[Federal Register Volume 64, Number 28 (Thursday, February 11, 1999)]
[Proposed Rules]
[Pages 6819-6823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3407]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 910
[No. 99-5]
RIN 3069-AA78
Allocation of Joint and Several Liability on Consolidated
Obligations Among the Federal Home Loan Banks
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
a rule to establish a framework for the orderly allocation of joint and
several liability among the Federal Home Loan Banks (FHLBank or Bank)
on consolidated obligations, i.e., bonds, notes or debentures issued by
the Finance Board pursuant to section 11 of the Federal Home Loan Bank
Act (Bank Act). The proposed rule is intended to protect holders of
consolidated obligations to the greatest extent practical by providing
a framework to ensure the continued timely payment of all principal and
interest on consolidated obligations in the unlikely event of a
projected inability of a Bank to meet its debt service payment
obligations. The proposed rule in no way would limit, restrict or
diminish the joint and several liability of the FHLBanks on the
consolidated obligations issued by the Finance Board.
DATES: The Finance Board will accept comments on the proposed rule in
writing on or before April 12, 1999.
ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by
electronic mail at bakere@fhfb.gov or by regular mail at the Federal
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.
Comments will be available for public inspection at this address.
FOR FURTHER INFORMATION CONTACT: Joseph McKenzie, Deputy Chief
Economist, Office of Policy, Research and Analysis, by telephone at
(202) 408-2845 or by electronic mail at mckenziej@fhfb.gov, or
Charlotte A. Reid, Special Counsel, Office of General Counsel, by
telephone at (202) 408-2510, by electronic mail at reidc@fhfb.gov, or
by regular mail at the Federal Housing Finance Board, 1777 F Street,
NW., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Bank Act, see 12 U.S.C. 1421 et seq., provides plenary
authority to the Finance Board in connection with the issuance of
bonds, debentures and notes (consolidated obligations or COs) for which
the FHLBanks are jointly and severally liable.\1\ Section 11 of the
Bank Act authorizes the Finance Board to issue rules and regulations
governing the issuance of COs. See 12 U.S.C. 1431(a). Finance Board
regulations governing the issuance of COs are set forth in 12 CFR Parts
910 and 941.
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\1\ A bond, note or debenture represents a loan made to the
FHLBanks by a lender (``bondholder''). When the Finance Board issues
a bond, note or debenture on behalf of the FHLBanks, the FHLBanks
become legally obligated by the terms of the instrument to repay a
specific amount of money, at a specific point in time, at a
specified rate of interest. In practice, the FHLBanks receiving the
proceeds of the issuance assume the obligation to service the
principal and interest payments for that issuance on behalf of all
of the FHLBanks. Interest payments on bonds usually are made twice a
year. Because the Bank Act specifies that the FHLBanks are jointly
and severally liable on the consolidated obligations issued by the
Finance Board for the benefit of the FHLBanks, each FHLBank is
liable for the repayment of the entire debt, including the interest
payments, for each consolidated obligation. Consolidated obligations
are sold in book entry form. The owner of the bond, note or
debenture has no certificate, and there is no trust indenture
associated with the issuance. Standard & Poors and Moody's are the
two primary rating services that rate bonds. The rating services
have developed a letter ranking system to indicate their assessment
of the likelihood of default of the instruments rated. Bonds rated
AAA by Standard & Poors and Aaa by Moodys are the highest quality
debt obligations. All consolidated obligation bonds are rated AAA or
Aaa.
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The FHLBanks finance their operations principally with the proceeds
from COs issued by the Finance Board on their behalf. As of September
30, 1998, there were approximately $336.3 billion in consolidated
obligations outstanding. In the history of the FHLBank System, no
FHLBank has ever been delinquent or defaulted on a principal or
interest payment on any consolidated obligation issued by the Finance
Board or the Federal Home Loan Bank Board, its predecessor agency
(FHLBB).
