# Affordable Housing Program Amendments > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A06-8492 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** October 6, 2006 - **Citation:** 71 FR 59262 ## Text FEDERAL HOUSING FINANCE BOARD 12 CFR Part 951 [No. 2006-17] RIN 3069-AB26 Affordable Housing Program Amendments AGENCY: Federal Housing Finance Board. ACTION: Final rule. SUMMARY: The Federal Housing Finance Board (Finance Board) is amending its Affordable Housing Program regulation to remove prescriptive requirements, clarify certain operational requirements, provide additional discretionary authority in certain areas, remove certain authorities, and otherwise streamline and reorganize the regulation. DATES: The final rule is effective on January 1, 2007. FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Associate Director, Office of Supervision, mcleanc@fhfb.gov or 202-408-2537; Sylvia C. Martinez, Senior Advisor, Office of Supervision, martinezs@fhfb.gov or 202-408-2825; Melissa L. Allen, Program Analyst, Office of Supervision, allenm@fhfb.gov or 202-408-2524; or Sharon B. Like, Senior Attorney Advisor, Office of General Counsel, likes@fhfb.gov or 202-408-2930. You can send regular mail to the Federal Housing Finance Board, 1625 Eye Street, NW., Washington DC 20006. SUPPLEMENTARY INFORMATION: I. Background Section 10(j)(1) of the Federal Home Loan Bank Act (Bank Act) requires each Federal Home Loan Bank (Bank) to establish an affordable housing program (AHP), the purpose of which is to enable Bank members to provide subsidized financing for long-term, low- and moderate-income, owner-occupied and affordable rental housing. See 12 U.S.C. 1430(j)(1). The AHP has played an important role in facilitating Bank support of their members' efforts to meet the housing needs of their communities. The strength of the AHP lies in its capacity to leverage additional public and private resources for housing. Since the inception of the program in 1990, the Banks have awarded more than $2.5 billion in AHP subsidies to assist nearly 472,000 housing units. Seventy percent of the units receiving AHP subsidies were for very low-income households. AHP subsidies have proven effective in financing projects that present underwriting challenges, such as projects for the homeless and special needs populations, which may include persons with disabilities and the elderly. The AHP also has been used effectively in conjunction with Low-Income Housing Tax Credits (LIHTC or tax credits), which are important funding sources for rental housing for very-low income households. The AHP also serves as an important resource for low- or moderate-income homeowners and first-time homebuyers. From 1990 through 2005, the program assisted in the financing of over 126,000 owner-occupied units under the Banks' competitive application programs, and over 47,000 units under their homeownership set-aside programs. Some of the units address specific housing needs, such as expanding homeownership opportunities for underserved households. II. Proposed Rule The Finance Board's regulation implementing the AHP provisions of the Bank Act is codified at 12 CFR part 951. The regulation generally has reflected a prescriptive approach, which was appropriate for rules implementing a newly created program. As the program has matured, the Finance Board periodically has revised the AHP regulation, to provide greater authority to the Banks in managing their individual programs and codify lessons learned through oversight of the Banks' operation of their programs. The Finance Board believes, based in part on its review of the AHP on a System-wide level, Report of the Horizontal Review of the Affordable Housing Programs of the Federal Home Loan Banks (March 15, 2005) (Horizontal Review), that there are a number of areas in which it can revise the regulation to provide for additional enhancement of the program. 1 Accordingly, on December 28, 2005, the Finance Board published proposed amendments to the AHP in the Federal Register for a 120-day comment period, which closed on April 27, 2006. See 70 FR 76938 (Dec. 28, 2005). The Finance Board received a total of 59 comment letters on the proposed rule, representing 61 commenters. 2 Commenters included: All 12 Banks; 4 Bank Affordable Housing Advisory Councils; 3 Bank members; 13 trade associations; 9 not-for-profit housing developers; 5 housing advocacy and assistance organizations; 3 State housing finance agencies; 3 for-profit housing developers; 3 community development financial institutions; 3 individuals; 2 wholesale financial intermediary and assistance organizations; and 1 secondary market entity for home purchase and rehabilitation mortgages. The Finance Board has considered all of the comments it received on the proposed rule, and has determined to adopt a final rule amending the AHP, with a number of revisions to the proposed rule, as further discussed below. Comments received that were relevant to the issues raised in the proposed rule are discussed below. Comments that raised issues beyond the scope of the proposed rule are not addressed in this final rule, but may be considered by the Finance Board at a future date. 1 The Horizontal Review is available on the Housing Programs page of the Finance Board's Web site: http://www.fhfb.gov/Default.aspx?Page=47. 2 Letters from 2 of the Banks also incorporate the comments of those Banks' respective Affordable Housing Advisory Councils. III. Analysis of the Final Rule As discussed in the SUPPLEMENTARY INFORMATION section of the proposed rule, the amendments to the AHP regulation are intended to address the following principal changes. 1. The final rule incorporates additional definitions into the regulation at § 951.1. These definitions establish the precise meaning of key terms that are used in the regulation. 2. The final rule reorganizes the regulatory text so that operational provisions relating to the competitive application program and the homeownership set-aside program, respectively, are fully contained within separate sections of the regulation. Section 951.5 addresses the competitive application program, while § 951.6 addresses the homeownership set-aside program. The reorganization is intended to make it easier for program sponsors and other interested parties to understand the individual operation of the competitive application and homeownership set-aside programs. 3. The final rule authorizes the Banks, in their discretion, to provide AHP direct subsidies under the competitive application program for eligible projects and households involving both the lending of the subsidy and subsequent re-lending of subsidy principal and interest repayments by a revolving loan fund. This change is intended to expand the eligible means of supporting affordable housing through the program. 4. The final rule specifies the conditions under which a Bank, in its discretion, may provide AHP subsidy under the competitive application program to loan pools. This change is intended to provide additional clarity for Banks that may wish to use such funding vehicles to support affordable housing through the program. 5. The final rule eliminates the existing discretionary authority for a Bank to prohibit applications for AHP subsidy for projects located outside a Bank's district. This change is in response to the expansion of interstate banking, which has resulted in many Bank members operating in markets outside a Bank's district boundaries. However, in response to comments received, the final rule retains the current discretionary scoring preference for in-district projects under the First District Priority, and continues to allow a Bank to adopt such a scoring preference under its Second District Priority. 6. In response to comments received, the final rule retains the Banks' current authority to draw on AHP funds from the subsequent year to fund the current year's AHP, but limits the amount that may be drawn to an amount up to the greater of $2 million or 20 percent of the Bank's annual required AHP contribution for the current year, which the Bank would deduct from the annual required AHP contribution for the subsequent year. This change responds to the fact that Banks have, at times, found this authority to be useful for addressing housing needs in their districts. 7. The final rule removes provisions in the regulation that would increase annually the maximum allowable dollar amount of a Bank's allocation to its homeownership set-aside program, and maximum allowable dollar amount drawn on the subsequent year's allocation under a Bank's homeownership set-aside and competitive application program, based on the annual inflation rate. This change addresses the potential for inflation to increase the allocation of AHP contributions to the homeownership set-aside program relative to the competitive application program. 8. The final rule replaces certain prescriptive monitoring requirements in the current regulation, which detail specific monitoring and control processes with which a Bank must comply, with broadly stated monitoring objectives to be accomplished through the Bank's adoption and implementation of written monitoring policies for its competitive application and homeownership set-aside programs. These principal changes relative to the current rule, and other provisions of the final rule, including significant changes from the proposed rule, are discussed in greater detail below. A. Definitions: § 951.1 Consistent with the proposed rule, the final rule revises certain of the existing AHP definitions and defines a number of other terms that are used throughout the regulation. See 12 CFR 951.1. New definitions are discussed below in the context of specific regulatory requirements. The more substantive changes are described below. Affordable. Consistent with the proposed rule, the final rule revises the existing definition of “affordable” by adding a reference, consistent with the AHP statutory term, to “rent charged to a household,” which is defined to mean the rent that is actually paid by the household occupying the unit. See 12 U.S.C. 1430(j)(13)(D). The change clarifies the existing regulatory language, which could be read to mean the amount of rent charged by the owner for the unit, which would be greater than the rent actually paid by the occupants if the occupants receive financial assistance for rent payments from other sources. One commenter supported the proposed revision, noting that the change acknowledges an important distinction between unit rent and the household's rent payment. The final rule also adds a new paragraph (2) to address rents charged for units that are subsidized with low-income housing assistance under the Department of Housing and Urban Development (HUD) Section 8 program, see 42 U.S.C. 1437f, as well as rents under other assistance programs that are charged in the same way as under the Section 8 program. This provision is intended to clarify that rents charged to a household under such programs will be deemed to be “affordable” for AHP purposes, even if the rent increases after initial occupancy, if the rent complied with the AHP definition of “affordable” upon initial household occupancy and thereafter the household continues to be assisted through the program. This provision is applicable for purposes of the annual adjustment of targeting commitments after initial occupancy under § 951.7(a)(5) of the final rule (which is re-designated from current §§ 951.10(d) and 951.11(b)). The proposed rule would have applied this paragraph (2) only to the Section 8 program. Several commenters supported the change, with 1 commenter adding that the United States Department of Agriculture (USDA) Rural Rental Assistance Program, at 7 CFR part 3560, charges rents in the same way as Section 8, and recommending that rents under that program be included in the AHP provision. The Finance Board believes that the commenter's suggestion has merit, and that the provision should include not only rents under the USDA program, but rents under any other assistance program that are charged in the same way as under the Section 8 program. Accordingly, the final rule adopts the proposed language as expanded to include rents under other assistance programs that are charged in the same way as under the Section 8 program. AHP project. Consistent with the proposed rule, the final rule adds a new definition—“AHP project”—that applies to both owner-occupied and rental projects that have been awarded or have received AHP subsidy through the competitive application program. This is intended to codify existing practice and clarify that the term “project” does not apply to direct subsidies, i.e. , grants, to households made pursuant to the homeownership set-aside program. The term applies to both single-family and multifamily projects. Consistent with the proposed rule, the final rule also makes conforming changes to the definitions of “owner-occupied project” and “rental project.” Several commenters supported the proposed changes. Low- or moderate-income household and very low-income household. Consistent with the proposed rule, the final rule amends the household-size adjustment provisions in paragraph (3) of the existing definition of “low- or moderate-income household” (and similarly for the definition of “very low-income household) by changing the household-size adjustment from an optional to a mandatory requirement, provided that if the source for the area median income data has no methodology to adjust the household income limit for household size, the Bank is not required to make such an adjustment. The existing regulation defines “low- or moderate-income household” to mean a household that has an income of 80 percent or less of the median income for the area, with the income limit adjusted for family ( i.e. , household) size, in a Bank's discretion, in accordance with the methodology of the applicable median income standard. The change in the final rule is intended to bring the AHP into conformance with other federal programs that adjust for household size. Several commenters supported the proposed change, stating that it would ensure consistency when the AHP is used with other federal programs. As discussed below, the final rule, consistent with the proposed rule, also relocates certain provisions of the existing definitions relating to when a household's income must be determined, to §§ 951.5(c)(1)(i) and (ii) and 951.6(c)(2)(i) for the competitive application program and the homeownership set-aside program, respectively. Median income for the area. Consistent with the proposed rule, the final rule removes the language “for purposes of that entity's housing programs” in the existing definition of “median income for the area,” which will enable the Finance Board to approve, upon a Bank's request, median income standards from sources, such as the U.S. Census Bureau, that publish