[Federal Register Volume 63, Number 143 (Monday, July 27, 1998)]
[Rules and Regulations]
[Pages 40018-40024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19912]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 933
[No. 98-29]
RIN 3069-AA67
Membership Approval
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
its regulation on membership in the Federal Home Loan Banks (Banks)
(Membership Regulation) to make certain technical and substantive
revisions to the regulation that would improve the operation of the
membership application process, as well as further streamline
application processing for certain types of applicants for Bank
membership.
EFFECTIVE DATE: August 26, 1998.
FOR FURTHER INFORMATION CONTACT: Richard Tucker, Deputy Director,
Compliance Assistance Division, Office of Policy, (202) 408-2848, or
Sharon B. Like, Senior Attorney-Adviser, Office of General Counsel,
(202) 408-2930, Federal Housing Finance Board, 1777 F Street, N.W.,
Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Under the Federal Home Loan Bank Act (Act), the Finance Board is
responsible for the supervision and regulation of the 12 Banks, which
provide advances and other financial services to their member
institutions. See 12 U.S.C. 1422a(a). Institutions may become members
of a Bank if they meet certain membership eligibility and minimum stock
purchase criteria set forth in the Act and the Finance Board's
implementing Membership Regulation. See id. sections 1424, 1426,
1430(e)(3); 12 CFR part 933.
On August 16, 1996, the Finance Board published a final rule
amending the Membership Regulation to authorize the 12 Banks, rather
than the Finance Board, to approve or deny all applications for Bank
membership, subject to certain criteria for determining compliance with
the statutory eligibility requirements for Bank membership formerly
contained in policy guidelines used by the Finance Board in approving
membership applications. See 61 FR 42531 (Aug. 16, 1996) (codified at
12 CFR part 933); Federal Home Loan Bank System Membership Application
Guidelines, Finance Board Res. No. 93-88 (Nov. 17, 1993) (Guidelines).
The final rule also provided for streamlined application processing for
certain types of membership applications. See 12 CFR part 933.
In the course of processing and approving membership applications
under the Membership Regulation, the Banks raised a number of technical
and substantive issues with the Regulation whose resolution would
improve operation of the membership application process and streamline
membership application processing for certain types of institutions. To
address these concerns, the Finance Board issued a proposed rule
revising various provisions of the Membership Regulation, which was
published in the Federal Register on February 19, 1998, with a 30-day
period for public comment. See 63 FR 8364 (Feb. 19, 1998). The Finance
Board received a total of four letters on the proposed rule. Commenters
included three Banks, and one Bank member thrift institution.
II. Analysis of the Final Rule
A. Definitions--Section 933.1
1. Definition of ``Primary Regulator''--Section 933.1(y)
Section 933.1(y) of the current Membership Regulation defines the
term ``primary regulator'' as the chartering authority for federally-
chartered applicants, the insuring authority for federally-insured
applicants that are not federally-chartered, or the appropriate state
regulator for all other applicants. See 12 CFR Sec. 933.1(y). This
definition does not include the Federal Reserve Board (FRB) for state-
chartered applicants that are members of the Federal Reserve System
(FRS). Under Sec. 933.11(a)(3), a Bank is required to obtain as part of
the membership application the applicant's most recent available
regulatory examination report prepared by its primary regulator or
appropriate state regulator. See id. Sec. 933.11(a)(3). Section
933.11(b)(1) provides that an applicant must have received a composite
regulatory examination rating from its primary regulator or appropriate
state regulator within two years preceding the date the Bank receives
the application for membership. See id. Sec. 933.11(b)(1).
One Bank identified a potential problem with meeting these
financial condition requirements where the FRB and a state financial
institution regulator alternate examinations of a state-chartered
applicant that is an FRS member. When the state financial institution
regulator performs the examination, it provides a copy of the
regulatory examination report to the FRB. According to the Bank,
certain state financial institution regulators in its district cannot
or will not release to the Bank copies of the regulatory examination
reports they have prepared, nor will the FRB release to the Bank copies
of the state regulatory examination reports. Thus, regulatory
examination reports prepared under such circumstances are not available
in order for the Bank to obtain a regulatory examination rating for the
applicant. Nor may the Bank obtain and rely on a copy of the regulatory
examination report and rating of the FRB when the FRB has examined the
applicant, because the definition of ``primary regulator'' in
Sec. 933.1(y) does not include the FRB. Thus, in such situations, the
Bank may not be able to obtain any examination report and rating for
the applicant and, therefore, the applicant cannot be deemed to satisfy
the financial condition requirements of Secs. 933.11(a)(3) and (b)(1).
The presumption of noncompliance with the financial condition
requirements would have to be rebutted under Sec. 933.17(d)(1) by
preparing a written justification providing substantial evidence
acceptable to the Bank that the applicant is in the financial condition
required by Sec. 933.6(a)(4), notwithstanding the lack of a regulatory
examination rating. See id. Sec. 933.17(d)(1).