Neither the Finance Board nor the FHLBB adopted regulations to
establish the manner in which the joint and several liability of the
FHLBanks would operate in the event of impending default or delinquency
on a consolidated obligation. Although the FHLBank System remains
financially healthy and strong, and no such default or delinquency is
expected, the joint and several liability has become a matter of
interest in recent years for other reasons. The municipal bankruptcy
and resulting receivership of the County of Orange, California (Orange
County), and the ensuing litigation brought by the receiver for Orange
County against the FHLBanks, Office of Finance and United States (among
others),\2\ raised issues concerning liability allocation arising from
issuing and servicing consolidated obligations. Additionally, new
initiatives and activities undertaken by the FHLBanks, such as the
Mortgage Partnership FinanceTM, pilot program
[[Page 6820]]
have caused at least one FHLBank to suggest that it would be beneficial
to clarify how the joint and several financial responsibility for the
consolidated obligations would be allocated among the FHLBanks if a
FHLBank were to experience a payment problem. The Finance Board
believes that it is prudent to clarify for holders of COs how they will
benefit from the statutory joint and several liability of the FHLBanks
set forth in section 11 of the Bank Act and to clarify for the FHLBanks
how their joint and several obligation would operate. The Finance Board
also believes it is important to emphasize the Finance Board's intent
that holders of COs will never experience an interruption in the flow
of interest or principal payments. The regulatory proposal is designed
to prevent delinquency in payment, to establish a payment priority
system, and to specify as a regulatory matter that the Finance Board
has ultimate authority and discretion at any time to call on any
FHLBank to make those payments.
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\2\ See County of Orange, et al. v. Federal Home Loan Bank of
Boston, et al., Case No. SA VC 97-122-GLT (C.D. Cal.). See also
County of Orange et al. v. Bear Stearns, & Co., et al., Case No. SA
CV 98-0527-GLT, et al. (C.D.Cal.) (Order granting good faith
settlement determinations entered November 30, 1998.) (Orange County
agreed to drop all claims against the FHLBank System in connection
with a settlement reached with Merrill, Lynch & Co. The FHLBanks,
Office of Finance, and United States deny any wrongdoing and will
not pay any amount in connection with the settlement.)
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The Finance Board cannot and does not seek to alter the statutory
joint and several liability of the FHLBanks for COs. Rather, pursuant
to its authority to ensure that the FHLBanks remain able to raise funds
in the capital markets and to adjust the relative equities among the
FHLBanks in connection with the issuance of COs, see 12 U.S.C.
1422a(a)(3)(B)(iii) and 1431(d), the Finance Board is proposing to
establish a procedure to assure timely interest and principal payments
on COs and a system of priorities among the FHLBanks under which the
assets of a FHLBank participating in the proceeds of a consolidated
obligation issuance would be applied first toward the satisfaction of
that consolidated obligation before the assets of any other FHLBank
would be reached.
II. Statutory and Regulatory Background
The Finance Board, consistent with its primary duty to ensure that
the FHLBanks operate in a financially safe and sound manner, must
``ensure that the FHLBanks remain adequately capitalized and able to
raise funds in the capital markets.'' See 12 U.S.C. 1422a(a)(3)(A) and
(3)(B)(iii). Pursuant to the authority set forth in sections 11(b) and
(c) of the Bank Act, the Finance Board may issue consolidated FHLBank
debentures or bonds which ``shall be the joint and several obligations
of all the Federal Home Loan Banks, and shall be secured and be issued
upon such terms and conditions as the [Finance] Board may prescribe.''
See 12 U.S.C. 1431(b) and (c). Moreover, section 11(d) of the Bank Act
provides that the Finance Board shall have full power to require the
FHLBanks to ``deposit additional collateral or to make substitutions of
collateral or to adjust equities between the Federal Home Loan Banks.''
12 U.S.C. 1431(d).
The FHLBanks collectively are the sole obligor on COs. The Bank Act
makes clear that COs are not the obligations of and are not guaranteed
by the United States. See 12 U.S.C. 1435. Congress underscored this
important precept when it enacted the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992, which provides in pertinent
part:
This chapter may not be construed as obligating the Federal
Government, either directly or indirectly, to provide any funds to *
* * the Federal Home Loan Banks, or to honor, reimburse, or
otherwise guarantee any obligation or liability of the * * * Federal
Home Loan Banks. This chapter may not be construed as implying that
any such * * * Bank, or any obligations or securities of such * * *
Bank, are backed by the full faith and credit of the United States.