median income data but do not have their own housing programs. The existing definition lists a number of median income standards that a Bank may adopt for purposes of determining household income eligibility. See 12 CFR 951.1. The regulation also provides that a Bank may request Finance Board approval for use of a median income for any definable geographic area, as published by a federal, state, or local government entity for purposes of that entity's housing programs. One commenter supported the change, citing the additional flexibility it would provide. Owner-occupied project and rental project. The final rule adopts the proposed amendments to the existing definitions of “owner-occupied project” and “rental project” by clarifying that they apply only to the competitive application program, and by deleting language requiring the project to involve “the purchase, construction, or rehabilitation” of owner-occupied housing or rental housing, respectively. That requirement is relocated to the provisions addressing the eligibility requirements for the use of AHP subsidy, at § 951.5(c)(1)(i) and (ii). No commenters addressed these technical changes. The proposed rule also would have added manufactured housing to the types of owner-occupied housing, and emergency shelters and single-room occupancy (SRO) housing as types of rental housing, which are explicitly referenced in the rule. In all cases, these types of housing have been eligible under the AHP since its inception, and the proposed rule sought to clarify this fact in the proposed language. However, some commenters misunderstood the proposed changes as indicating that these types of housing currently are not eligible for AHP funding. Based on the comments, the Finance Board has determined that the eligibility of manufactured housing should be further clarified as eligible for all AHP funding, including owner-occupied and rental projects under the competitive application program and owner-occupied units under the homeownership set-aside programs. Accordingly, the final rule adds the term “manufactured housing” not only to the definition of “owner-occupied project” but also to the definition of “rental project” and to the provision on eligible uses of AHP direct subsidy under the homeownership set-aside program (§ 951.6(c)(4)). However, as noted by 1 commenter, whether manufactured housing is treated as an owner-occupied unit or a rental project depends on the actual use of the AHP subsidy. 3 3 See, e.g., Finance Board Regulatory Interpretation 2000-RI-04 (May 26, 2000) (available in the FOIA Reading Room on the Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=59&ListYear=2000&ListCategory=8#8\2000). Several commenters suggested that the Finance Board restrict the types of manufactured housing that would be eligible housing under the AHP, for example, by requiring that the housing be on a permanent foundation. The Finance Board recognizes the benefits of placing a manufactured home on a permanent foundation. However, the Finance Board is not adopting such a requirement, because the various types of manufactured housing provide different and significant sources of affordable housing stock, including temporary shelters during an emergency following a natural disaster. Retention period. The final rule revises the proposed definition of “retention period” to provide that, in the case of rehabilitated units that currently are occupied by the owner and do not involve a closing, the retention period shall commence on the date established by the Bank in its AHP Implementation Plan. The proposed rule would have provided that the retention period commenced on the date of completion of the rehabilitation. One commenter supported the proposal, while a number of commenters opposed it, pointing out that it can be difficult to determine with specificity the date that rehabilitation of an already owner-occupied unit is complete. The comments indicated that Banks have adopted different dates for the commencement of the retention period, based on local rehabilitation and real estate practices, and suggested that the Banks be given the discretion to establish the date. The Finance Board finds merit in the commenters' suggestions and, consequently, has revised the language in the final rule to require a Bank to specify in its AHP Implementation Plan the date that the retention period commences for rehabilitated units that are currently occupied by the owner and do not involve a closing. Sponsor. Consistent with the proposed rule, the final rule amends the existing definition of “sponsor” by requiring a Bank to define in its AHP Implementation Plan the terms “ownership interest” and “integrally involved,” which are part of the definition of “sponsor.” Under the existing definition, a Bank must consider a “sponsor” to include any entity that has an ownership interest in a rental project, regardless of how small or temporary such ownership interest is. Requiring a Bank to define “ownership interest” in its AHP Implementation Plan would allow the Bank to address concerns that some rental project sponsors may manipulate ownership interests in order to receive points as not-for-profit sponsors under the competitive application program's scoring system. Several commenters agreed that the proposal would address concerns about sponsors that are only nominally or initially involved in a project. Commenters concurred with the Finance Board that the proposal would allow the Banks to address projects that attempt to “game” the scoring system by using minimally involved not-for-profit sponsors to get points under the scoring criterion for sponsorship by a not-for-profit or government entity. Consistent with the proposed rule, the final rule also expands the definition of “sponsor” to include revolving loan funds or entities that operate loan pools. Those terms are used for purposes of implementing amendments to the competitive application program rules that address revolving loan funds and loan pools, respectively. Subsidy. The final rule adopts the proposed revisions to the existing definition of “subsidy.” Specifically, the provisions specifying the dates as of which the amount of the subsidy is to be determined are deleted, and the substance of those provisions is incorporated into § 951.5(c)(12), which sets forth the eligibility requirements relating to the competitive application program. In addition, the term “homeownership set-aside funds” is removed from the definition of “subsidy” because homeownership set-aside funds are direct subsidies, which are included within the definition of “subsidy.” No commenters addressed these technical changes. B. Required Annual AHP Contributions; Allocation of Contributions: § 951.2 Required annual contribution: § 951.2(a). Under the Bank Act, each Bank annually must contribute to its AHP an amount equal to the greater of 10 percent of the Bank's previous year's net income or such prorated amount as is required to assure that the aggregate contribution of the 12 Banks is no less than $100 million. 12 U.S.C. 1430(j)(5)(C); 12 CFR 951.2. The pro rata allocation method has not been needed since the Banks' annual contributions based on the 10 percent of income formula have exceeded $100 million. Nonetheless, consistent with the proposed rule, § 951.2(a)(2) of the final rule revises the existing provision to clarify that if the pro rata allocation method is used in any future year, the required annual contribution for any Bank shall not exceed its net earnings for the previous year. This primarily is intended as a safety and soundness measure to avoid the possibility that a Bank might otherwise be required to contribute an amount in excess of its income, thereby reducing its regulatory capital. Several commenters supported the change. Net earnings of a Bank: § 951.1. Consistent with the proposed rule, § 951.1 of the final rule revises the existing definition of “net earnings of a Bank” to clarify existing practice with respect to how a Bank's earnings are defined for purposes of calculating its required AHP contribution. See 12 CFR 951.1. Each Bank must present its financial statements in accordance with Generally Accepted Accounting Principles in the United States (GAAP). The application of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), requires the Banks to classify capital stock subject to a mandatory redemption request as a liability on the statement of condition and requires that they treat the dividends on capital stock subject to a mandatory redemption request as interest expense on the statement of income. The Bank Act provisions related to the AHP provide that each Bank shall make an annual contribution equal to 10 percent of its net earnings for the previous year after reduction for any payment required under 12 U.S.C. 1441b (the Resolution Funding Corporation obligations) and before declaring any dividend. 12 U.S.C. 1430(j)(8). Because the Bank Act requires that the AHP contribution be calculated before the declaration of dividends, net earnings for purposes of calculating the AHP contribution should not be reduced by any dividend declaration, including those associated with mandatorily redeemable stock, even though those dividends are treated as interest expense in the calculation of GAAP net income. One commenter supported the change. Allocation of contributions: § 951.2(b). Consistent with the proposed rule, the final rule relocates the allocation of contributions provisions for the competitive application program and homeownership set-aside program in existing § 951.3(a) to § 951.2(b), as they relate to the requirements for AHP contributions, which are set forth in § 951.2. No comments addressed this technical change. AHP subsidies are disbursed through a Bank's competitive application program and its homeownership set-aside program. Under the existing regulation, a Bank may set aside annually up to the greater of $3 million or 25 percent of its annual required AHP contribution to provide funds to members through its homeownership set-aside programs. See 12 CFR 951.3(a)(1)(i). If member demand in a given year exceeds the AHP subsidy amount available for that year, a Bank may allot (or accelerate) additional amounts from the subsequent year's AHP contribution, up to the greater of $3 million or 25 percent of the Bank's annual required AHP contribution for the following year, to the current year's homeownership set-aside program. In addition to those amounts, under the current regulation, a Bank may set aside annually up to the greater of $1.5 million or 10 percent of its annual required AHP contribution to fund a homeownership set-aside program to be used solely to provide financial assistance to first-time homebuyers. See 12 CFR 951.3(a)(1)(ii). If member demand for that homeownership set-aside program exceeds the amount of available AHP subsidy for a particular year, a Bank may allot an additional amount from the subsequent year's AHP contribution, up to the greater of $1.5 million or 10 percent of the Bank's annual required AHP contribution for the subsequent year, to the current year's first-time homebuyer set-aside program. Under the competitive application program, a Bank currently may allot up to the greater of $3 million or 25 percent of its annual required AHP contribution for the subsequent year, to the current year's competitive application program. These maximum allowable dollar amounts are adjusted annually by the Finance Board to reflect any percentage increase in the preceding year's Consumer Price Index (CPI). See 12 CFR 951.3(a)(1)(iii), (a)(2). Removal of CPI adjustment provisions. Consistent with the proposed rule, the final rule removes the existing provision authorizing an annual CPI adjustment of the caps on the dollar amounts, including amounts allotted from the subsequent year, that may be allocated to the homeownership set-aside programs, principally because it has the potential over time to increase disproportionately the amounts allocated to the homeownership set-aside programs versus the competitive application program. See 12 CFR 951.3(a)(1)(iii). In addition, the provision authorizing a CPI adjustment of any amount allotted from the subsequent year under the competitive application program, as provided under existing § 951.3(a)(2), is eliminated. Several commenters supported the changes, with 1 commenter stating that the changes are needed to ensure some parity between the homeownership set-aside and competitive application programs. Consolidation of separate homeownership set-aside program authorities: § 951.2(b)(2). Consistent with the proposed rule, § 951.2(b)(2) of the final rule retains the maximum allowable aggregate allocation of AHP dollars to the homeownership set-aside programs, i.e. , the greater of $4.5 million or 35 percent of a Bank's annual required AHP contribution, but eliminates the first-time homebuyer set-aside program authority as a separate and distinct authority. See 12 CFR 951.3(a)(1). The final rule replaces the existing separate first-time homebuyer set-aside program provision with a requirement that at least one-third of a Bank's aggregate annual homeownership set-aside allocation be targeted for first-time homebuyers, which reflects a comparable commitment to first-time homebuyers. The Finance Board understands that most of the Banks currently dedicate a substantial portion of their general homeownership set-aside allocation to first-time homebuyers before allocating funds under the separate homeownership set-aside authority that specifically targets first-time homebuyers. Therefore, the Finance Board believes the change will simplify the regulation without causing a material change in the allocation of homeownership set-aside funds to first-time homebuyers. A number of commenters supported the change. One commenter requested clarification on whether one-third of any amount allocated and not actually disbursed by a Bank for its homeownership set-aside programs in a given year must be targeted to first-time homebuyers. Consistent with current practice, the “allocation” language in the rule makes clear that the one-third requirement applies to the amount allocated and not to the amount actually disbursed. Several commenters suggested that the one-third allocation include households displaced by natural disasters, rather than be limited to first-time homebuyers. The Banks may use their remaining allocation of homeownership set-aside funding to assist households displaced by natural disasters. In addition, a Bank may request a waiver from the Finance Board to use its first-time homebuyer allocation for other purposes. Additional funding authority: § 951.2(b)(3). Section 951.2(b)(3) of the final rule revises the proposal by providing that a Bank may draw on AHP funds from the subsequent year to fund the current year's AHP, up to an amount equal to the greater of $2 million or 