finding under this section, the Director may require a written plan to augment capital to be submitted on a timely basis to address the methods by which such temporary increase may be attained and the time period for reaching the new temporary minimum capital level.

(b) Rescission of a Temporary Increase. In making a determination to rescind a temporary increase in the minimum capital level, whether in full or in part, the Director shall consider the following standards:

(1) Changes to the circumstances or facts that led to the imposition of a temporary increase in the minimum capital levels;

(2) The meeting of targets set for a regulated entity in advance of any capital or capital-related plan agreed to by the Director;

(3) Changed circumstances or facts based on new developments occurring since the imposition of the temporary increase in the minimum capital level, particularly where the original problems or concerns have been successfully addressed or alleviated in whole or in part; or

(4) Such other standard as the Director may consider as detailed by the Director in the notice provided under § 1225.3.

(c) Time Frame for Review of Temporary Increase for Purpose of Rescission. (1) Absent an earlier determination to rescind in whole or in part a temporary increase in the minimum capital level for a regulated entity or entities, the Director shall no less than every 12 months, consider the need to maintain, modify, or rescind such increase.

(2) A regulated entity or regulated entities may at any time request in writing such review by the Director.

(d) Guidances. The Director may determine, from time to time, issue guidance to elaborate, to refine or to provide new information regarding standards or procedures contained herein.

Dated: January 31, 2010.

Edward J. DeMarco,

Acting Director, Federal Housing Finance Agency.

Footnotes

1.  12 U.S.C. 4513.

2.  See sections 1302 and 1312 of HERA.

3.  The Bank Act's current minimum capital requirements apply to the eleven banks that have converted to the capital structure provided in the Bank Act as amended by the Gramm-Leach-Bliley Act of 1999, see Bank Act section 6(a)(2), 12 U.S.C. 1426(a)(2), but do not apply to the Federal Home Loan Bank of Chicago. The Federal Home Loan Bank of Chicago is subject to capital requirements as set forth in a 2007 Cease and Desist Order, as amended. See 74 FR 5597 (January 30, 2009). As a result, the definition of “minimum capital level” as set forth in the proposed regulation is structured to take into account the current supervisory status of the Federal Home Loan Bank of Chicago.

4.  12 U.S.C. 4612(c).

5.  12 U.S.C. 4612(e).

6.  12 U.S.C. 4612(f).

7.  12 U.S.C. 4612(d)(1).

8.  12 U.S.C. 4612(d)(2).

9.  12 U.S.C. 4612(d)(3).