Pub. L. 102-550, 106 Stat. 3944, tit. XIII, sec. 1304 (Oct. 28, 1992),
codified at 12 U.S.C. 4503.
The issuance of COs is governed by Finance Board regulations set
forth in 12 CFR Parts 910 and 941. The Finance Board sets the general
parameters for the issuance of COs through periodic debt
authorizations. See, e.g., Finance Board Res. No. 98-59 (Dec. 2, 1998).
As originally enacted in 1932, section 11 of the Bank Act made no
provision for the Finance Board's predecessor, the FHLBB, to issue COs
on behalf of the FHLBanks. Section 11 permitted the FHLBanks, under
certain conditions, to issue debt individually or in concert with one
or more other FHLBanks. In all cases, as originally enacted, section 11
required that ``the [FHL]Banks shall be jointly and severally liable
for the payment when due of all bonds and debentures, and of notes and
other obligations issued by any [FHL]Bank.'' 12 U.S.C. 1431 (1932). The
FHLBanks were permitted to make agreements to ensure the payment of
such obligations, so long as the agreements did not restrict in any way
the FHLBanks' joint and several liability. Thus, under the original
statutory scheme, the FHLBanks were jointly and severally liable for
the debt of any FHLBank and were required (subject to the rules,
regulations and orders of the FHLBB) to make provisions for the payment
of their obligations on the bonds, etc., so long as there was no
restriction on the joint and several liability of the FHLBanks. To
date, no FHLBank has issued any debt instrument in the capital markets.
See H.R. Rep. No. 1922, 73rd Cong., 2d Sess., at 72-74 (1934).
In 1934, Congress amended section 11 of the Bank Act to give the
FHLBank System more ready access to the capital markets. Section 503 of
the National Housing Act of 1934 amended section 11 of the Bank Act to
authorize the FHLBB to issue consolidated obligations on which the
FHLBanks would be jointly and severally liable. 12 U.S.C. 1431(b) and
(c). The constraints on the FHLBanks' power to issue debt contained in
section 11 as originally enacted were replaced by a provision that made
the FHLBanks' power to issue debt ``generally subject to the rules and
regulations prescribed by the Federal Home Loan Bank Board.'' 12 U.S.C.
1431 (1932). The 1934 amendments also eliminated the requirement that
the FHLBanks must be jointly and severally liable for any individual
FHLBank's issuance. Section 11 as it reads now is essentially unchanged
from the 1934 amendments.
Sections 11(b) and (c) of the Bank Act provide that every
consolidated obligation ``shall be the joint and several liability of
all [FHL]Banks. * * *'' See 12 U.S.C. 1431(b) and (c). The imposition
of joint and several liability means that each FHLBank is an obligor on
every consolidated obligation; that is, each FHLBank is bound jointly
with all other FHLBank-obligors and is liable separately for the entire
obligation.\3\ The legal effect of joint and several liability is that
a ``creditor may sue one or more of the parties to such liability
separately, or all of them together at his option.''\4\
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\3\ See Williston & Jaeger, 2 A Treatise on the Law of Contracts
Sec. 316 (3d ed., 1959).
\4\ See Black's Law Dictionary 751 (5th ed. 1979). ``On such a
contract each obligor is liable severally or jointly with his co-
obligors for all of the damages caused by a breach. There is,
therefore, one more cause of action than there are obligors.'' Id.
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Pursuant to the statutory authority recited above, the Finance
Board has promulgated regulations governing the issuance of
consolidated obligations. In 1989, Congress authorized the Finance
Board to maintain the Office of Finance, a joint office of the
FHLBanks, and to delegate the ministerial functions associated with the
issuance of the consolidated obligations. See 12 U.S.C. 1422b(b)(1) and
(2). See also Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 183, tit. VII, sec.
702, Aug. 9, 1989. Accordingly, the Finance Board delegated to the
Office of Finance the authority to issue consolidated obligations under
section 11 of the Bank Act subject to Finance Board regulations,
resolutions or
[[Page 6821]]
policies. See 12 CFR 900.30. The operations of the Office of Finance
are governed by regulations promulgated by the Finance Board in 12 CFR
Part 941.
