00-16790. Amendment of Membership Regulation and Advances Regulation

AGENCY:

Federal Housing Finance Board.

ACTION:

Final rule.

SUMMARY:

The Federal Housing Finance Board (Finance Board) is adopting as final, with several changes, the Interim Final Rule that: Amended its Membership Regulation and Advances Regulation to conform certain provisions to the requirements of the Federal Home Loan Bank System Modernization Act of 1999 (Modernization Act); and made certain technical revisions to the Membership Regulation that are not related to the Modernization Act, in order to clarify the treatment of de novo members that fail to meet the 10 percent residential mortgage loans requirement within the required one-year time frame.

DATES:

This final rule shall be effective on July 3, 2000.

FOR FURTHER INFORMATION CONTACT:

James L. Bothwell, Director, [phone], Jennifer R. Salamon, Program Analyst, [phone], or Patricia L. Sweeney, Program Analyst, [phone], Office of Policy, Research and Analysis; or Sharon B. Lake, Senior Attorney-Advisor, [phone], Office of General Counsel, Federal Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Under the Federal Home Loan Bank Act (Bank Act), the Finance Board is responsible for the supervision and regulation of the 12 Federal Home Loan Banks (Banks), which provide advances and other financial services to their member institutions. See 12 U.S.C. 1422a(a) (1994). Institutions, including those not meeting the Qualified Thrift Leader (QTL) test, may become members of a Bank if they meet certain membership eligibility and minimum stock purchase criteria set forth in the Bank Act and the Finance Board's implementing Membership Regulation. See id. secs. 1424, 1426, 1430(e)(3) (1994); 12 CFR part 925.^[1] Members may obtain advances from a Bank subject to certain statutory and regulatory requirements. See 12 U.S.C. 1430(a) (1994). Prior to recent amendments to the Bank Act, discussed further below, access to advances by non-QTL members was restricted in various ways. See id. sec. 1430(e).

The recently enacted Modernization Act ^[2] amended certain membership eligibility provisions, and repealed certain stock purchase and non-QTL advances provisions, in the Bank Act. See Pub. L. No. 106-102, secs. 602, 603, 604(c), (d)(1), 605, 608 (1999). Accordingly, the Finance Board adopted the Interim Final Rule, which amended its regulations to conform them to the Modernization Act amendments. See 65 FR 13866 (March 15, 2000). The Finance Board also took the opportunity in the Interim Final Rule to make certain technical revisions to the Membership Regulation that are not related to the Modernization Act, in order to clarify the treatment of de novo members that fail to meet the 10 percent residential mortgage loans requirement within the required one-year time frame. See id.

The Interim Final Rule provided for a 30-day public comment period, which closed on April 14, 2000. The Finance Board received a total of 7 comment letters on the Interim Final Rule. Commenters included 4 Banks and three financial institutions trade associations. Commenters generally focused their comments on how the three-year average total assets number for community financial institutions (CFIs) should be calculated. These comments are discussed below.

II. Analysis of the Final Rule

A. Removal of the 10 Percent Residential Mortgage Loans Requirement For Community Financial Institution Applicants For Membership; Definition of “Community Financial Institution”—§§ 925.1(ff), 925.6(b), 925.10, 925.14(a)(3)

Section 4(a)(2)(A) of the Bank Act formerly provided that an insured depository institution may become a member of a Bank only if it has at least 10 percent of its total assets in residential mortgage loans (10 percent requirement). See 12 U.S.C. 1424(a)(2)(A) (1994). Section 4(a)(2) also provided that an insured depository institution commencing business operations after January 1, 1989 (de novo institution), may become a member of a Bank if at least 10 percent of its total assets are in residential mortgage loans, within one year after the commencement of its operations. See id. sec. 1424(a)(2). Section 4(a)(2) is implemented by §§ 925.6(b), 925.10 and 925.14(a)(3) of the Finance Board's Membership Regulation. See 12 CFR 925.6(b), 925.10, 925.14(a)(3).

The Modernization Act amended section 4(a)(2) of the Bank Act to exempt from the 10 percent requirement any applicants, including de novo institutions, that qualify as “community financial institutions” See Modernization Act, sec. 605 (to be codified at 12 U.S.C. 1424(a)(2)(A)(4)). The Modernization Act defines a “community financial institution” to mean an institution whose deposits are insured under the Federal Deposit Insurance Act (FDIA) and that has, as of the date of the transaction at issue, less than $500 million in average total assets, based on an average of total assets over the three years preceding that date. See id. sec. 602 (to be codified at 12 U.S.C. 1422(13)). Accordingly, the Interim Final Rule amended §§ 925.6(b), 925.10 and 925.14(a)(3) of the Membership Regulation to include an exemption from the 10 percent requirement for CFIs, and added a definition of “community financial institution” in new § 925.1(ff) that mirrored the statutory definition. A definition of “community financial institution” that predates the Modernization Act, in § 925.1(n)(1)(iii), also was removed. The Finance Board requested comments in the Interim Final Rule on what source of data should be used in calculating the average of total assets over the three preceding years.