20 percent of the Bank's annual required AHP contribution for the current year. The Bank would deduct the amount from the annual required AHP contribution for the subsequent year. The proposed rule would have removed the 2 existing provisions authorizing such allotment for the competitive application and homeownership set-aside programs. See 12 CFR 951.3(a)(1)(i) and (ii) and (a)(2). The Banks have not often used this authority, although 1 or 2 Banks may do so in a year. The existing authority may present operational difficulties because it may require the Banks to project future earnings in order to determine how much they may allot to the current year, and these projections may fall short. Basing the authority on the known amount of the current year's contribution eliminates uncertainty about the maximum permissible amount that the Bank may allot from the subsequent year's required AHP contribution to the current year's AHP funding levels. A number of commenters supported eliminating this authority from the homeownership set-aside and competitive application programs, citing operational difficulties. However, a Bank and its Advisory Council stated that the Bank has not found the authority to be difficult to administer. A number of other commenters favored retaining the authority, stating that it has been an important tool for the Banks to meet housing demand and to respond to the need for emergency owner-occupied housing and rehabilitation following natural disasters. Commenters also noted that some Banks have used the authority to ensure some minimum availability of AHP funding when reduced Bank earnings cause a significant decrease in AHP contributions in a given year. Several commenters suggested that the Finance Board retain the authority provision but further limit the amount of AHP funds that may be allotted from the subsequent year. Based on the comments, the Finance Board recognizes that the authority may be helpful for Banks in responding to housing needs in their districts and the need for emergency housing and rehabilitation following natural disasters, but believes that the authority should be limited in scope and calculated based on the current year's required AHP contribution to minimize potential operational and compliance difficulties with the subsequent year's allocation requirement. A Bank could request a waiver from the Finance Board of the funding limits in the event that those limits are not sufficient to address specific housing needs in the Bank's district. Consequently, the final rule allows a Bank to allot AHP funds from the subsequent year to fund the current year's AHP, up to an amount equal to the greater of $2 million or 20 percent of its annual required AHP contribution for the current year, which the Bank would deduct from its annual required AHP contribution for the subsequent year. C. AHP Implementation Plan: § 951.3 Adoption of Plan: § 951.3(a). Consistent with the proposed rule, § 951.3(a) of the final rule reorganizes and streamlines requirements for a Bank's AHP Implementation Plan to conform them to amendments to other parts of the AHP regulation. See 12 CFR 951.3(b). The changes to the specific program operating requirements for AHP Implementation Plans are discussed elsewhere in this preamble in the context of the particular operating requirements. The final rule also adopts the proposed requirement that the AHP Implementation Plan include the Banks' retention agreement requirements. A number of commenters supported the changes to the requirements for the AHP Implementation Plan, but expressed concern that they would require a Bank to include all of its policies and procedures in its Plan, which would make for a cumbersome document and complicate the Bank's process for amending the policies and procedures. The Finance Board intends that a Bank's program requirements, such as its scoring guidelines, but not its implementing operating procedures, be included in the Plan. A Bank may reference its operating procedures in the Plan so that AHP participants will be aware of their existence and make them available upon request. Notification of Plan amendments: § 951.3(c). Section 951.3(c) of the final rule adopts the proposed requirement that a Bank notify the Finance Board within 30 days of amending its AHP Implementation Plan. Several commenters supported the change. Public access: § 951.3(d). Section § 951.3(d) of the final rule adopts the proposed requirement that a Bank make the amended AHP Implementation Plan publicly available through its Web site within 30 days after adoption of the amendments. Under the current rule, the Bank must submit all amendments to the Finance Board and make its AHP Implementation Plan available to members of the public upon request. See 12 CFR 951.3(b)(4), (b)(5). Making the AHP Implementation Plan available through the Banks' Web sites is intended to provide the public with easy access to important information about the AHP, as well as to promote greater transparency and accountability in the program. A number of commenters supported the change as increasing transparency and accountability and noted that most of the Banks have now placed their AHP Implementation Plans on their Web sites. D. Advisory Councils: § 951.4 The final rule makes a number of revisions to the existing provisions addressing the Advisory Councils of the Banks, many of which are intended to clarify, but not change the substance of, the existing rule. See 12 CFR 951.4. The provisions that have a substantive effect are described below. Terms of Advisory Council members: § 951.4(b). Section 951.4(b) of the final rule adopts the proposed requirement that each Bank adopt policies governing the appointment process for Advisory Council members. In addition, the final rule requires each Bank to appoint Advisory Council members to terms of 3 years, except that a Bank may appoint members for terms of 1 or 2 years as a transitional measure solely for purposes of achieving the necessary staggering of the 3-year terms. Proposed § 951.4(b) would have required each Bank to appoint members to terms of “up to” 3 years. This proposal was intended to enhance the effectiveness of the Advisory Councils by lessening the likelihood that the terms of more than one-third of the Advisory Council members will expire in any 1 year, by allowing the Banks to appoint as a transitional measure some individuals to terms of 1 or 2 years as a means of ensuring an appropriate balance of experience and service among members of the Advisory Council as a whole while achieving appropriate staggering of terms. Under the current rule, the Banks must appoint members of the Advisory Council to 3-year terms. See 12 CFR 951.4(d). A number of commenters supported the proposal, stating that it would allow for better balance of expiring terms and provide greater continuity of the Advisory Council membership. Other commenters raised concerns that the proposal would allow the Banks as a routine matter to appoint Advisory Council members to terms of 1 year and 2 years in addition to 3 years, creating positions of unequal power and resulting in greater turnover and loss of members with AHP knowledge and expertise. The Finance Board's intent in proposing the change was to allow the Banks the flexibility to appoint members to shorter terms when necessary as a transitional measure to reconfigure the staggering of the 3-year terms on the Advisory Councils. Although the Banks originally set staggering of the 3-year terms beginning in January 1998, when the current AHP regulation became effective, the Banks have found it necessary to reset the staggering from time to time. The Finance Board has acted on a number of Bank requests, through waivers or no-action letters, to allow the Banks to readjust staggering by appointing some members to terms of less than 3 years. The Finance Board recognizes the concerns of the commenters, but also recognizes the need of the Banks for flexibility to stagger the Advisory Council member terms. Consequently, the language is revised in the final rule to provide that Advisory Council terms shall be for 3 years, except that a Bank may appoint members for terms of 1 or 2 years as a transitional measure solely for purposes of achieving the necessary staggering of the 3-year terms. Election of officers: § 951.4(c). Consistent with the proposed rule, § 951.4(c) of the final rule imposes on the Advisory Council an affirmative obligation to elect certain officers, which is intended to ensure that each Advisory Council has in place a chairman and vice chairman. The current rule permits, but does not require, election of such officers. See 12 CFR 951.4(e). Several commenters supported the change. Duties: Meetings with the Banks: § 951.4(d)(1)(ii). Consistent with the proposed rule, § 951.4(d)(1)(ii) of the final rule revises the duties of the Advisory Council principally by adding a list of specific matters on which the Advisory Council must provide recommendations to the Bank's board of directors. See 12 CFR 951.4(f)(1). Those matters include: The relative allocation of AHP subsidies between the competitive application and homeownership set-aside programs; the AHP Implementation Plan; eligibility criteria for each program; scoring criteria and related definitions for the competitive application program; and any priority criteria for the homeownership set-aside program. A number of commenters supported the changes, stating they would strengthen communication among the Bank's board, the Advisory Council, and the public. Annual Advisory Council analysis; public access: § 951.4(d)(3). Section 951.4(d)(3)(i) of the final rule adopts the proposed extension of the deadline by which the Advisory Council must submit its annual analysis of the Bank's low- and moderate-income housing and community lending activity to the Finance Board from March 1 to May 1. See 12 CFR 951.4(f)(3). The proposed change in the due date was intended to respond to requests received from some of the Advisory Councils, which meet at least quarterly, for additional time after the end of each calendar year to prepare, review, and approve their report. A number of commenters supported the change in the due date, with 1 commenter stating that it would offer the Advisory Council a better opportunity to summarize the accomplishments of the year. Section 951.4(d)(3)(ii) of the final rule adopts the proposed requirement that each Bank publish the Advisory Council analysis on its publicly available Web site within 30 days of its submission to the Finance Board. Making the Advisory Councils' analyses available to the public through the Banks' Web sites is intended to promote greater transparency and accountability in the Banks' AHP and in the work of the Banks' Advisory Councils. A number of commenters supported the change, stating that it would increase transparency and accountability. No delegation: § 951.4(f). Section 951.4(f) of the final rule prohibits a Bank's board of directors from delegating to Bank officers or other Bank employees its responsibility for appointing Advisory Council members and meeting with the Advisory Council at the quarterly meetings required by the Bank Act. See 12 U.S.C. 1430(j)(11). This provision is intended to ensure that each board of directors fulfills its statutory obligations with regard to its interaction with the Advisory Council and is consistent with findings of the Finance Board's Horizontal Review, which indicated that in general the Bank boards could improve their interactions with their Advisory Councils. See 12 U.S.C. 1430(j)(11); Horizontal Review at 23. Several commenters supported the proposal, stating that it would improve the Bank board's understanding of affordable housing issues. A Bank and its Advisory Council opposed the proposal, believing it would add to the duties and responsibilities of the Bank's board and apply to Advisory Council meetings beyond the quarterly meetings with the Bank's board that are required by the Bank Act. It was not the Finance Board's intent to prohibit Bank staff from meeting with the Advisory Councils at times other than the Bank boards' quarterly meetings with the Advisory Councils. Consequently, the language is revised in the final rule to clarify that the prohibited delegation applies only to the statutorily-required quarterly meetings between the Banks' boards and their Advisory Councils. E. Competitive Application Program: § 951.5 Consistent with the proposed rule, the final rule consolidates existing regulatory provisions governing the operation of the competitive application program into a single section of the AHP rule—§ 951.5. Under the current regulation, some of those provisions are located in different sections of the regulation. A number of commenters supported the proposed reorganization, streamlining, and consolidation of the regulatory provisions. Commenters stated that these technical revisions would be helpful for the Banks, members, and sponsors in understanding the specific requirements of the competitive application and homeownership set-aside programs. The principal revisions to the existing regulatory structure are described below. Removal of optional nonmember applicants provision: § 951.5(b)(2). Consistent with the proposed rule, § 951.5(b)(2) of the final rule eliminates the current discretionary authority for a Bank to accept AHP applications from institutions that are not members of the Bank, but that have applied for membership. See 12 CFR 951.6(b)(1). A trade association opposed the proposed change, stating that the AHP offers an incentive for nonmember institutions to join the Banks and the current regulatory provision remains an important membership recruitment tool for the Banks. The Finance Board notes that the AHP would remain a membership recruitment tool under the final rule as the institution can apply for AHP funds once it is a member. A Bank opposed the proposal, stating that where a member that intends to submit AHP applications on behalf of sponsors is merged into a nonmember, and the nonmember intends to apply for Bank membership, the proposal would prohibit the nonmember from continuing the process of submitting to the Bank the AHP applications for those sponsors for an imminent funding round. The Bank noted that this would result in the AHP activities of the nonmember being prohibited for as much as 180 days. See 12 CFR 925.24(b). The Finance Board believes that such an event would be rare, and the Bank has alternatives to address the matter so that the sponsors could compete for funding at that time, such as by assisting the sponsors in identifying another member to submit the application. Eligibility requirements: § 951.5(c). Consistent with the proposed rule, § 951.5(c) of the final rule sets out the eligibility requirements that apply in connection with the receipt of AHP subsidies under the competitive application