The exclusion of the FRB from the definition of ``primary
regulator'' in Sec. 933.1(y) was an oversight. The Banks should be able
to rely on regulatory examination reports and examination ratings from
the FRB to determine an applicant's financial condition under
Sec. 933.11. An applicant should not have to go through the additional
burden of establishing its satisfactory financial condition through the
rebuttal process if an FRB regulatory examination report and rating are
available. Two Bank commenters specifically supported allowing the
Banks to rely on FRB regulatory examination reports and ratings. One
commenter stated that it believes the FRB examination is equivalent in
rigor and thoroughness to an examination by the Federal Deposit
Insurance Corporation (FDIC) or the Office of the Comptroller of the
Currency (OCC).
Accordingly, consistent with the proposed rule, the final rule
revises the definition of ``primary regulator'' in
[[Page 40019]]
Sec. 933.1(y), as further described below, to include the FRB.
Another limitation of the current definition of ``primary
regulator'' in Sec. 933.1(y) is that it requires a Bank to obtain the
regulatory examination report and rating only from the ``primary''
regulator listed, even though a regulatory examination report and
rating from an alternate regulator also may be available. For example,
many potential members are examined by more than one regulator.
However, under the regulation, the Bank is required to obtain the
regulatory examination report and rating prepared by the FDIC for a
state-chartered, FDIC-insured institution, even though there may be a
more recent state regulatory examination report and rating available
for such institution. A Bank should not be limited to using only the
``primary'' regulator's regulatory examination report and rating when
more current information is available.
Accordingly, consistent with the proposed rule, the final rule
amends Sec. 933.1(y) by changing the term ``primary regulator'' to the
broader term ``appropriate regulator,'' and defining it to mean a
regulatory entity listed in Sec. 933.8, as applicable. The regulatory
entities listed in Sec. 933.8 are: for depository institution
applicants, the FDIC, FRB, National Credit Union Administration, OCC,
Office of Thrift Supervision (OTS), or other appropriate state
regulator; and for insurance company applicants, an appropriate state
regulator accredited by the National Association of Insurance
Commissioners. See id. Sec. 933.8. The final rule replaces the terms
``primary regulator'' and ``primary regulator or appropriate state
regulator'' wherever they appear throughout the Membership Regulation
with the term ``appropriate regulator.''
2. Nonperforming Assets Performance Trend Criterion; Definitions of
``Nonperforming Loans, Leases and Securities;'' ``Performing Loans,
Leases and Securities''--Sections 933.11(b)(3)(i)(B); 933.1(u), (x)
Section 933.11(b)(3)(i)(B) of the current Membership Regulation
provides that if an applicant's most recent composite regulatory
examination rating within the past two years was ``2'' or ``3,'' the
applicant's nonperforming loans, leases and securities plus foreclosed
and repossessed real estate may not have exceeded 10 percent of its
performing loans, leases and securities plus foreclosed and repossessed
real estate, in the most recent calendar quarter. See id.
Sec. 933.11(b)(3)(i)(B). This nonperforming assets performance trend
criterion was intended to be the same criterion as that required in the
former Finance Board Guidelines, but was described incorrectly in the
Membership Regulation. The proposed rule revised the criterion to state
it correctly as provided in the Guidelines, and made conforming changes
to components of the criterion consistent with the Guidelines. One Bank
commenter specifically supported this proposed change.
Accordingly, consistent with the proposed rule, the final rule
revises Sec. 933.11(b)(3)(i)(B) to state the criterion correctly, as
follows: the applicant's nonperforming loans and leases plus other real
estate owned, did not exceed 10 percent of its total loans and leases
plus other real estate owned, in the most recent calendar quarter. The
final rule makes a conforming change to the definition of
``nonperforming loans, leases and securities'' in Sec. 933.1(u) by
deleting the references to securities. The final rule also makes a
conforming change to Sec. 933.1(x) by replacing the definition of
``performing loans, leases and securities'' with a new definition of
``other real estate owned.''
3. Definition of ``Consolidation''--Section 933.1(ee)
Sections 933.24 and 933.25 of the current Membership Regulation set
forth certain requirements and procedures in the event of the
``consolidation'' of members with other members or members with
nonmembers. See id. Secs. 933.24, 933.25. Questions were raised as to
whether the term ``consolidation'' applies only to transactions falling
within the narrow meaning of the term, i.e., combinations where a new
company is formed to acquire the net assets of the combining companies.
The term ``consolidation'' was not intended to apply solely to such
combinations of entities. The proposed rule clarified this issue by
adding a new definition of ``consolidation'' in Sec. 933.1(ee) to
include a consolidation, a merger, or a purchase of all of the assets
and assumption of all of the liabilities of an entity by another
entity. One Bank commenter specifically supported the proposed
definition.
Accordingly, the final rule adopts the proposed definition without
change.