The issuance of the consolidated obligations is governed by the
regulations set forth in 12 CFR Parts 910 and 941. The Finance Board
also adopted a regulation that provides for a leverage limit on the
issuance of consolidated obligations. The rule prohibits the issuance
of senior bonds where immediately following such issuance the aggregate
amount of senior bonds and unsecured, senior liabilities would exceed
twenty times the total paid-in capital stock, retained earnings, and
reserves (exclusive of loss and deposit reserves required pursuant to
section 1431(g) of all of the FHLBanks).\5\ Additionally, the Finance
Board promulgated a regulation requiring the FHLBanks to maintain
certain assets at all times free of lien or pledge (the so-called
``negative pledge'' requirement) to ensure sufficient collateralization
of the consolidated obligations.\6\ Since the Finance Board was
authorized to issue consolidated obligations on which the FHLBanks are
jointly and severally liable, no FHLBank has defaulted on any principal
or interest payment.
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\5\ The following definitions apply to the leverage limit
provisions: ``(b) `Consolidated bonds' means bonds or notes issued
on behalf of all [FHL]Banks. (c) `Senior bonds' means consolidated
bonds issued pursuant to 12 U.S.C. 1431 and this part and not
defeased, other than bonds specifically subordinated to any then
outstanding consolidated bonds. (d) `Unsecured, senior liabilities'
means all obligations of the Banks recognized as a liability under
Generally Accepted Accounting Principles, except (1) Liabilities
that are covered by a perfected security interest; (2) Consolidated
bonds; (3) Bonds issued pursuant to 12 U.S.C. 1431(a); and (4)
Allowances for losses for off-balance sheet obligations.'' 12 CFR
910.0(b)-(d).
\6\ See 12 CFR 910.1(c). ``The [FHL]Banks shall at all times
maintain assets of the following types, free from any lien or
pledge, in a total amount at least equal to the amount of senior
bonds outstanding: (1) Cash; (2) Obligations of or fully guaranteed
by the United States; (3) Secured advances; (4) Mortgages as to
which one or more [FHL]Banks have any guaranty or insurance, or
commitment therefore, by the United States or any agency thereof;
(5) Investments described in section 16(a) of the Bank Act, as
amended (12 U.S.C. 1436(a)); and (6) Other securities which have
been assigned a rating or assessment by a major nationally
recognized securities rating agency that is equivalent to or higher
than the rating or assessment assigned by such agency or senior
bonds outstanding. (Proviso omitted.)''
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Under the present system, a FHLBank that needs funds for its
operations contacts the Office of Finance to begin negotiations with
one or more of the numerous broker-dealers who have been pre-screened
and qualified by the Office of Finance to purchase and resell
consolidated obligations in the capital markets. Once the parties are
in agreement on the terms of the obligation, offering documents are
prepared and the Office of Finance issues instructions for the delivery
of the consolidated obligation to, and simultaneous receipt of the
proceeds from, the purchaser through the electronic payment system
operated by the Federal Reserve Bank of New York (``FEDWIRE''). A
``Master Fiscal Agency Agreement'' is in place between the FHLBanks and
the Board of Governors of the Federal Reserve System for this purpose.
The Office of Finance has an account at the Federal Reserve Bank of New
York (NY Fed) that is used to effect delivery and payment transactions.
Pursuant to FEDWIRE instructions from the Office of Finance, the NY Fed
credits OF's account with the proceeds of a consolidated obligation
issuance. Likewise, the NY Fed debits OF's account for interest and
principal payments on a consolidated obligation. (In some cases, more
than one FHLBank may participate in an issuance, and is entitled to the
proceeds in the proportions agreed upon, and required to make principal
and interest payments accordingly.) At the end of each business day,
the OF nets the proceeds against the principal and interest payments
due for each participating FHLBank. While a participating FHLBank is
obligated to make the principal and interest payments on its
consolidated obligations, all FHLBanks, by law, are jointly and
severally liable for the interest and principal payments on all
consolidated obligations, which is stated on the face of the Offering
Circular.