program. Timing of household income-eligibility determination: § 951.5(c)(1). Consistent with the proposed rule, the final rule relocates the current provisions on timing of household income eligibility from the definitions of “low- or moderate-income household” and “very low-income household” in § 951.1 to § 951.5(c)(1). In addition, consistent with the proposed rule, the final rule incorporates into this section, without change, the requirements in the existing definitions of “owner-occupied project” and “rental project” that the AHP subsidy be used for the purchase, construction, or rehabilitation of owner-occupied or rental housing. Need for subsidy: § 951.5(c)(2). The final rule permits a Bank, in its discretion, to permit a project's sources of funds to include or exclude the estimated market value of in-kind donations and voluntary professional labor or services (excluding the value of sweat equity), provided that the project's uses of funds also include or exclude, respectively, the value of such estimates. The existing regulation requires that, for purposes of determining a project's eligibility, the project must demonstrate a need for the subsidy, based on its estimated total sources and uses of funds. See 12 CFR 951.5(b)(2). The proposed rule would have maintained this requirement, but would have eliminated a related requirement that the estimated sources and uses of funds analysis include estimates of the market value of in-kind donations and volunteer professional labor or services (excluding the value of sweat equity) as sources of funds. See 12 CFR 951.5(b)(2)(i)(B). By focusing the analysis on cash sources and uses, the sponsor can streamline the analysis, as non-cash contributions are exactly offset by the amount of non-cash expenses they cover and, therefore, cancel out of the comprehensive sources and uses of funds analysis. For example, a contribution of materials (in-kind) is a source that reduces the need for cash payments by exactly its value. The Finance Board stated in the SUPPLEMENTARY INFORMATION section of the proposed rule that experience since 1998 indicated that estimates of non-cash costs generally do not affect the amount of subsidy needed for a project, and that eliminating this requirement also would obviate the need for Regulatory Interpretation 1999-RI-03 (Jan. 26, 1999), 4 which already had eliminated this requirement for self-help homeownership projects involving such non-cash costs. 4 1999-RI-03 is available in the FOIA Reading Room on the Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=59&ListCategory=8#8. One commenter opposed the proposal, stating that if estimates of non-cash costs generally do not affect the amount of subsidy needed for a project, then it should not matter whether or not a project includes non-cash sources and uses in its development budget, and the rule should leave it to the Bank's discretion whether the development budget may include such items. This commenter stated that sponsors must make these estimates as line items in their budgets for funding from certain federal programs such as Low-Income Housing Tax Credits and Community Development Block Grants, and the regulation should not require them to do separate budgets for the AHP. The Finance Board finds the comment persuasive. Accordingly, the final rule provides a Bank with the discretion to determine whether estimates of market value of in-kind donations and voluntary professional labor or services (excluding the value of sweat equity) may be a required component in determining a project's source of funds along with the identical value included as a use of funds. Section 951.5(c)(2)(ii) of the final regulation also includes a requirement for how a self-help homeownership sponsor that provides permanent financing must account for the value of cash payments that it will receive from the purchaser of the home when determining the sponsor's cash sources of funds. Several commenters were concerned that rescinding 1999-RI-03 also would remove a provision relating to the determination of cash sources of funds for such sponsors. The Regulatory Interpretation provides that, in performing the cash sources and uses of funds analysis, the sponsor's cash contribution must include the present value, rather than the face value, of any payments the sponsor is to receive from the homebuyer, i.e. , any cash down payment from the buyer plus the present value of any below-market purchase note the sponsor holds on the unit. If such a note carries a market interest rate commensurate with the credit quality of the borrower (market rate), the present value of the note equals the face value of the note. If the note carries an interest rate below the market rate, the present value of the note can be determined using the market rate to discount the cash flows. The commenters stated that, without the provision in 1999-RI-03, such sponsors would be required to include the face value of the mortgage payments received rather than the discounted amount, which would result in the development budget for these types of projects showing cash sources of funds in excess of cash uses, i.e., no need for AHP subsidy, thereby making such projects ineligible to receive AHP subsidy. The Finance Board concurs that the provision related to the use of the net present value should continue to apply to sponsor-financed self-help housing, and the final rule codifies the 1999-RI-03 provision in § 951.5(c)(2)(ii). The final rule also adopts the proposal that would make the need for subsidy requirement independent of the project developmental and operational feasibility requirements. These feasibility requirements are separate assessments and, therefore, should not be linked to the need for subsidy requirement. The Finance Board stated in the SUPPLEMENTARY INFORMATION section of the proposed rule that this change also may have the effect of more competition by smaller projects and projects with higher production or operating costs, such as projects with services or more common space, and several commenters agreed that this could be a result of the proposed change. Project costs: § 951.5(c)(3). Section 951.5(c)(3)(i) of the final rule adopts the proposed clarification that the determination of project costs is a separate eligibility requirement, and removes an existing requirement that project costs be “customary” and determined according to “industry standards” in accordance with the Bank's project feasibility guidelines. See 12 CFR 951.5(b)(2)(ii). In lieu of that requirement, a Bank is still required to establish feasibility and cost guidelines as a basis for evaluating project costs, but must determine whether an individual project's costs are reasonable by taking into account the geographic location of the project, development conditions, and other non-financial household or project characteristics, such as housing for the elderly or for persons with disabilities, which affect the project's costs. The changes are intended to make the eligibility review process more adaptive to projects such as those serving special needs populations, and other projects that may require special architectural features or other amenities appropriate to their location. Several commenters supported the proposal as providing additional flexibility for a Bank to assess project costs based on the characteristics of individual projects, taking into consideration factors that could increase costs in determining whether a project's costs are reasonable. Some commenters stated, however, that the proposed language could be read to require a Bank's feasibility guidelines to reflect a variety of characteristics for different project types. This was not the intent of the proposal. Accordingly, the language in the final rule is reworded to state that the Bank's feasibility guidelines themselves need not include characteristics for different project types. As discussed above under Need for Subsidy, the proposed rule would have eliminated the existing provision in § 951.5(b)(2)(i)(B) that requires, for purposes of a Bank's sources and uses of funds analysis, that the Bank include as sources of funds estimates of the market value of in-kind donations and volunteer professional labor or services (excluding the value of sweat equity) committed to the project. See 12 CFR 951.5(b)(2)(i)(B). Several commenters objected that removal of this provision would result in payment of a lower developer's fee where the fee is calculated as a percentage of the project's total development costs, as the total development costs amount would be lower. One commenter stated that this consequence would be particularly difficult for small, not-for-profit housing producers, especially in rural areas, that rely on income from the developer's fee for their continuing operations. Commenters stated that the Banks should be given discretion to include in-kind donations and volunteer professional labor or services as part of total development costs in the budget. The Finance Board believes the comments have merit. Accordingly, § 951.5(c)(3)(i)(B) of the final rule allows a Bank to include estimates of the market value of in-kind donations and volunteer professional labor or services (excluding the value of sweat equity) in total development costs for purposes of calculating the developer's fee. The Bank would continue to be required to determine, after calculating the fee, that it is a reasonable fee pursuant to the Bank's project cost guidelines, as required by § 951.5(c)(3)(i)(A) of the final rule. Project feasibility: § 951.5(c)(4). Consistent with the proposed rule, § 951.5(c)(4) of the final rule separates the 2 aspects of project feasibility—developmental feasibility of a project and, in the case of rental housing, operational feasibility of the project over time—and defines the terms. These 2 types of project feasibility are not differentiated in the existing rule. Section 951.5(c)(4)(i) requires that a project be developmentally feasible, which is defined as the likelihood that the project will be completed and occupied, based on relevant factors contained in the Bank's project feasibility guidelines, including the project's development budget, market analysis, and the sponsor's experience in providing the requested assistance to households. Section 951.5(c)(4)(ii) requires that a rental project be operationally feasible, which is defined as the ability of the project to operate in a financially sound manner, in accordance with the Bank's project feasibility guidelines, as projected in the project's operating pro forma. A Bank and its Advisory Council supported the proposal, stating that it would allow the Banks more flexibility in addressing project needs based on a variety of factors that can influence development costs and operational budgets. Financing costs: § 951.5(c)(5). Consistent with the proposed rule, the final rule makes a technical change by relocating the provision regarding interest rates, points, fees, and other charges for loans financing the project from existing § 951.5(b)(2)(iii) to § 951.5(c)(5) of the final rule. See 12 CFR 951.5(b)(2)(iii). The final rule also clarifies that this provision applies to loans made for the project in conjunction with the AHP subsidy. Refinancing: § 951.5(c)(8). Section 951.5(c)(8) of the final rule adopts a proposed technical change regarding the use of AHP subsidies in connection with a refinancing of a project. See 12 CFR 951.5(b)(6). The change clarifies that refinancing is permitted only if it generated equity proceeds and if the proceeds are used to purchase, construct, or rehabilitate eligible housing units. The change also clarifies that the requirement regarding use of the equity proceeds applies only to an amount of equity proceeds that is at least equal to the amount of AHP subsidy in the project. No comments addressed this technical change. Project sponsor qualifications: § 951.5(c)(10). Consistent with the proposed rule, § 951.5(c)(10)(ii) and (iii) of the final rule revises existing § 951.5(b)(8) by requiring a Bank to adopt written policies regarding the project sponsor qualifications for revolving loan funds and loan pools. See 12 CFR 951.5(b)(8). These issues are discussed separately below under the sections addressing use of the AHP subsidy by revolving loan funds and loan pools. Calculation of AHP subsidy: § 951.5(c)(12). Consistent with the proposed rule, § 951.5(c)(12) of the final rule, which relates to the calculation of the AHP subsidy, incorporates, without change, the existing provisions regarding the time at which the calculation of subsidy is to be made, which currently is included as part of the definition of “subsidy” in § 951.1. No comments addressed this technical change. Lending and re-lending of AHP direct subsidy by revolving loan funds: § 951.5(c)(13). General requirements: Consistent with the proposed rule, the final rule authorizes a Bank, in its discretion, to provide AHP direct subsidy under its competitive application program for eligible projects and households involving both the lending of the subsidy and subsequent lending of subsidy principal and interest repayments by a revolving loan fund. The final rule further provides that both the initial loans made by the revolving loan fund, as well as any subsequent loans made with amounts received from repayments of the initial loans, would have to meet AHP eligibility requirements, as applicable depending on whether the subsidy is used for initial lending or for subsequent lending, as discussed below. The revolving loan fund also would have to assure that the initial loans are made to projects and households that meet the commitments made in the approved AHP application, and that they will be met for the full AHP retention period. In order to exercise this authority, a Bank would have to consult with its Advisory Council and then adopt written policies governing the disbursement of the AHP direct subsidy through this type of entity. A number of commenters supported allowing the Banks to provide AHP direct subsidy to revolving loan funds as proposed, stating that it could maximize the impact of the direct subsidy because using loans rather than grants allows the financial benefit of the subsidy to be leveraged many times over. One commenter stated that it would meet a need for small, flexible-term loans for a broad range of purposes. Another commenter stated that it would benefit rural areas that are losing affordable housing, as revolving loan funds are better able to match the capital needs of smaller scale, scattered-site development efforts typical in rural areas. Other commenters opposed the proposal, stating that it would be unworkable because of difficulties with scoring, monitoring and compliance. A commenter stated that lending the AHP direct subsidy would erode the value of the AHP grants. Several commenters stated that revolving loan funds charge