B. Action on Applications--Section 933.3(c)
Section 933.3(c) of the current Membership Regulation requires a
Bank to notify an applicant when its application is deemed by the Bank
to be complete. See id. Sec. 933.3(c). Section 933.3(c) also requires a
Bank to notify an applicant if the 60-day period for acting on a
membership application is stopped, and when the period for acting on
the application is resumed. See id. The proposed rule required the Bank
to provide such notices to the applicant in writing. The intent was to
ensure that there is a written record of the Banks' actions during the
application processing period, which may be relevant in the event of an
appeal of a Bank's denial of an application for membership.
No commenters opposed the proposed requirement that the Banks
provide written notice to an applicant when its application is deemed
complete, which starts the 60-day processing clock. Accordingly, this
requirement is retained in the final rule.
Two Bank commenters specifically opposed requiring the Banks to
provide written notice to an applicant when the 60-day processing
period is stopped or resumed. They stated that telephone notification
to the applicant, with a written log of such notification maintained in
the application files at the Bank, should be sufficient. The commenters
viewed the notice requirement merely as ``bureaucratic paperwork'' that
would provide no additional information to the applicant, which would
already have received verbal notice from the Bank, while increasing the
workload for Bank staff. One commenter also noted that the processing
clock often is stopped only for short periods of time in order to get
additional information from the applicant, and the Bank probably will
have received the requested information from the applicant before it
has had time to generate the notice letter.
The Finance Board believes there is merit in the commenters'
arguments. A written record can be ensured, for purposes of reviewing
any appeal of a Bank's denial of a membership application, by requiring
the Banks to maintain a written log in their application files of
notices provided to applicants when the processing clock is stopped or
resumed. Written notice to the applicants in such circumstances does
not appear to be necessary. The final rule is revised accordingly.
C. Automatic Membership Approval For Certain Consolidations--Section
933.4(d)
Sections 933.4(a) and (b) of the current Membership Regulation
provide for automatic Bank membership approval for institutions
required by law to become Bank members, and for institutions that have
undergone certain charter conversions, respectively. See id.
Secs. 933.4(a), (b). Several Banks
[[Page 40020]]
suggested that the Regulation also should allow for automatic Bank
membership approval where a member consolidates with a nonmember, the
nonmember is the surviving entity, and a significant percentage of the
surviving entity's total assets are derived from the assets of the
disappearing member. Where the surviving entity has substantially the
same assets as the disappearing member, the surviving entity arguably
should not have to go through the membership application process. The
proposed rule authorized such automatic membership approval where 90
percent or more of the total assets of the surviving entity are derived
from the assets of the disappearing member, and where the surviving
entity provides written notice to the Bank that it desires to be a
member of the Bank. The Finance Board requested comment on the
arguments for or against this proposal, including whether the 90
percent calculation or some other number or approach was an appropriate
method for determining the similarity of the disappearing and surviving
entities. In response to a Bank suggestion, the Finance Board also
requested comment on whether the chief executive officer of the
surviving entity should be required to submit a letter or certification
stating that the surviving entity continues to meet the membership
eligibility requirements.
1. 90 Percent Test
One Bank commenter specifically supported the proposed 90 percent
test. Two Bank commenters recommended reducing the percentage
requirement to 75 percent or 50 percent, which also was supported by
the Bank endorsing the 90 percent test. Two of these commenters
recommended that the surviving entity in such consolidations be
required to provide a letter or certification stating that it continues
to meet the membership eligibility requirements. The other commenter
stated that such a letter or certification is not necessary since the
preponderance of the assets is derived from the disappearing member,
and it is highly unlikely that the surviving entity would not meet the
membership eligibility requirements. The commenters stated that
lowering the percentage requirement would further streamline the
membership process, while posing little financial risk to the Banks.
Otherwise, there would be an interruption in membership status while
the surviving entity applied for membership, which could result in lost
business for the Bank as well as the surviving entity. The thrift
member commenter opposed the proposed amendment, stating that any
efficiencies that may be gained by allowing automatic membership
approval for the small number of institutions that would be eligible
for such treatment are outweighed by the risks of not maintaining
appropriate vigilance over Bank membership.
After consideration of the comments, the Finance Board has decided
to retain in the final rule the proposed 90 percent test, but to make
its application discretionary with the Banks. The final rule also
clarifies that a consolidated institution that is approved for
automatic membership by a Bank may become a member of the Bank only
upon the purchase of its minimum stock purchase requirement pursuant to
the requirements of Sec. 933.20.
The intent of the 90 percent test is to permit automatic membership
approval for consolidated institutions where substantially all of the
institution's assets are derived from the assets of the disappearing
member, making satisfaction of the membership eligibility requirements
essentially automatic. The Finance Board is comfortable that the 90
percent test generally represents a satisfactory proxy for this
eligibility determination and that there are not significant risks that
would affect the integrity of the membership process. However, the
Finance Board recognizes that there may be special circumstances where
relying solely on the 90 percent proxy test is not sufficient, and that
warrant obtaining additional information about the consolidated
institution in order to verify its satisfaction of the membership
eligibility requirements. In such cases, a Bank may want to conduct
additional due diligence of the consolidated institution's financial
condition or other eligibility factors, pursuant to the normal
membership application process, in order to verify the institution's
compliance with the eligibility requirements. Thus, rather than
requiring automatic membership approval for all consolidated
institutions meeting the 90 percent test, the final rule authorizes the
Banks, in their discretion, to approve automatic membership for
consolidated institutions meeting the 90 percent test.