The issue of how to calculate an institution's average total assets over the three preceding years also arises in the context of the new authority under the Modernization Act allowing CFI members to pledge secured loans for small business or agriculture, or securities representing a whole interest in such secured loans, as security for advances. See Modernization Act, section 604(a)(5)(C). The Finance Board recently issued a proposed rule to implement this new advances collateral authority (Advances Collateral Rule). See 65 FR 26518 (May 8, 2000). A number of commenters on the Interim Final Rule recommended that the Banks be allowed to calculate average total assets of all of their member institutions on an annual basis, based on calendar year-end financial data available from the institutions' regulatory financial reports filed with their regulators or, in the alternative, based on data available from the institutions' quarterly regulatory financial reports for the preceding three years. Commenters stated that it would be confusing to determine CFI status on a quarterly or monthly basis when § 925.22(b)(1) of the Membership Regulation requires the Banks to calculate annually each member's minimum capital stock requirement using calendar year-end financial data. Commenters stated that calculation of CFI status on a quarterly or monthly basis would result in unnecessary administrative burdens and expense. Other commenters supported quarterly calculations of average total assets based on the institutions' quarterly regulatory financial reports over the three preceding years. Commenters also stated that calculation of CFI status on a quarterly or monthly basis would cause some members' CFI status to fluctuate more frequently, which, for members approaching the CFI asset cap, could have a chilling effect on their reliance on Bank funding secured by CFI-eligible collateral.

For membership eligibility purposes, the determination of whether an institution applying for Bank membership is a CFI and, therefore, exempt from the 10 percent requirement, is only required to be made by the Bank one time, during the membership application evaluation process. Therefore, the comments regarding the administrative burden and cost of performing more frequent periodic calculations, coordinating with the annual stock purchase calculation, and the effect on use of Bank funding, are inapposite for membership eligibility purposes. Rather, these comments appear to be directed at how CFI status should be calculated for purposes of allowing CFI members to use the expanded collateral authority under the Modernization Act. These comments, and the definition of CFI for advances collateral purposes, are more appropriately addressed in the Finance Board's final Advances Collateral Rule.

Under the Membership Regulation, the calculation of the 10 percent requirement is based on the applicant's total assets and residential mortgage loans drawn from its most recent quarterly regulatory financial report filed with its appropriate regulator. See 12 CFR 925.10. Since the calculation of average total assets to determine CFI status is necessary in order to determine whether the 10 percent requirement applies, it would be consistent with the current membership application review process at the Banks to use the same total assets data from the applicant's most recent quarterly regulatory financial report for the CFI calculation. In addition, since an average of total assets over three years is required for the CFI calculation, it also would be reasonable to include in the calculation the total assets data from the quarterly regulatory financial reports filed with the applicant's appropriate regulator for the immediately preceding 11 calendar quarters.

Because the calculation of the three-year total assets average affects the determination of CFI status for both membership and advances purposes, the definition of CFI belongs in § 900.1, which contains general definitions applying to all Finance Board regulations. Accordingly, this final rule removes the definitions of “community financial institution” and “community financial institution asset cap” (§ 925.1(ff) and (gg)) from the Membership Regulation. The final Advances Collecteral Rule will add the calculation for membership purposes as described above, as well a the calculation for advances purposes, to a definition of “community financial institution” in § 900.1. The final Advances Collateral Rule also will add the definition of “community financial institution asset cap” to § 900.1.

B. Readmission to Membership—§ 925.30

The final rule makes technical revisions to the language on readmission to membership in § 925.30 of the Interim Final Rule for greater clarity.

III. Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this final rule, the provisions of the Regulatory Flexibility Act, U.S.C. 601 et seq., do not apply.

IV. Paperwork Reduction Act

For the reasons stated in the Interim Final Rule, the Finance Board adopted the Interim Final Rule on an expedited basis to conform provisions of its regulations to the recently enacted statutory amendments to the Bank Act. Due to the expedited nature of this rulemaking, the Finance Board has not completed its analysis of the information collection requirements contained in the final rule. The amendments in the final rule may result in a reduction in the information collection burden for institutions that qualify as community financial institutions, and an increase in the number of respondents that apply for Bank membership. The Finance Board intends to submit to the Office of Management and Budget the information collection requirements contained in this final rule in accordance with the requirements of section 3507(d) of the Paperwork Reudction Act of 1995, 44 U.S.C. 3507(d).

List of Subjects in Parts 925 and 950

• Credit
• Federal home loan banks
• Reporting and recordkeeping requirements

Accordingly, the Interim Final Rule amending title 12, chapter IX, parts 925 and 950, Code of Federal Regulations, which was published at 65 FR 13866 (March 15, 2000), is adopted as final with the following changes:

PART 925—MEMBERS OF THE BANKS

1. The authority citation for part 925 continues to read as follows:

Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430, 1442.

§ 925.1

[Amended]

2. Amend § 925.1 by removing paragraphs (ff) and (gg).

3. Revised § 925.30 to read as follows:

§ 925.30

Readmission to membership.

(a) In general. An institution that has withdrawn from membership, or otherwise terminated its membership, may not be readmitted to membership in any Bank for a period of 5 years from the date on which its membership terminated.

(b) Exceptions. An institution that transfers membership between two Banks without interruption shall not be deemed to have withdrawn from Bank membership. Any institution that withdrew from Bank membership prior to December 31, 1997, and for which the 5-year period has not expired, may apply for membership in a Bank at any time, subject to the approval of the Finance Board and the requirements of 12 CFR part 925.

Dated: June 23, 2000.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairman.

Footnotes

1.  The Finance Board recently reorganized and redesignated all of its regulations. See 65 FR 8253 (Feb. 18, 2000). The Membership Regulation, which formerly was part 933 of the Finance Board's regulations, 12 CFR part 933 of the Finance Board's regulations, 12 CFR part 933 (1999), was redesignated as part 925. See 65 FR 8253, 8260 (to be codified at 12 CFR part 925).

2.  The Modernization Act is Title VI of the Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338, enacted into law on November 12, 1999.