interest or fees that increase project costs, thereby effectively reducing the amount of AHP subsidy passing through to the project, and projects that cannot support debt service would not be able to benefit from revolving loan funds using direct subsidy as loan principal instead of grants. The Finance Board acknowledges these potential concerns, but notes that under the regulation no Bank would be obligated to accept applications from a revolving loan fund. The authority in the rule is permissive, not mandatory. The Finance Board believes that revolving loan funds can provide opportunities for the benefits of the AHP to reach harder-to-serve populations, such as those in rural areas or those with special needs. By allowing revolving loan funds to lend and re-lend direct subsidy, the regulation will enable entities specializing in community development lending to leverage additional funds for low-income borrowers, or bring added value to the services provided by not-for-profit corporations and local governments, and provide technical assistance that can contribute to project success and help develop capacity of small, not-for-profit housing producers. As noted previously, § 951.1 of the final rule expands the definition of “sponsor” to specify revolving loan funds in the list of eligible sponsors. Section 951.1 of the final rule defines a “revolving loan fund” as a capital fund established to make mortgage or other loans whereby loan principal is repaid into the fund and re-lent to other borrowers. Commenters questioned whether members would qualify as revolving loan funds under the rule, noting that if members could not qualify, the rule would give revolving loan funds an unfair competitive advantage over members in access to AHP funds. Members are eligible to apply for AHP subsidy as revolving loan funds if they meet the definition of “revolving loan fund” and the project sponsor qualifications requirement in the final rule. The Finance Board notes that revolving loan funds currently can and do apply as sponsors under the competitive application program for AHP subsidy for funding specified projects. Under § 951.5(c)(13)(i) of the final rule, in a Bank's discretion, a revolving loan fund would be able to apply for direct subsidy to lend to a specified or an unspecified project (or projects) meeting the requirements of the competitive application program and to re-lend repayments of that subsidy to subsequent projects that meet certain minimum eligibility requirements. A number of commenters stated that it was not clear how an application for an unspecified project could meet the eligibility requirements for project feasibility and project costs. To address these issues, § 951.5(c)(13)(i) and (ii) of the final rule provides that an application for an unspecified project to be funded through a revolving loan fund must include the revolving loan fund's criteria for lending of the subsidy, including its project cost and project feasibility guidelines, which the Bank will evaluate according to the AHP eligibility requirements, including the Bank's project cost and project feasibility guidelines. See § 951.5(c)(3) and (c)(4) of final rule. Pursuant to § 951.7(a)(1) of the final rule, upon initial monitoring of the actual project(s) funded with the initial lending of subsidy, the Bank will have to determine that the actual project costs were reasonable in accordance with the Bank's project cost guidelines, and that the subsidy was needed in accordance with § 951.5(c)(2). Section 951.5(c)(13)(ii) of the final rule provides that a Bank shall review an application from a revolving loan fund to evaluate the project or criteria for the initial lending of the subsidy, as applicable, pursuant to the Bank's scoring guidelines. Some commenters questioned how an application for an unspecified project(s) could be scored against other applications for projects. Under § 951.5(c)(13)(i), an application with nonspecific project(s) would have to propose how the project(s) will meet various applicable scoring criteria and, if approved, the revolving loan fund would have to ensure that the actual project or projects eventually funded with the initial lending of subsidy would meet those scoring criteria. If, upon initial monitoring of the project, the Bank found that the project did not meet the scoring criteria and could not be modified under § 951.5(f), then the revolving loan fund would have to repay the AHP subsidy to the Bank. Many revolving loan funds operating for the purpose of financing housing for very low- and low- or moderate-income households either restrict their funding to projects with certain requirements, such as housing for the elderly, or have a pipeline of potential projects. Consequently, the Finance Board believes that an application can be scored based on the proposed characteristics of an unspecified project. An application with unspecified project(s) must still meet the eligibility requirement in § 951.5(c)(6) that the project must be likely to begin drawing down some or all of the AHP subsidy or use it to procure other financing commitments within 12 months of the date of the application's approval. The Finance Board does not intend that approved AHP subsidy lay idle for significant periods of time. Section 951.5(c)(13)(iv) of the final rule also provides that payments of interest on the lending of the AHP direct subsidy must be used by the revolving loan fund in accordance with the requirements for subsequent lending of AHP direct subsidy in that section. Some commenters opposed allowing interest earned on the lending of the AHP subsidy to be used for general operating support of the revolving loan fund or the sponsor, and the Finance Board concurs. Under § 951.13(d)(3) of the current AHP regulation, a member or sponsor that lends AHP direct subsidy to a project must pay any repayments of principal and payments of interest forthwith to the Bank for use by other AHP-eligible projects. See 12 CFR 951.13(d)(3). Requiring a revolving loan fund to return interest payments to its lending fund and use them for AHP-eligible purposes in accordance with the subsequent lending provisions is consistent with this existing requirement. In addition, § 951.9(a)(9) of the final rule revises existing § 951.13(d)(3) to provide for an exception to the requirement that repayments of principal and payments of interest must be paid to the Bank in the case of lending and re-lending of direct subsidy by a revolving loan fund. Initial lending of AHP direct subsidy: § 951.5(c)(13)(iii): Section 951.5(c)(13)(iii)(A) of the final rule provides that, once its application is approved, a revolving loan fund may lend direct AHP subsidy to 1 or more projects or households, as needed to use the full amount of subsidy approved, that meet the eligibility criteria of § 951.5(c) and the commitments made in the approved AHP application. Like all other approved projects, the project or projects funded as part of the revolving loan fund's initial lending of the AHP direct subsidy are subject to AHP retention agreements, and to initial and long-term monitoring, as applicable according to whether the housing is owner-occupied or rental. The revolving loan fund may re-lend subsidy principal and interest repayments received in accordance with the “subsequent lending” requirements described below. Section 951.5(c)(13)(iii)(B) of the final rule provides that if an initial-lending project or owner-occupied unit is not in compliance with the commitments in the approved AHP application, or is sold or refinanced prior to the end of the applicable AHP retention period, the required amount of AHP subsidy must be repaid to the revolving loan fund in accordance with §§ 951.8 and 951.9 of the final rule. The revolving loan fund must re-lend such repaid subsidy, excluding the amounts of AHP subsidy principal already repaid to the revolving loan fund, to another project or owner-occupied unit meeting the initial lending requirements for the remainder of the retention period. For example, if an initial-lending rental project is sold after 8 years and the buyer does not commit to maintain the AHP income-targeting and affordability commitments, then the revolving loan fund must re-lend the repaid subsidy to another eligible project meeting the initial lending requirements that will have a retention period of 7 years in order to complete the full 15-year retention period required for an initial-lending rental project. In this case, the amount of subsidy that must be used for another initial-lending project does not include the amounts of AHP subsidy principal already repaid to the revolving loan fund. Subsequent lending of AHP subsidy principal and interest repayments: § 951.5(c)(13)(iv): Section 951.5(c)(13)(iv)(B) of the final rule provides that subsequent lending of AHP subsidy principal and interest repayments must be for the purchase, construction, or rehabilitation of owner-occupied units for households with incomes at or below 80 percent of the median income for the area, or of rental projects where at least 20 percent of the units are occupied by and affordable for households with incomes at or below 50 percent of the median income for the area, and must meet all other eligibility requirements in § 951.5(c). Section 951.5(c)(13)(iv)(C) provides that a Bank may, in its discretion, require the revolving loan fund's subsequent lending of AHP subsidy principal and interest repayments to be subject to retention period, monitoring, and recapture requirements as defined by the Bank in its AHP Implementation Plan. A number of commenters expressed concerns about the revolving loan fund sponsor having to monitor revolved payments of AHP subsidy over the long-term retention period. Some commenters stated that the monitoring requirements would be extremely difficult or unworkable, and would be different than those applicable under the final rule for projects that do not involve revolving loan funds. Commenters recommended various approaches to the monitoring of the revolved subsidy, including that: The Bank have flexibility to determine whether to require monitoring over a long-term period (as proposed); the sponsor be allowed to commingle the AHP funds with its other funds but be required to separately account for the AHP funds through an annual A-133 type audit; the Bank be allowed to monitor the performance of the revolving loan fund rather than the individual households or properties; and the monitoring period be limited to 5 years or until the AHP direct subsidy is rolled over twice. The Finance Board recognizes the potential problems that monitoring for subsequent lending of the repaid subsidy could entail. As discussed above, only projects funded with the revolving loan fund's initial lending of subsidy would be subject to the monitoring requirements applicable to all projects under the competitive application program. The Bank, in its discretion, may decide what, if any, monitoring, retention, or recapture requirements should apply to subsequent lending of the repaid AHP subsidy. Section 951.5(c)(13)(iv)(A) of the final rule also provides that a revolving loan fund, in its discretion, may provide part or all of the AHP subsidy principal and interest repayments as nonrepayable grants to eligible projects under the “subsequent lending” requirements. Under § 951.5(c)(13)(v), the revolving loan fund must return to the Bank any AHP subsidy that will not be used for AHP-eligible purposes. Several commenters wanted to ensure that the Finance Board or the Banks would not set the interest rate that a revolving loan fund could charge for lending the AHP direct subsidy. The final rule does not set the interest rates that a revolving loan fund can charge; however, a revolving loan fund's interest rates must be reasonable and comply with the financing costs requirement of § 951.5(c)(5). Revolving loan fund sponsor qualifications: § 951.5(c)(10(ii): Consistent with the proposed rule, § 951.5(c)(10)(ii) of the final rule provides that, pursuant to written policies adopted by a Bank's board, a revolving loan fund sponsor that intends to use the AHP subsidy in accordance with this section must: (i) Provide audited financial statements that its operations are consistent with sound business practices; and (ii) demonstrate the ability to re-lend AHP subsidy repayments on a timely basis and track the use of the AHP subsidy. Several commenters recommended that the regulation give priority to community development financial institutions as qualified revolving loan fund sponsors, because of their experience and controls and reporting systems for the lending of funds. Another commenter suggested that a revolving loan fund sponsor should have to have a minimum of 2 years' experience successfully operating a revolving loan fund in order to be considered an eligible sponsor. The Finance Board does not believe it is appropriate to give preference in the regulation to any particular type of sponsor or indicator of experience. The AHP is a competitive application process and, during the application review process, a Bank must evaluate a sponsor's experience in determining whether the sponsor has the qualifications to be eligible to participate in the competitive application process. Those sponsors that can demonstrate such qualifications will be eligible to participate in the competitive application process. Other issues: Several commenters also recommended that the Banks be allowed to fund revolving loan funds as a separate set-aside, rather than under the competitive application program, and that the Banks be allowed to establish the governing policies for their revolving loan fund programs. The Finance Board does not believe that it is appropriate to set aside AHP funds for specific types of sponsors. The AHP is primarily a competitive program that awards funds based on the merits of the application, regardless of sponsorship. Under the final rule, AHP funds disbursed through a revolving loan fund may not be used for purposes, such as to pay for operating costs, that are unrelated to the purchase, construction, or rehabilitation of housing. Several commenters stated that AHP subsidy should be able to be used for operating costs, citing the more intensive servicing needed for higher-risk, low-income loans. A commenter proposed that revolving loan funds be able to use interest earned on lending the AHP direct subsidy and on short-term investment of the AHP subsidy for servicing and related functions and investments. The Finance Board believes that use of AHP subsidy for operating costs and investment of the subsidy would not be consistent with the requirement in the Bank Act that AHP subsidy only be used for the financing of purchase, construction, or rehabilitation of affordable housing and, as discussed above, that interest earned on the lending of the subsidy should also be used for AHP-eligible