A percentage requirement below 90 percent does not ensure automatic
satisfaction of the membership eligibility requirements, as
substantially all of the surviving institution's assets cannot be said
to be derived from the assets of the disappearing member. An
independent determination that the surviving institution continues to
meet the eligibility requirements would be necessary. This goes beyond
the intent of the proposed rule, which was to streamline the membership
process for consolidated institutions that can be deemed to
automatically satisfy the membership eligibility requirements. Relying
on a self-certification of eligibility from the surviving institution
is no longer an automatic membership process, and may not achieve the
desired effect of streamlining the process. The surviving institution
still would have to work through the data from its regulatory financial
report and determine whether it satisfies the eligibility requirements
before it could certify its eligibility, and the Bank presumably would
need to conduct some sort of informal analysis of the institution's
data in order to ensure that it is comfortable with relying on the
certification. Moreover, it may not be advisable for a Bank to rely on
an institution's self-certification of eligibility, in light of the
fact that the Banks often are required to work extensively with
membership applicants to get all of the information needed to conduct
an adequate eligibility review. In addition, it is not clear how the
rebuttable presumption process under the current Regulation should work
under a certification process. The Regulation currently allows an
applicant to rebut a presumption of noncompliance with eligibility
requirements, as determined in the discretion of the Bank. It may not
make sense to allow an institution to make its own discretionary
certification that it has rebutted a presumption of noncompliance.
In view of all these factors, the final rule does not adopt the
commenters' suggestions, which go beyond the intended scope of the
proposed rule.
2. Post-Consolidation Notice Requirement
Two Bank commenters recommended that the surviving entity be
required to notify the Bank of its desire for membership within 60 days
after the effective date of the consolidation, consistent with the 60-
day notice requirement for consolidations involving nonmembers that do
not satisfy the 90 percent test, which must apply for membership under
Sec. 933.25(b) of the current Regulation. See id. Sec. 933.25(b). There
appears to be no reason why consolidated institutions meeting the 90
percent test should be treated differently, for membership notice
purposes, from consolidated institutions that do not meet the 90
percent test and must apply for membership. Sixty days appears to be a
reasonable amount of time for consolidated institutions meeting the 90
[[Page 40021]]
percent test to make a decision regarding whether they want to be
members. Accordingly, the final rule adopts a 60-day post-consolidation
notice requirement for automatic consolidations.
3. Treatment of Acquired Advances and Stock During Notice Period
Since the final rule allows for a 60-day post-consolidation notice
period, the rule also must clarify how any outstanding Bank advances
and Bank stock acquired from the disappearing member will be treated
during that period before the consolidated institution has announced
its intention whether to accept membership. The final rule treats such
advances and stock consistent with the treatment for consolidated
institutions not meeting the 90 percent test, under
Secs. 933.25(d)(1)(i), (e) and (f) of the current regulation, i.e.,
during the 60-day notice period, the consolidated institution's Bank
may permit the institution to continue to hold any outstanding Bank
advances and stock, and the institution shall have the limited rights
associated with such stock in accordance with Secs. 933.25(e) and (f).
See id. Secs. 933.25(d)(1)(i), (e), (f).\1\ Of course, if the
consolidated institution ultimately decides not to accept membership,
then the liquidation of any outstanding indebtedness owed to the
disappearing institution's Bank and redemption of stock of such Bank
would be carried out in accordance with the requirements of Sec. 933.29
of the current Regulation. See 12 CFR 933.29.
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\1\Section 933.25(f) of the current Membership Regulation
provides that the consolidated institution may not vote the Bank
stock acquired in the consolidation from the disappearing member
unless and until the consolidated institution is a Bank member. See
id. Sec. 933.25(f). Under the Finance Board's proposed amendments to
its regulations governing the election of Bank directors,
Sec. 933.25(f) would be removed. See 63 FR 26532, 26544 (May 13,
1998). The proposed election regulation would provide that the
consolidated institution may vote the Bank stock acquired from the
disappearing member that was held by such member on the record date
(December 31 of the calendar year immediately preceding the election
year). See proposed Secs. 932.1 (definition of ``record date''),
932.5(b), 63 FR 26539-40.