The likelihood of a delinquency or default on a consolidated
obligation has been and continues to be extremely remote. In order to
avoid the possibility of such delinquency or default on a consolidated
obligation, however remote, the Finance Board believes it is important
to adopt a regulation that will codify the authority of the Finance
Board to act promptly to intercede before any substantial deterioration
of a FHLBank's earnings, and to ensure the continued timely servicing
of any and all COs. To the maximum extent possible under the law,
holders of consolidated obligations will have first priority in any
payment plan. The FHLBanks that participate in a consolidated
obligation will be called upon to use all of their available assets to
make good on their payment obligations. Any non-participating FHLBank
that makes an interest payment or otherwise makes good on a
consolidated obligation shall be entitled to reimbursement from the
participating FHLBanks and all other FHLBanks as the Finance Board
determines pursuant to this proposed rule.
III. Analysis of Proposed Rule
In furtherance of the Finance Board's duties to ensure that the
FHLBanks operate in a safe and sound manner and are able to obtain
funding in the capital markets, the proposed rule sets forth the means
by which the Finance Board will apportion the joint and several
liability on consolidated obligations among the FHLBanks. The proposed
rule would establish a process by which the Finance Board would look
first to the assets of a FHLBank that received the proceeds of a
consolidated obligation to make the principal and interest payments on
that consolidated obligation, and defines such a FHLBank as a
``participating FHLBank'' for purposes of that issuance. The proposed
rule would define a FHLBank that projected a net loss, non-compliance
with statutory and regulatory liquidity requirements set forth in
section 11 of the Bank Act, 12 U.S.C. 1431(g), and section III of the
Finance Board's Financial Management Policy (FMP), or an inability to
service the interest and principal payments due on the consolidated
obligations in which it was a participating FHLBank as a ``non-
performing FHLBank.'' The proposed rule would require each FHLBank to
submit quarterly certifications to the Finance Board regarding the
consolidated obligations in which the FHLBank is a participating
FHLBank. Each participating FHLBank must certify quarterly that it will
not suffer a net loss, will remain in compliance with the statutory and
regulatory liquidity requirements set forth in section 11 of the Bank
Act, 12 U.S.C. 1431(g), and the FMP, and will remain capable of
satisfying all consolidated obligation payments due in the next
quarter. The proposed rule further provides that any participating
FHLBank that cannot so certify shall file a consolidated obligation
payment plan with the Finance Board specifying the measures the FHLBank
will undertake to fully and timely meet its payment obligations. The
proposed rule would require a non-performing FHLBank to refrain from
incurring non-essential expenses, paying dividends or redeeming stock
until its plan has been approved by the Finance Board or all of its
consolidated obligation payment obligations for the quarter have been
satisfied. The proposed rule would require a non-performing FHLBank to
apply all of its assets to meet its consolidated obligation payments.
Furthermore, the proposed rule would codify the authority of the
Finance Board to
[[Page 6822]]
require any other FHLBank to make any such payment; and provide for any
FHLBank making consolidated obligation payments on behalf of a non-
performing FHLBank to receive reimbursement.
The proposed rule would add two new definitions to section 910.0--
``Participating Federal Home Loan Bank,'' and ``Non-performing Federal
Home Loan Bank.'' The proposed rule would also add a new section 910.7.
Section 910.7(a) would state the joint and several liability of the
FHLBanks and the duty of the FHLBanks to give priority to consolidated
obligation payments. Proposed section 910.7(b)(1) would require
quarterly certification by each FHLBank to the Finance Board that the
FHLBank will not suffer a net loss, will remain in compliance with the
statutory and regulatory liquidity requirements set forth in section 11
of the Bank Act, 12 U.S.C. 1431(g), and the FMP, and will remain
capable of servicing all of its consolidated obligation payments due
during that quarter. Section (b)(2) would require a participating
FHLBank to report immediately any projected net loss, inability to
service its consolidated obligations, or any non-compliance with the
statutory and regulatory liquidity requirements. The proposed rule in
section (b)(3) would codify the authority of the Finance Board to
require a FHLBank to file a report pursuant to section (b)(2) under
certain circumstances. Under section (c) of the proposed rule any
FHLBank projecting or experiencing an inability to service its current
consolidated obligations would be required to submit a consolidated
obligation payment plan to the Finance Board and would be required to
refrain from incurring non-essential operating expenses, declaring or
paying dividends, or redeeming any stock, until its consolidated
obligation payment plan is approved by the Finance Board and its
consolidated obligation payment obligations are satisfied. In the
remote event that any participating FHLBank would be unable, due to
actual or projected cash flow or balance sheet deficiencies, to service
such consolidated obligations, section (d) of the proposed rule
provides that the Finance Board would order one or more other FHLBanks
to make such payments. The non-performing FHLBank would be liable to
those other FHLBanks for reimbursement. The Finance Board would look to
the assets of the non-performing FHLBank for reimbursement of such
payments.