purposes. See 12 U.S.C. 1430(j)(2). Some commenters also stated that revolving loan funds should be allowed to lend AHP subsidy to fund predevelopment costs for rental housing, or short-term construction loans. The Finance Board notes that lending for short-term construction loans is an eligible use of AHP subsidy, provided that the resulting housing complies with the AHP retention requirements. The Finance Board has determined that predevelopment costs are not an eligible use of AHP subsidy if no eligible housing is produced as a result. Under the AHP, a project that meets the eligibility requirements, including developmental and operational feasibility requirements, may include previously incurred predevelopment costs in its uses of funds. Three years after promulgation of the new revolving loan fund authority, the Finance Board intends to conduct a program review of the use of the authority to determine how the program is working and to address any issues that have arisen. Use of AHP subsidy in loan pools: § 951.5(c)(14). General requirements: Consistent with the proposed rule, § 951.5(c)(14) of the final rule specifies the conditions under which a Bank, in its discretion, may provide AHP subsidies under its competitive application program for the origination of first mortgage loans or rehabilitation loans with subsidized interest rates to AHP-eligible households through a purchase commitment by an entity that will purchase and pool the loans. The final rule also allows a loan pool sponsor to use repaid AHP subsidy resulting from prepayments of a loan in the pool for the origination of another AHP-assisted loan as substitution for the prepaid loan in the pool, rather than requiring the return of the AHP subsidy to the Bank, as is required under the current regulation. Because of this new reuse authority, the Finance Board has determined that each Bank should have the discretion to determine whether to fund AHP applications for loan pools under its competitive application program. The Bank would determine whether there is a market need for such funding in its district as part of its determination whether to permit funding of applications for loan pool sponsors. In order to make available the loan pool authority under its competitive application program, a Bank would have to consult with its Advisory Council and then adopt written policies governing the disbursement of the AHP subsidy through this type of funding arrangement. A number of commenters generally supported the use of AHP subsidy by loan pool sponsors, stating that greater use of secondary market operations could help sponsors provide homeownership to more low-or moderate-income households in their communities. Commenters also supported the discretionary nature of the proposal. Other commenters opposed the proposal, citing a number of reasons, including that loan pools may not be addressing a specific market need. The Finance Board notes that loan pool entities are already eligible sponsors for AHP-assisted projects provided that the loan originations through the purchase commitments meet the requirements of the current AHP regulation. However, prepayments of loans prior to the end of the retention period required that AHP subsidy be returned to the Bank in accordance with the retention agreements. One Bank stated that it has received applications for AHP subsidy from a loan pool sponsor in its district, but was unsure how loan pool operations could meet the AHP requirements, especially when loans in the pool prepaid. The Finance Board believes that loan pools can facilitate the origination of AHP-subsidized home purchase mortgage loans, owner-occupied rehabilitation loans, and rental property loans for eligible households. Consequently, consistent with the proposed rule, the final rule specifies the criteria that the Finance Board has determined meet the requirements of the AHP, especially in the areas of retention, eligible uses, need for subsidy, pass through of the subsidy to the ultimate borrower, and substitution of prepaid loans. Loan pool sponsor qualifications: § 951.5(c)(10)(iii): As noted previously, § 951.1 of the final rule specifically includes in the definition of “sponsor” entities that operate loan pools in the list of eligible sponsors. Consistent with the proposed rule, § 951.1 of the final rule defines a “loan pool” as a group of AHP-eligible loans that are purchased, pooled, and held in trust. Consistent with the proposed rule, and in light of the new authority to reuse repaid subsidy for new AHP-assisted loans to substitute in the loan pools, § 951.5(c)(10)(iii) of the final rule provides that, pursuant to written policies adopted by a Bank's board, a project sponsor that operates a loan pool must: (i) Provide evidence of sound asset/liability management practices; (ii) provide audited financial statements that its operations are consistent with sound business practices; and (iii) demonstrate the ability to track the use of the AHP subsidy. Several commenters recommended that only loan pool sponsors that have previously received AHP funds should be considered eligible sponsors. For the same reasons discussed above under Revolving Loan Funds, the Finance Board does not believe it is appropriate to give preference in the regulation to particular types of sponsors or indicators of experience. However, a Bank may take into consideration a sponsor's experience in determining its qualifications and the eligibility of the project to participate in the AHP competitive application process. Commenters also questioned whether members could qualify as loan pool sponsors under the rule, noting that if members could not qualify, the proposed rule could give secondary market entities an unfair competitive advantage over members that are engaged in originating loans for their portfolios or for sale. The Finance Board believes that members, like any other entity, should be eligible to apply for AHP subsidy as loan pool sponsors if they meet the definition of “loan pool” sponsor and the project sponsor qualifications requirement in the final rule. Eligibility requirements; forward commitment: § 951.5(c)(14)(i), (ii)(A): The final rule adopts a number of proposed provisions intended to ensure that AHP subsidies disbursed through a loan pool sponsor actually benefit AHP-eligible households. Specifically, § 951.5(c)(14)(i) provides that the loan pool's use of the AHP subsidy must meet the requirements of § 951.5(c)(14), and shall not be used for the purpose of providing liquidity to the originator or holder of the purchased loans, or paying the loan pool's operating or secondary market transaction costs. The loan pool sponsor must purchase the loans pursuant to a forward commitment that conforms to the approved AHP application. Subsequent purchases of loans to substitute for repaid loans in the pool also must be made pursuant to the terms of the approved AHP application. The use of a forward commitment ensures that the loan originators will originate the end loans in accordance with the requirements of the sponsor's approved AHP application and the requirements of the AHP, such that each end loan will have the prescribed interest rate and term and be subject to a retention agreement and that each household will meet the income-eligibility commitments in the approved AHP application. The Finance Board requested comment in the proposed rule on whether it is preferable to establish by regulation a time limit, to be specified in the forward commitment, within which a project sponsor would have to expend the full amount of the AHP subsidy and, if so, the duration of that time limit, or whether to allow a Bank to establish the time limit as part of its AHP Implementation Plan, as proposed. Several commenters stated that the Bank should have the discretion to establish the time limit, noting that different time limits may be appropriate depending on the type, complexity, and specific funding needs of the loan pool, as well as legal and regulatory factors that may affect the pool. The Finance Board recognizes the need for some flexibility in this regard. The time limit should reflect the loan pool sponsor's market volume, considering the size and capacity of the network of originators that the loan pool sponsor uses to produce the AHP-assisted loans. However, the Finance Board believes that the time period should be no longer than 1 year because the use of the subsidy is interest-rate sensitive. Accordingly, the final rule allows a Bank to determine the time limit, to be specified in the forward commitment, for use of the AHP subsidy, provided that such limit may not exceed 1 year from the date of approval of the AHP application. Section 951.5(c)(14)(ii)(B) of the final rule provides that, as an alternative to using a forward commitment, a loan pool sponsor may purchase an initial round of loans that were not originated pursuant to an AHP-specific forward commitment, provided that the entities from which the loans were purchased are required to use the proceeds from these purchases within the time limits specified in the Bank's AHP Implementation Plan, which shall not exceed 1 year from the date of approval of the AHP application. The proceeds must be used by such entities for loans with terms in the approved AHP application and subject to AHP retention agreements. Retention agreements and other requirements: § 951.5(c)(14)(iii): Section 951.5(c)(14)(iii) of the final rule requires that each AHP-assisted owner-occupied unit and rental property receiving AHP direct subsidy or a subsidized advance shall be subject to the requirements for monitoring and remedial action for noncompliance in the final rule, as well as the requirement for an AHP 5-year or 15-year retention agreement, respectively. The proposed rule inadvertently omitted the requirement for such a retention agreement in the case of loans financed with the proceeds of a subsidized advance. Consistent with the proposed rule, § 951.9(a)(7)(ii)(A) of the final rule eliminates current § 951.13(c)(4)(i)(B), such that households receiving permanent mortgage loans through the use of a subsidized advance would not have to repay any AHP subsidy in the case of a refinancing of the owner-occupied unit prior to the end of the retention period. However, the final rule continues to require such households to have retention agreements in place, because the retention agreement contains the requirements for notice to the Bank of any sale or refinancing of the unit. Several commenters favored not requiring a retention agreement for owner-occupied units assisted with subsidized advances, and recommended that a retention agreement also not be required where owner-occupied units are assisted with direct subsidies. The Finance Board believes that households funded with AHP-assisted mortgage loans and rehabilitation loans whose origination was funded by a loan pool sponsor should be subject to the same requirements as households receiving AHP-assisted loans or direct subsidies from other sponsors. Use of AHP subsidy as interest-rate buy down: § 951.5(c)(14)(iv): Section 951.5(c)(14)(iv) of the final rule provides that where AHP direct subsidy is being used to buy down the interest rate of a loan or loans from a member or other lender, the loan pool sponsor must use the full amount of the AHP direct subsidy to buy down the interest rate at the time of closing on such loan or loans to achieve the permanent below-market interest rate on the loan as specified in the approved AHP application. Other issues: A number of commenters recommended that the Banks be allowed to fund loan pools as a separate set-aside, rather than under the competitive application program, and that the Banks be allowed to establish the governing policies for their loan pool programs. As discussed above under Revolving Loan Funds, the Finance Board does not believe that it is appropriate to set aside AHP funds for specific types of sponsors such as loan pool sponsors. The AHP is primarily a competitive program that funds projects based on their individual merits, regardless of sponsorship. The Finance Board requested comment in the proposed rule on whether, in addition to loans for AHP-assisted owner-occupied units, rental housing loans should be eligible under the AHP loan pool authority, and if so, what kinds of loans and activities, consistent with the AHP requirements, should be eligible. Several commenters stated generally that rental housing loans should be eligible under the loan pool authority, with 1 commenter stating that this would help maximize the Bank's ability to meet housing needs in its district. The Finance Board recognizes that there may not be a sizable market at the current time for purchase and pooling of rental housing loans. Nevertheless, the Finance Board does not want to foreclose the potential use of AHP subsidy for this purpose should such opportunities arise. Accordingly, the final rule allows rental housing loans to be eligible under the AHP loan pool authority. Out-of-district projects eligibility requirement: § 951.5(c)(15). Consistent with the proposed rule, § 951.5(c)(15) of the final rule removes the existing provision that allows a Bank, in its discretion, to require as an eligibility requirement that a project receiving AHP subsidy must be located in the Bank's district. See 12 CFR 951.5(b)(10)(i)(B). In addition, proposed § 951.5(c)(17) would have prohibited a Bank from establishing an eligibility requirement that a project receiving AHP subsidy must be located in the Bank's district. This provision is unnecessary and is omitted from the final rule, as a Bank in any case may not adopt additional eligibility requirements not specifically authorized under the AHP regulation. See the further discussion of the out-of-district projects issue below, under AHP Projects Outside the District. Removal of discretionary minimum Bank credit product usage requirement. Consistent with the proposed rule, the final rule removes the existing provision that authorizes a Bank, in its discretion, to require its members to have used a minimum amount of the Bank's other credit products within the previous 12 months as a condition to applying for additional amounts of AHP subsidy. See 12 CFR 951.5(b)(10)(i)(C). A number of commenters opposed elimination of this discretionary authority, stating that members who use a Bank's credit products contribute to the Bank's earnings, thereby generating more funds for the AHP, and a credit product usage requirement can be an incentive to encourage borrowing by members. The Finance Board believes that AHP funding should be provided, without restriction, to projects that score highest under a Bank's competitive application scoring criteria without regard to a member's Bank credit product usage. Accordingly, the final rule eliminates the authority. Discretionary homebuyer or homeowner counseling