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4. Multiple Members Merging Into a Nonmember; ``Same District''
Requirement
A Bank commenter also recommended that automatic membership be
allowed for multiple members merging into a single nonmember, but only
if the principal places of business of the multiple members are located
in the same Bank district as the principal place of business of the
surviving nonmember, consistent with the ``same district'' requirement
in Sec. 933.25(b) of the current Regulation. The final rule allows for
automatic membership for multiple members merging into a single
nonmember, where 90 percent of more of the total assets of the
consolidated institution are derived from the total assets of the
disappearing members. The final rule also applies to consolidations
meeting the 90 percent test the ``same district'' requirement, which
was inadvertently omitted from the proposed rule.
D. Allowance For Loan and Lease Losses Performance Trend Criterion--
Section 933.11(b)(3)(i)(C)
Section 933.11(b)(3)(i)(C) of the current Membership Regulation
provides that if an applicant's most recent composite regulatory
examination rating within the past two years was ``2'' or ``3,'' the
applicant's ratio of its allowance for loan and lease losses to
nonperforming loans, leases and securities must have been 60 percent or
greater during 4 of the 6 most recent calendar quarters. This allowance
for loan and lease losses performance trend criterion was intended to
be the same criterion as that required in the former Finance Board
Guidelines, but was described incorrectly in the Membership Regulation.
The proposed rule revised the criterion to state it correctly as
provided in the Guidelines. One Bank commenter specifically supported
this proposed change.
Accordingly, consistent with the proposed rule, the final rule
revises Sec. 933.11(b)(3)(i)(C) to state the criterion correctly, as
follows: the applicant's ratio of its allowance for loan and lease
losses plus the allocated transfer risk reserve to nonperforming loans
and leases was 60 percent or greater during 4 of the 6 most recent
calendar quarters.
One Bank commenter recommended that the minimum 60 percent ratio be
reduced to 40 percent, arguing that 60 percent is too high a threshold
that too often triggers the need for rebutting a presumption of
noncompliance with this criterion for applicants that are in a strong
financial condition. The Bank also suggested an alternative measure of
compliance through reliance on a determination by the applicant's
primary regulator of satisfactory performance of the criterion, based
on the primary regulator's own definition of the criterion.
The substantive issue of what amount should be the required ratio
for this performance criterion was not specifically raised for comment
in the proposed rule, which was intended merely to correct, consistent
with the Guidelines, an incorrect statement of the ratio in the current
regulation. No other commenter recommended lowering the ratio from 60
percent. This issue, therefore, does not appear to be ripe for review
at this time. However, if additional information is brought to the
Finance Board's attention at a future time that suggests that the 60
percent figure should be reconsidered, the Finance Board will act
accordingly.
E. De Novo Insured Depository Institution Applicants--Section 933.14
Section 933.14 of the current Membership Regulation sets forth the
requirements for processing and approving membership applications from
de novo insured depository institution applicants. See id. Sec. 933.14.
Section 933.14(a) provides for streamlined processing for newly-
chartered applicants that have not yet commenced operations, which are
deemed to meet the duly organized, inspection and regulation, financial
condition, and character of management eligibility requirements. See
id. Sec. 933.14(a)(1). Section 933.14(b) requires newly-chartered
applicants that have commenced operations to meet all of the
eligibility requirements, subject to certain exceptions provided in
paragraph (b). In particular, if such applicants have not yet filed
regulatory financial reports for the last six calendar quarters
preceding the date the Bank receives the membership application, the
applicant need not meet the performance trend criteria in
Sec. 933.11(b)(3)(i)(A) through (C) if the applicant has filed
regulatory financial reports for at least three calendar quarters of
operation. See id. Sec. 933.14(b)(2)(iii)(A).
A number of Banks stated that the requirement for having filed
three calendar quarters of regulatory financial reports should not be
necessary for institutions that have recently commenced operations. The
financial condition and character of management of such institutions
already will have been recently reviewed and approved by their
chartering and insuring regulators (see, e.g., 12 U.S.C. 1816, 12 CFR
303.7(d)(ii) (FDIC); 12 U.S.C. 26, 12 CFR 5.20 (OCC)), will have been
based on a forward looking business plan, and should not have changed
significantly since the commencement of operations. The Banks should
not have to duplicate the review performed by the prospective member's
appropriate regulator. Further, de novo insured depository institution
applicants should be treated similarly to mandatory de novo thrift
institutions, which do not have to satisfy any specific Bank membership
[[Page 40022]]
eligibility requirements since they are required by law to be Bank
members.
Based on these arguments, proposed Sec. 933.14(a)(1) extended the
streamlined application processing currently applicable to newly-
chartered insured depository institutions that have not yet commenced
operations to newly-chartered insured depository institutions that have
commenced operations. Such applicants would be deemed to meet the duly
organized, inspection and regulation, financial condition, and
character of management eligibility requirements. In order to be
considered newly-chartered and subject to the streamlined application
processing procedures of Sec. 933.14(a)(1), applicants would have to
have been chartered within three years prior to the date the Bank
receives the application for membership. Three years is consistent with
the time period for de novo treatment applied by other financial
institution regulators. See, e.g., 12 CFR 543.3(a) (OTS).