Under section (e) of the proposed rule, the reallocation of the
payment obligations among the other FHLBanks would be based on the pro
rata participation of each FHLBank in all consolidated obligations
outstanding as of the most recent month end for which the Finance Board
has data. The reallocation (as opposed to payments that may be ordered
by the Finance Board) would occur only after the non-performing FHLBank
had applied all of its assets to service any consolidated obligation.
Finally, section (f) of the proposed rule codifies the authority of the
Finance Board to act if the inability of any FLHBank to service its
consolidated obligations cannot be cured promptly.
IV. Regulatory Flexibility Act
The proposed rule applies only to the FHLBanks, 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, 5 U.S.C. 605(b), the Finance Board
hereby certifies that this proposed rule, if promulgated as a final
rule, will not have significant economic impact on a substantial number
of small entities.
V. Paperwork Reduction Act
This proposed rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 350, et
seq. Consequently, the Finance Board has not submitted any information
to the Office of Management and Budget for review.
List of Subjects in 12 CFR Part 910
Consolidated bonds and debentures, Federal home loan banks,
Securities.
For the reasons stated in the preamble, the Finance Board proposes
to amend 12 CFR part 910 as follows:
PART 910--CONSOLIDATED BONDS AND DEBENTURES
1. Revised the authority citation for part 910 to read as follows:
Authority: 12 U.S.C. 1422a, 1422b and 1431.
2. Amend Sec. 910.0 by adding paragraphs (e) and (f) to read as
follows:
Sec. 910.0 Definitions.
* * * * *
(e) Participating Federal Home Loan Bank means the Federal Home
Loan Bank or Banks that received proceeds from the sale of a
consolidated obligation issued by the Board pursuant to section 11 of
the Federal Home Loan Bank Act (12 U.S.C. 1431).
(f) Non-Performing Federal Home Loan Bank means any participating
Federal Home Loan Bank that fails to certify pursuant to
Sec. 910.7(b)(1) of this part that it is able to pay principal and
interest payments when due, that fails to make such payments when due,
that fails to file a plan with the Board to meet its obligations on
consolidated obligations, that is required by the Board pursuant to
Sec. 910.7(b)(3) of this part to file a report, or that is determined
by the Board to require assistance in meeting its obligations on
consolidated obligations.
3. Add Sec. 910.7 to read as follows:
Sec. 910.7 Joint and several liability
(a) In general. (1) Each and every Federal Home Loan Bank,
individually and collectively, has a duty to make full and timely
payment of all principal and interest on consolidated obligations when
due.
(2) Each and every Federal Home Loan Bank individually and
collectively shall ensure that the timely payment of principal and
interest on all consolidated obligations is given priority over, and is
paid in full in advance of any payment to or redemption of shares from
any shareholder, or any other creditor not entitled by law or contract
to priority over or parity with the holder of consolidated obligations.
(b) Certification and Reporting. (1) Before the end of each
calendar quarter, and before declaring or paying any dividend for that
quarter, the President of each Federal Home Loan Bank shall certify in
writing to the Finance Board that the Federal Home Loan Bank will not
suffer a net loss, will remain in compliance with the statutory and
regulatory liquidity requirements set forth in section 11 of the
Federal Home Loan Bank Act (12 U.S.C. 1431(g)), and the Board's
Financial Management Policy, and will remain capable of making full and
timely payment of all interest and principal payments on consolidated
obligations coming due during the upcoming quarter, in which such
Federal Home Loan Bank is a participating Federal Home Loan Bank (as
defined in Sec. 910.0(e) of this part).