requirement: § 951.5(c)(15)(ii). Section 951.5(c)(15)(ii) of the final rule adopts the proposed provision authorizing a Bank, in its discretion, to require homebuyer or homeowner counseling as an eligibility requirement for owner-occupied projects under the competitive application program. Under such a requirement, a Bank could limit AHP subsidies to owner-occupied projects that provide this resource for low- or moderate-income households. Such counseling, particularly for first-time homebuyers, can contribute to successful long-term homeownership, which the Finance Board has recognized in supporting such counseling for low- or moderate-income households receiving home purchase assistance under the AHP homeownership set-aside program. See 12 CFR 951.5(a)(2)(ii); see also discussion of counseling below under Homeownership Set-Aside Program. A number of commenters supported allowing the Banks to require homeownership counseling as an eligibility requirement for homeownership projects under the competitive application program, with some commenters stating that the Finance Board should go further by making homeownership counseling mandatory under the competitive application program. However, several commenters pointed out that there are situations, such as rehabilitation of currently owner-occupied units or homeownership for households that are not first-time homebuyers, such as disaster victims, in which it is unnecessary or impractical to require counseling. It is for this reason that the Finance Board also proposed to make the currently mandatory counseling requirement under the homeownership set-aside program discretionary for households that are not first-time homebuyers ( see § 951.6(c)(2)(iii)). The Finance Board does not believe that it is appropriate to mandate counseling for all projects under the competitive application program, nor was such a proposal noticed for comment in the proposed rule. Nevertheless, the Banks, in their discretion, may require homebuyer or homeownership counseling, such as counseling for first-time homebuyers. Several commenters also suggested that the Finance Board set minimum standards for homeownership counseling. The Finance Board believes that the Banks have better knowledge of what counseling is available in their districts and, under the final rule, the Banks have the discretion to set minimum counseling requirements. The Finance Board does not believe that it is appropriate to set national requirements in the rule that may create challenges in delivery for some local jurisdictions. Several commenters also recommended that the Finance Board permit the use of AHP funds for counseling even when the counseled household does not purchase an AHP-assisted unit. The Finance Board believes that allowing this would not be consistent with the statutory requirement that AHP funds be used for the purchase, construction, or rehabilitation of eligible housing. See 12 U.S.C. 1430(j)(2). Prohibited use of AHP subsidy: prepayment fees: § 951.5(c)(16)(i). Section 951.5(c)(16)(i) of the final rule revises the current provision by allowing a project to use AHP subsidy to pay prepayment fees imposed by a Bank on a member if the member prepays a subsidized advance, provided that: (i) The project is in financial distress that cannot be remedied through a project modification pursuant to § 951.5(f); (ii) the prepayment of the subsidized advance is necessary to retain the project's affordability and income targeting commitments; (iii) subsequent to such prepayment, the project will continue to comply with the terms of the approved AHP application and the requirements of the AHP regulation for the duration of the original retention period; (iv) any unused AHP subsidy is returned to the Bank and made available for other AHP projects; and (v) the amount of AHP subsidy used for the prepayment fee may not exceed the amount of the member's prepayment fee to the Bank. The existing provision does not include the restrictions in (i), (ii), and (v) above. See 12 CFR 951.5(b)(4)(i). The proposed rule would have prohibited AHP subsidy from being used for prepayment fees under all circumstances. One commenter supported elimination of the authority, stating that AHP subsidy should be used only for purchase, construction, or rehabilitation of housing, as required by the Bank Act. A number of other commenters opposed elimination of the authority, citing potential adverse consequences for ongoing project retention and affordability. A Bank stated that when a project is in financial distress and cannot maintain the AHP debt service, sale of the project or injection of additional equity or grant funds and subsequent repayment of the outstanding AHP subsidized advance may be its only recourse, with prepayment of the AHP subsidy allowing the project to be feasible provided it agrees to continue to meet the AHP requirements. The Bank asserted that such use of the AHP subsidy constitutes use of the subsidy for purchase, construction, or rehabilitation, as required by the Bank Act. Other commenters stated that the proposal appears to place members using AHP subsidized advances at a disadvantage over members using direct subsidies, by placing a greater burden on members that would likely pass some or all of the burden on to homeowners, project owners, and sponsors, thereby having a potentially chilling effect on member participation in the AHP. A Bank stated that the proposal would limit members' use of AHP subsidized advances because of the increased exposure to prepayment fees, and noted that subsidized advances provide long-term benefits to members and projects. The commenters also stated that prepayment fees are a customary part of financing costs for the purchase, construction, or rehabilitation of housing and, therefore, should be allowed as an eligible use of AHP subsidy. Based on the comments, the Finance Board believes that in the limited circumstances where a project is in financial distress that cannot be remedied through a project modification pursuant to § 951.5(f), and prepayment of the AHP subsidized advance is necessary to retain the project's affordability and income targeting commitments, the AHP subsidy should be able to be used to pay the prepayment fee. Subsequent to prepayment, the project would have to continue to comply with the terms of the approved AHP application and the requirements of the AHP regulation for the duration of the original retention period, and any unused AHP subsidy would have to be returned to the Bank and made available for other AHP projects. In addition, the amount of AHP subsidy used for the prepayment fee may not exceed the amount of the member's prepayment fee to the Bank. Accordingly, the final rule allows AHP subsidy to be used for prepayment fees under these limited circumstances. Changes to the scoring system: § 951.5(d) . Section 951.5(d)(1) and (2) of the final rule retains the current provisions that require each Bank to adopt written scoring guidelines for its competitive application program, and to allocate 100 points among 9 scoring criteria. See 12 CFR 951.6(b)(4). The proposal would not have made any substantive changes to those criteria, except for those relating to disaster areas and out-of-district projects, but proposed a number of technical revisions to the current rules and codification of certain staff interpretations. Variable-point scoring: § 951.5(d)(3)(ii): Section 951.5(d)(3)(ii) of the final rule adopts the proposal to retain the provisions relating to fixed-point and variable-point scoring criteria, but makes technical changes to the latter, the effect of which is to codify a current staff interpretation that allows a Bank to implement variable-point scoring criteria either through a fixed scale or on a scale relative to the other applications that are to be scored in the same funding round. See 12 CFR 951.6(b)(4)(iii). Several commenters supported the proposal, with 1 commenter stating that the flexibility ensures that a Bank can meet effectively the housing needs in its district. Removal of optional income-targeting scoring provision for projects receiving government funds or tax credits: § 951.5(d)(5)(iii)(A): Consistent with the proposed rule, § 951.5(d)(5)(iii)(A) of the final rule removes a provision of the existing regulation that allows a Bank, in its discretion, to score rental projects according to the targeting commitments made by the project to a government or tax credit allocating entity that provides funds or tax credits, respectively, to the project. See 12 CFR 951.6(b)(4)(iv)(C)(1). That provision is no longer necessary because of the changes to the rule, located at § 951.7(a)(2) and (a)(3), discussed further below, that allow a Bank, in its discretion, to rely for AHP long-term monitoring purposes on monitoring by government or tax credit monitoring entities, and the new risk-based monitoring authority that will enable a Bank to adopt risk-based monitoring requirements for such projects even if the projects' targeting commitments differ from those of the government or tax credit allocating entity. This does not preclude a project from using the targeting commitments of another housing program when applying for AHP subsidy, even when the project intends to exceed such targeting commitments in practice. No comments addressed elimination of this scoring provision. Owner-occupied project income-targeting scoring: § 951.5(d)(5)(iii)(B): Section 951.5(d)(5)(iii)(B) of the final rule adopts the proposed language clarifying regulatory practice relating to the scoring criterion for income targeting in owner-occupied projects. The provision clarifies that a Bank may determine in its AHP Implementation Plan how to award scoring points on a declining scale, taking into consideration the percentages of units and targeted income levels. One commenter supported the change. Disaster areas and displaced households scoring criterion: § 951.5(d)(5)(vi)(E) . Section 951.5(d)(5)(vi)(E) of the final rule adopts the proposed language permitting a Bank to award scoring points for applications that would finance housing located in a federally declared disaster area, as well as for applications that would finance housing for low-or moderate-income households that have been displaced from a federally declared disaster area due to a disaster, irrespective of the household's current residential location. The current regulatory provision on disaster area scoring permits the Banks to award scoring points only to the financing of housing located in federally declared disaster areas. See 12 CFR 951.6(b)(4)(iv)(F)(5). Because disasters may displace families from their homes, as in the case of Hurricane Katrina in 2005, the Finance Board believes that this scoring criterion should be expanded to address such situations. A number of commenters supported the change, stating that it would be consistent with other federal initiatives. One Bank recommended that the Finance Board eliminate income-eligibility requirements for displaced households, or codify in the regulation its No-Action Letter 2005-NAL-01 (Sept. 9, 2005), 5 which temporarily suspended income-eligibility requirements for existing AHP rental projects that provide vacant units for households displaced by Hurricane Katrina. However, the AHP income-eligibility limits are required by the Bank Act, and suspension of these limits only should be done on a case-by-case basis in extraordinary circumstances. 5 2005-NAL-01 is available in the FOIA Reading Room on the Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=59&ListYear=2005&ListCategory=7#72005 . AHP projects outside the district: §§ 951.5(d)(5)(vi)(L), 951.5(d)(5)(vii) . Consistent with the proposed rule, the final rule rescinds the Bank's existing discretionary authority to prohibit applications to fund projects located outside a Bank's district. However, in contrast to the proposed rule, the final rule retains, at § 951.5(d)(5)(vi)(L), the Bank's current discretionary authority to give a scoring preference under the First District Priority to applications to fund projects located in the Bank's district. In addition, under § 951.5(d)(5)(vii) of the final rule, a Bank continues to have the discretion to adopt a Second District Priority for in-district projects. Under the current regulation, a Bank, in its discretion, may deny consideration of applications to the AHP competitive application program from members proposing to fund projects located outside a Bank's district. See 12 CFR 951.5(b)(10)(i)(B). Another provision of the current regulation permits a Bank to give scoring point preference to applications proposing to finance housing located within the Bank's district. See 12 CFR 951.6(b)(4)(iv)(F)( 12 ). The proposed rule would have eliminated both provisions. In addition, proposed § 951.5(d)(5)(vii) would have prohibited a Bank from adopting as its Second District Priority a scoring preference for projects located in the Bank's district. See 12 CFR 951.6(b)(4)(iv)(G). The Bank Act does not set up the AHP as a geographically targeted program. Rather, it requires each Bank to establish a program to provide subsidized funding to its members. See 12 U.S.C. 1430(j)(1). The existing discretionary authority to prohibit applications for out-of-district projects was adopted at a time when all Bank members generally conducted business only within the boundaries of a state within the Bank's district. As a result of interstate branching, however, many members now do business in communities outside their Bank district. The authority to restrict AHP projects to the Bank's district, if exercised, would limit a member's ability to support otherwise eligible AHP projects in certain of the communities that it serves solely because those communities are located outside the Bank's district boundaries. This restriction also could disadvantage communities served by financial institutions that move their headquarters to a state located in a different Bank district. The Finance Board believes that a Bank should not prohibit applications for AHP projects simply because the projects are located outside the Bank's district, so long as they are in communities in which a member does business. In addition, the existing authority in the current AHP regulation has not been extensively invoked by the Banks. In 2004, only 1 Bank prohibited the use of AHP funds for out-of-district projects, and only 2 Banks elected to give scoring preference to in-district projects. Nor has there been a significant outflow of AHP funds as a result of member financing of projects outside the district. Of over 10,000 AHP projects funded since the beginning of the program in 1990, approximately 300 projects, or 3.0 percent, have been located outside a Bank's district. A number of commenters supported elimination of the 2 provisions, stating that the proposal recognized the changing nature of member