The Finance Board requested comment on the arguments for or against
this proposal. Three Bank commenters specifically supported the
proposal, while the thrift member commenter opposed it. The supporting
commenters cited the reasons expressed in the proposed rule for
streamlining the process. One commenter also noted that the de novo
applicant's other regulators closely scrutinize the financial condition
of the institution during its first three years of operations, which
should provide additional comfort regarding the safety and soundness of
the institution. The commenter also pointed out that after approving a
de novo institution for membership, the Bank would closely monitor its
financial soundness before providing any advances to the institution.
In addition, the commenter noted that streamlining membership approval
for such institutions will enable them to more quickly access long-term
Bank advances for the purpose of originating long-term housing and
community and economic development loans.
The thrift member stated that the efficiencies to be gained by the
proposal appeared small compared to the risks being assumed by the Bank
System. The commenter indicated that a de novo applicant's first three
quarterly reports should be reviewed to compare its actual performance
with its business plan, thereby preserving the possibility of early
identification and avoidance of financial risks to the Bank System.
However, as discussed above, streamlined membership processing for de
novos should not increase the financial risks to the Bank System, given
the extensive financial scrutiny of the institution already performed
by its other regulators, as well as the close monitoring that the Banks
will conduct before making advances to such an institution.
Accordingly, the final rule retains the proposed provisions, with a
clarification that the charter date to be used in determining the
three-year period for de novo status is the date the charter was
approved. One commenter suggested that the charter date be the date the
letter approving the charter is issued to the applicant by its
regulator. This seems unnecessary as the date of charter approval
should be easily verifiable.
F. Recent Merger or Acquisition Applicants--Section 933.15
Sections 933.9 and 933.10 of the current Membership Regulation
require applicants to show satisfaction of the ``makes long-term home
mortgage loans'' and ``10 percent residential mortgage loans''
requirements, respectively, based on the applicant's most recent
regulatory financial report. See id. Secs. 933.9, 933.10. An applicant
that recently has merged with or acquired another institution prior to
applying for Bank membership must show satisfaction of these
eligibility requirements based on the most recent regulatory financial
report filed by the consolidated entity. See id. However, a newly
consolidated entity may not be able to show compliance with these
requirements as it may be several months before the next quarterly
regulatory financial report is due to be filed with the appropriate
regulator.
One Bank suggested that in order to allow the applicant to be
approved for membership promptly, the applicant should be allowed to
demonstrate satisfaction of Secs. 933.9 and 933.10 by providing the
combined pro forma financial statement that the combined entity filed
with the regulator that approved its merger or acquisition. Another
suggestion was that the applicant should be allowed to provide the most
recent regulatory financial report filed prior to the merger or
acquisition by each of the institutions that entered into the merger or
acquisition. The Bank then would consolidate the relevant data from
both reports for purposes of determining compliance with Secs. 933.9
and 933.10. The proposed rule allowed reliance on such regulatory
financial reports, provided that in the case of showing satisfaction of
the 10 percent residential mortgage loans requirement, the Bank
obtained a certification from the applicant that there was no material
decrease in the ratio of consolidated residential mortgage loans to
consolidated total assets derived from the reports since the reports
were filed with the appropriate regulator.
One Bank commenter specifically supported this proposal. However,
upon further consideration of the issue, the Finance Board is concerned
that simply consolidating the mortgage loan data contained in the
regulatory financial reports filed by the entities before the merger or
acquisition does not accurately reflect a true valuation of the asset
composition of the combined entity. The proposed rule also created a
potential difficulty in defining what constitutes a ``material''
decrease in the ratio of consolidated residential mortgage loans to
consolidated total assets. The Finance Board believes that the combined
pro forma financial statement filed with the regulator that approved
the merger or acquisition represents a more accurate picture of the
combined institution's asset composition. Moreover, Sec. 933.15(a)(ii)
of the current Regulation already allows such applicants to provide
combined pro forma financial statements to show satisfaction of the
performance trend criteria in Secs. 933.11(b)(3)(i)(A) to (C) where
combined regulatory financial reports are not available. See id.
Sec. 933.15(a)(ii). Accordingly, the final rule provides that, for
purposes of determining compliance with Secs. 933.9 and 933.10, a Bank
may, in its discretion, permit a recent merger or acquisition applicant
that has not yet filed the required consolidated regulatory financial
report as a combined entity with its appropriate regulator, to provide
the combined pro forma financial statement for the combined entity
filed with the regulator that approved the merger or acquisition.
III. Regulatory Flexibility Act
The final rule implements statutory requirements binding on all
Banks and on all applicants for Bank membership, regardless of their
size. The Finance Board is not at liberty to make adjustments to those
requirements to accommodate small entities. The final rule does not
impose any additional regulatory requirements that will have a
disproportionate impact on small entities. Therefore, in accordance
with section 605(b) of the Regulatory Flexibility Act, see 5 U.S.C.
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.