(2) A Federal Home Loan Bank shall report immediately to the Board
if at any time:
(i) The Federal Home Loan Bank is unable to provide the
certification required in paragraph (b)(1) of this section;
(ii) Subsequent to providing the certification required in
paragraph (b)(1) of this section, the Federal Home Loan Bank projects
that it will incur a net loss, fail to comply with statutory and
regulatory liquidity requirements, or will be unable to timely and
fully service consolidated obligations in which the Federal Home Loan
Bank is
[[Page 6823]]
a participating Federal Home Loan Bank due during the quarter;
(iii) The Federal Home Loan Bank actually incurs a net loss, fails
to comply with statutory and regulatory liquidity requirements, or will
be unable to timely and fully service consolidated obligations in which
the Federal Home Loan Bank is a participating Federal Home Loan Bank
due during the quarter.
(iv) The report shall be accompanied by the consolidated obligation
payment plan referenced in paragraph (c) of this section.
(3) If at any time the Board has reason to believe that a Federal
Home Loan Bank will incur a net loss, cease to be in compliance with
the statutory and regulatory liquidity requirements, or will lack the
capacity to timely and fully service its consolidated obligations, the
Board may require such Federal Home Loan Bank to file a report pursuant
to paragraph (b)(2) of this section.
(c) Consolidated obligation payment plans. (1) If a participating
Federal Home Loan Bank becomes a non-performing Federal Home Loan Bank
(as defined in Sec. 910.0(f) of this part) as a result of failing to
provide the certification required in paragraph (b)(1) of this section,
that Federal Home Loan Bank shall, prior to the beginning of the
quarter in which the shortfall is estimated to occur, submit a
``consolidated obligation payment plan.'' A consolidated obligation
payment plan shall specify the measures the non-performing Federal Home
Loan Bank will undertake to make full and timely payments of all
principal and interest consolidated obligation payments due during the
quarter.
(2) A Federal Home Loan Bank submitting a report pursuant to
paragraphs (b)(2) or (b)(3) of this section, shall at the same time
submit a consolidated obligation payment plan as described in paragraph
(c)(1) of this section.
(3) A non-performing Federal Home Loan Bank shall refrain from
incurring any non-essential expenses, from declaring or paying
dividends, and from redeeming any capital stock, until such time as the
Board has approved the Federal Home Loan Bank's consolidated obligation
payment plan or ordered another remedy, and all of the non-performing
Federal Home Loan Bank's consolidated obligation payments have been
brought current.
(d) Board payment orders. (1) The Board, in its discretion, may
order any Federal Home Loan Bank to make any principal or interest
payment due on any consolidated obligation.
(2) To the extent that a Federal Home Loan Bank is ordered by the
Board to make, or otherwise by agreement makes, any payment on any
consolidated obligation in excess of its obligations as a participating
Federal Home Loan Bank, the Federal Home Loan Bank shall be entitled to
reimbursement from the non-performing Federal Home Loan Bank (which
shall have a corresponding obligation to reimburse the Federal Home
Loan Bank providing assistance) to the extent of such payment and other
associated costs, including reasonable interest.
(e) Adjustment of equities. (1) Any non-performing Federal Home
Loan Bank shall apply its assets to fulfill its consolidated
obligations payment obligations, which shall include reimbursement
(including reasonable interest) to any Federal Home Loan Bank that has
made payments on behalf of the non-performing Federal Home Loan Bank,
whether by agreement with the non-performing Federal Home Loan Bank or
by order of the Board.
(2) If the assets of a non-performing Federal Home Loan Bank are
insufficient to satisfy all consolidated obligation payment obligations
set forth in paragraph (e)(1) of this section, then the Board shall
allocate the outstanding liability among the remaining Federal Home
Loan Banks on a pro rata basis in proportion to each Federal Home Loan
Bank's participation in all consolidated obligations outstanding as of
the end of the most recent month for which the Board has data.
(f) Reservation of authority. Nothing in this section shall affect
the Board's ability to take such enforcement or other action against
any Federal Home Loan Bank pursuant to the Board's authority under the
Federal Home Loan Bank Act or otherwise to supervise the Federal Home
Loan Banks and ensure that they are operated in a safe and sound
manner.
Dated: January 27, 1999.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-3407 Filed 2-10-99; 8:45 am]
BILLING CODE 6725-01-P