operations resulting from interstate mergers and acquisitions, and would allow members to obtain the benefits of the AHP for their entire market areas. Some commenters pointed out that the proposal would enable developers and communities to continue established relationships with financial institutions even when mergers and acquisitions result in a change in the Bank district of which the institution is a member. Other commenters opposed elimination of the 2 provisions, citing a number of reasons, including increased monitoring costs, less familiarity with out-of-district projects and their market areas, and the concern that large, multiregional members would have access to more projects outside of the district that could compete for funds more effectively than projects in the district, putting local, state-chartered members at a disadvantage. Several Banks stated that their Advisory Councils and members preferred to keep the district's resources within the district where they can help meet local needs, especially when other resources for affordable housing may be less available to local projects. The remaining commenters on the proposal stated that they would not object to requiring the Banks to permit applications for out-of-district projects, provided the regulation retained the current discretionary scoring preference for in-district projects under the First District Priority. These commenters stated that this discretionary scoring priority preserves a geographic balance by spreading projects across and among the different Bank districts, and eliminating the priority may eventually divert projects from districts with fewer or smaller members to districts with large, multibillion dollar members. A trade association representing local member institutions encouraged the Finance Board to continue to permit the Banks to provide some scoring points for in-district projects for at least a portion of their AHP funds, to ensure that those members that do not operate out-of-district have access to some share of AHP funds. The Finance Board continues to believe that the Banks should not be authorized to prohibit applications for AHP funding for out-of-district projects, because the AHP should be available to all members and each Bank has members with branches located outside the district boundaries. However, the Finance Board is persuaded by the comments that there is merit in retaining the current discretionary authority for the Banks to give scoring preference to in-district projects. Consequently, the final rule eliminates the existing discretionary authority to prohibit out-of-district projects, but retains the existing discretionary scoring criterion for in-district projects under the First District Priority. The final rule also retains the existing language in the Second District Priority, thereby allowing a Bank, in its discretion, to adopt a scoring preference for in-district projects under that scoring category. However, the Finance Board intends that a Bank should not use the scoring criteria as a way to exclude out-of-district projects from the competitive application program. Modifications of approved AHP applications: § 951.5(f) . Section 951.5(f) of the final rule adopts the proposed codification of current practice by adding a requirement that a Bank must document in writing its analysis and justification for any modification of a previously approved project. See 12 CFR 951.7(a). One commenter supported the proposed language. Progress towards use of AHP subsidies: § 951.5(g)(2) . Section 951.5(g)(2) of the final rule requires each Bank to establish and implement policies, including time limits, for determining whether progress is being made towards draw-down and use of AHP subsidies by approved projects, and whether to cancel an AHP application approval for lack of such progress. Progress requirements must be included in the Bank's AHP Implementation Plan. Affordable housing projects often may encounter delays due to changes in funding, legal requirements, community challenges, or other events. These delays may affect the ability of a project to progress towards its scheduled draw-down and use of the AHP subsidy. The current regulation requires a Bank to specify a time period in its AHP Implementation Plan for the draw-down and use of the AHP subsidy. If a project does not do so within such period, the Bank must cancel its approval of the application. See 12 CFR 951.8(c)(1). The rigidity of this requirement sometimes has impaired the ability of the Banks to determine whether the delays are significant enough to affect a particular project's ability to draw down and use the subsidy. While the Banks have extended the time period for certain projects in an effort to take into account such delays, the current cancellation requirement limits a Bank's ability to manage this process. The final rule gives the Banks greater capacity to manage this process by requiring them to adopt policies that address how they will make such determinations. Several commenters supported the change as providing increased flexibility. Compliance upon disbursement: § 951.5(g)(3) . Section 951.5(g)(3) of the final rule adopts the proposed requirement that a Bank establish and implement policies for determining, prior to initial disbursement of AHP subsidy, and prior to each subsequent disbursement if the need for AHP subsidy has changed, that the project meets the applicable eligibility requirements and all obligations committed to in the approved AHP application. The final rule also states that if a Bank cancels any AHP application approvals due to failure to meet the eligibility requirements, the Bank shall make the AHP subsidies available for other AHP-eligible projects. The Bank's requirements must be included in its AHP Implementation Plan. Under the current regulation, a Bank must verify compliance with eligibility requirements and application commitments prior to each disbursement of AHP subsidy. See 12 CFR 951.8(c)(2). The requirement to repeatedly verify project compliance during every stage of the disbursement process may be more than is necessary to ensure compliance with the rules, and effectively precludes a Bank from using its best judgment to determine whether the circumstances of a particular AHP project warrant repeated verification of compliance with the rules. The change gives the Banks greater latitude in determining when it is appropriate to verify compliance prior to disbursing AHP funds. Several commenters supported the change as providing additional Bank discretion to establish appropriate compliance procedures. Bank board of directors duties and delegation: § 951.5(h) . The final rule consolidates provisions of the current and proposed rules addressing the Bank board of directors” various duties regarding establishment and implementation of the competitive application program requirements in one section, § 951.5(h). Specifically, § 951.5(h)(1) states that a Bank's board, after consultation with its Advisory Council, shall be responsible for adoption of the AHP Implementation Plan, and for approving or disapproving the applications for AHP subsidy. Section 951.5(h)(2) reiterates that the Bank's board may not delegate these responsibilities to Bank officers or other Bank employees. No comments addressed these changes. F. Homeownership Set-Aside Program: § 951.6 The final rule adopts the proposed reorganization of the existing regulation, generally by combining various homeownership set-aside program provisions into one section, located at § 951.6. A number of commenters supported these technical changes, stating that they would be helpful for the Banks, members, and sponsors in understanding the different requirements of the competitive application and homeownership set-aside programs. Removal of optional nonmember applicants provision: § 951.6(b). Consistent with the proposed rule, § 951.6(b) of the final rule eliminates the existing provision permitting a Bank, in its discretion, to accept applications for homeownership set-aside program subsidies from an institution that is not a member of the Bank, but which has pending an application for membership. See 12 CFR 951.6(a). Thus, an applicant would have to be a member of the Bank at the time that it submits an AHP application. The rationale for this revision was discussed above in connection with a similar amendment for the competitive application program. Timing of household income-eligibility determination; reservation of set-aside funds; qualification of students: § 951.6(c)(2)(i), (e)(2). Timing of household enrollment: § 951.6(c)(2)(i): Section 951.6(c)(2)(i) of the final rule provides that a household's income eligibility is to be determined at the time the member enrolls the household in the Bank's homeownership set-aside program, with the time of enrollment by the member to be defined by the Bank in its AHP Implementation Plan. The existing regulation has been interpreted by some Banks as requiring that the household's income qualification for purposes of the AHP be determined at the time that the household is qualified for a mortgage loan. See 12 CFR 951.1 (definition of “low- or moderate-income household”); 951.5(a)(2)(i). Such an interpretation has posed problems for certain households participating in empowerment programs, such as multi-year job training or savings or welfare-to-work programs, that are designed to assist very low- and low- or moderate-income households accumulate assets over a number of years, including households that might not otherwise qualify for a mortgage loan. The problem has been that by the time the household completes such a program and can qualify for a mortgage loan, the household may no longer qualify as low- or moderate-income as required under the AHP homeownership set-aside program. In response to the concern that participants in empowerment programs be able to depend on receipt of anticipated closing cost or down payment assistance when they are ready to purchase a home, such as offered by homeownership set-aside funding, § 951.6(c)(2) of the proposed rule would have provided that the household's income eligibility be determined at the time the household is enrolled by the member and the Bank in the homeownership set-aside program. This was intended to clarify that once a household is enrolled in an empowerment program, the household's income eligibility for the homeownership set-aside program is assured. This clarification was intended to be consistent with the belief that such assurance is important to achieving the purpose of such programs to prepare households for homeownership. This provision in the proposed rule, however, caused some confusion among commenters, because the process of “enrollment” was not described in the rule. Several commenters pointed out that under some existing Bank homeownership set-aside programs, members and Banks enroll households at different times; e.g. , a member may enroll a household for participation in the homeownership set-aside program at the member level, but not notify the Bank of the household's participation until the household has met the requirements of the Bank's homeownership set-aside program, such as saving for a specified period or receiving homeownership counseling. This process recognizes that any number of households enrolled by the member will not complete the program before completing program requirements, and minimizes the administrative requirements of processing them at the Bank level. The Finance Board wants to ensure that a Bank may allow a household to enroll with a member, even though the household may not meet the requirements of the Bank's homeownership set-aside program for a number of years because the household is participating in an empowerment program. The Finance Board believes the individual Bank should establish the policies for enrollment of households by members in the Bank's homeownership set-aside program. Accordingly, the final rule provides that income eligibility is to be determined as of the date the household is enrolled by the member in the Bank's homeownership set-aside program, with the time of enrollment by the member defined by the Bank in its AHP Implementation Plan. Reservation of set-aside subsidies: § 951.6(e)(2): In the past, the Finance Board generally has considered a household to be enrolled in the AHP homeownership set-aside program at the time the member or the Bank reserves the set-aside funds for the household so that the funds will be available when the household closes on its home purchase. While such a process might ensure that the set-aside funds will be available when all program requirements have been met for households participating in job-training or other empowerment programs, such a process could result in many years elapsing between the time of enrollment of the households in the homeownership set-aside program and the disbursement of the set-aside funds to that household. Such a delay is inconsistent with the intent of § 951.6(e)(3), which requires progress to be made towards draw-down and use of the AHP direct subsidies by eligible households pursuant to the requirements in the Bank's policies. The homeownership set-aside program requires careful administration by a Bank and the participating member and should be subject to reasonable Bank policies on the reservation and timely use of AHP subsidy. In those cases in which members enroll households that may take a number of years to complete the program requirements, the Bank should not reserve funds for these households at the time of enrollment by the member in the homeownership set-aside program, but should anticipate the timing of disbursement and manage future set-aside allocations based on that. The Finance Board believes that, in managing future set-aside allocations, it would be reasonable for a Bank to reserve set-aside funds up to 2 years in advance of the Bank's time limit for the draw-down and use of the funds by the household. The Bank should reserve such funds from the set-aside allocation of the year in which the Bank makes the reservation. For example, a household enrolling with a member at the same time it enrolls in the Family Self Sufficiency (FSS) Program has 5 years in which to complete the requirements of the FSS. In this case, a member may enroll a household in 2006, but the Bank should not reserve 2006 set-aside funds for the household. Rather, the Bank should anticipate funding that household from a future year's set-aside allocation, with such future reservation of funds being no more than 2 years prior to the expected disbursement to the household. In this case, the Bank could reserve funds from its 2009 set-aside allocation for a household that has until 2011 to complete its FSS requirements and purchase its home. It is expected tha [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A06-8492. Public record. Not legal advice.