IV. Paperwork Reduction Act
As part of the proposed rulemaking, the Finance Board published a
request
[[Page 40023]]
for comments concerning proposed changes to the collection of
information in the current Membership Regulation, see 63 FR 8364, 8367
(Feb. 19, 1998), which previously was approved by the Office of
Management and Budget (OMB) and assigned OMB control number 3069-0004.
The Finance Board also submitted to OMB an analysis of the proposed
changes to the collection of information contained in Sec. 933.15 of
the proposed rule, in accordance with section 3507(d) of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3507(d). No comments were received by
the Finance Board on the proposed changes to the collection of
information. OMB approved the information collection without conditions
with an expiration date of April 30, 2001. The final rule does not
substantively or materially modify the approved information collection.
The Banks and, where appropriate, the Finance Board, will use the
information collection under Sec. 933.15(c) of the final rule to
determine whether a recent merger or acquisition applicant meets
certain membership eligibility requirements. See 12 U.S.C.
1424(a)(1)(C), (a)(2)(A); 12 CFR 933.9, 933.10. Only applicants meeting
such requirements may become Bank members. See id.; id. Responses are
required to obtain or retain a benefit. See 12 U.S.C. 1424. The Finance
Board and the Banks will maintain the confidentiality of information
obtained from respondents pursuant to the collection of information as
required by applicable statute, regulation, and agency policy. Books or
records relating to this collection of information must be retained as
provided in the regulation.
Likely respondents and/or recordkeepers will be the Finance Board,
Banks, and financial institutions that have recently undergone a merger
or acquisition and are eligible to become Bank members under the Act,
see id. section 1424(a)(1), including any building and loan
association, savings and loan association, cooperative bank, homestead
association, insurance company, savings bank, or insured depository
institution. The title, description of need and use, and a description
of the information collection requirements in the final rule are
discussed further in part II. of the SUPPLEMENTARY INFORMATION.
Potential respondents are not required to respond to the collection of
information unless the regulation collecting the information displays a
currently valid control number assigned by OMB. See 44 U.S.C. 3512(a).
The changes to the information collection will not impose any
additional costs on the Finance Board or the Banks. The estimated
annual reporting and recordkeeping hour burden on respondents is:
a. Number of respondents--15
b. Total annual responses--15
Percentage of these responses collected electronically--0%
c. Total annual hours requested--60
d. Current OMB inventory--59,152
e. Difference--(59,092)
The estimated annual reporting and recordkeeping cost burden on
respondents is:
a. Total annualized capital/startup costs--$0
b. Total annual costs (O&M)--$0
c. Total annualized cost requested--$1,800
d. Current OMB inventory--$1,684,000
e. Difference--($1,682,200)
Any comments regarding the collection of information may be
submitted in writing to Elaine L. Baker, Executive Secretary, Federal
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006, and
to the Office of Information and Regulatory Affairs of the Office of
Management and Budget, Attention: Desk Officer for Federal Housing
Finance Board, Washington, D.C. 20503.
List of Subjects in 12 CFR Part 933
Credit, Federal home loan banks, Reporting and recordkeeping
requirements.
Accordingly, the Finance Board hereby amends title 12, chapter IX,
part 933, Code of Federal Regulations, as follows:
PART 933--MEMBERS OF THE BANKS
1. The authority citation for part 933 continues to read as
follows:
Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430,
1442.
PART 933--[AMENDED]
2. Part 933 is amended by removing the term ``primary regulator or
appropriate state regulator'' wherever it appears and adding the term
``appropriate regulator'' in its place in the following locations:
a. Sec. 933.1(l);
b. Sec. 933.1(z);
c. Sec. 933.2(c)(2);
d. Sec. 933.11(a)(3);
e. Sec. 933.11(a)(4);
f. Sec. 933.11(b)(1);
g. Sec. 933.12(a);
h. Sec. 933.17(e)(1) introductory text;
i. Sec. 933.17(e)(1)(i);
j. Sec. 933.17(e)(2)(i); and
k. Sec. 933.17(e)(3)(i).
Sec. 933.11 [Amended]
3. Section 933.11(b)(3)(i) introductory text is amended by removing
the term ``primary regulatory or appropriate state regulator'' and
adding the term ``appropriate regulator'' in its place.
Secs. 933.11 and 933.17 [Amended]
4. Sections 933.11(a)(4) and 933.17(e)(1)(i) are amended by
removing the phrase ``, whichever is applicable,'' wherever it appears.
5. Part 933 is amended by removing the term ``primary regulator''
wherever it appears and adding the term ``appropriate regulator'' in
its place in the following locations:
a. Sec. 933.1(aa);
b. Sec. 933.9;
c. Sec. 933.10;
d. Sec. 933.11(a)(1);
e. Sec. 933.11(b)(2);
f. Sec. 933.11(b)(3)(i) introductory text;
g. Sec. 933.11(b)(3)(ii);
h. Sec. 933.15(a)(i);
i. Sec. 933.15(a)(ii);
j. Sec. 933.16; and
k. Sec. 933.17(f)(1).
6. Section 933.1 is amended by revising paragraphs (u), (x), and
(y), and adding paragraph (ee) to read as follows:
Sec. 933.1 Definitions.
* * * * *
(u) Nonperforming loans and leases means the sum of the following,
reported on a regulatory financial report: loans and leases that have
been past due for 90 days (60 days in the case of credit union
applicants) or longer but are still accruing; loans and leases on a
nonaccrual basis; and restructured loans and leases (not already
reported as nonperforming).
* * * * *
(x) Other real estate owned means all other real estate owned
(i.e., foreclosed and repossessed real estate), reported on a
regulatory financial report, and does not include direct and indirect
investments in real estate ventures.
(y) Appropriate regulator means a regulatory entity listed in
Sec. 933.8, as applicable.
* * * * *
(ee) Consolidation includes a consolidation, a merger, or a
purchase of all of the assets and assumption of all of the liabilities
of an entity by another entity.
7. Section 933.3 is amended by revising the fourth and fifth
sentences of paragraph (c) to read as follows:
Sec. 933.3 Decision on application.
* * * * *
(c) * * * The Bank shall notify an applicant in writing when its
[[Page 40024]]
application is deemed by the Bank to be complete, and shall maintain a
copy of such letter in the applicant's membership file. The Bank shall
notify an applicant if the 60-day clock is stopped, and when the clock
is resumed, and shall maintain a written record of such notifications
in the applicant's membership file. * * *
* * * * *
8. Section 933.4 is amended by adding paragraph (d) to read as
follows:
Sec. 933.4 Automatic membership.
* * * * *
(d) Automatic membership, in the Bank's discretion, for certain
consolidations. (1) If a member institution (or institutions) and a
nonmember institution are consolidated and the consolidated institution
has its principal place of business in a state in the same Bank
district as the disappearing institution (or institutions), and the
consolidated institution will operate under the charter of the
nonmember institution, on the effective date of the consolidation, the
consolidated institution may, in the discretion of the Bank of which
the disappearing institution (or institutions) was a member immediately
prior to the effective date of the consolidation, automatically become
a member of such Bank upon the purchase of stock in that Bank pursuant
to Sec. 933.20, provided that:
(i) 90 percent or more of the total assets of the consolidated
institution are derived from the total assets of the disappearing
member institution (or institutions); and
(ii) The consolidated institution provides written notice to such
Bank, within 60 calendar days after the effective date of the
consolidation, that it desires to be a member of the Bank.
(2) The provisions of Sec. 933.25(d)(1)(i) shall apply, and upon
approval of automatic membership by the Bank, the provisions of
Secs. 933.25(d)(2)(i), (e) and (f) shall apply.
9. Section 933.11 is amended by revising paragraphs (b)(3)(i)(B)
and (b)(3)(i)(C) to read as follows:
Sec. 933.11 Financial condition requirement for applicants other than
insurance companies.
* * * * *
(b) * * *
(3) * * *
(i) * * *
(B) Nonperforming assets. The applicant's nonperforming loans and
leases plus other real estate owned, did not exceed 10 percent of its
total loans and leases plus other real estate owned, in the most recent
calendar quarter; and
(C) Allowance for loan and lease losses. The applicant's ratio of
its allowance for loan and lease losses plus the allocated transfer
risk reserve to nonperforming loans and leases was 60 percent or
greater during 4 of the 6 most recent calendar quarters.
* * * * *
10. Section 933.14 is amended by removing the heading for paragraph
(a), revising paragraph (a)(1), and removing and reserving paragraph
(b), as follows:
Sec. 933.14 De novo insured depository institution applicants.
(a)(1) Duly organized, subject to inspection and regulation,
financial condition and character of management requirements. An
insured depository institution applicant whose date of charter approval
is within three years prior to the date the Bank receives the
applicant's application for membership in the Bank, is deemed to meet
the requirements of Secs. 933.7, 933.8, 933.11 and 933.12.
* * * * *
11. Section 933.15 is amended by adding new paragraph (c) to read
as follows:
Sec. 933.15 Recent merger or acquisition applicants.
* * * * *
(c) Makes long-term home mortgage loans requirement; 10 percent
requirement. For purposes of determining compliance with Secs. 933.9
and 933.10, a Bank may, in its discretion, permit an applicant that, as
a result of a merger or acquisition preceding the date the Bank
receives its application for membership, has not yet filed a
consolidated regulatory financial report as a combined entity with its
appropriate regulator, to provide the combined pro forma financial
statement for the combined entity filed with the regulator that
approved the merger or acquisition.
* * * * *
Sec. 933.20 [Amended]
12. Section 933.20 is amended by removing the citation
``Sec. 933.4(a)'' in paragraphs (b)(1) and (b)(2) and adding the
citation ``Sec. 933.4(a) or (d)'' in its place.
Dated: June 24, 1998.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-19912 Filed 7-24-98; 8:45 am]
BILLING CODE 6725-01-P
