Affordable Housing Program

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 960

[No. 93-94]

Affordable Housing Program

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Board) is proposing to

amend in its entirety its regulation governing the operation of the

Affordable Housing Program (AHP or Program). The proposed rule modifies

or carries forward requirements of the Board's existing AHP regulation,

adds new provisions, and incorporates, with modifications, the

provisions of the Board's existing policy guidelines governing the

award of funds to loan funds and loan consortia.

DATES: Comments on this proposed rule must be received in writing on or

before March 11, 1994.

ADDRESSES: Comments should be mailed to: Federal Housing Finance Board,

Executive Secretary, 1777 F Street, NW., Washington, DC 20006. Comments

will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Diane E. Dorius, Deputy Director, or

Sylvia C. Martinez, Director, Housing Finance Directorate, (202) 408-

2576, or Sharon B. Like, Attorney-Advisor, (202) 408-2930, or Brandon

B. Straus, Attorney-Advisor, (202) 408-2589, Office of Legal & External

Affairs-Legal Division, Federal Housing Finance Board, 1777 F Street,

NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. General

Section 10(j)(1) of the Federal Home Loan Bank Act (Act) requires

each Federal Home Loan Bank (Bank) to establish a Program to subsidize

the interest rate on advances to members of the Federal Home Loan Bank

System (Bank System) engaged in lending for long-term, low- and

moderate-income, owner-occupied and affordable rental housing at

subsidized interest rates. The Board is required to promulgate

regulations governing the Program. 12 U.S.C. 1430(j)(1). The Board's

existing regulation governing the operation of the AHP appears at part

960 of the Board's regulations. 12 CFR part 960.

This proposed rule amends the Board's existing AHP regulation to

address operational issues that have arisen during the three and one-

half years that the AHP has been in existence. The proposed amendments

are intended to make the AHP more responsive to low-income housing

needs in each of the twelve Federal Home Loan Bank Districts

(Districts), to increase efficiency in the administration of the

Program, and to enhance coordination of the AHP with other housing

programs whose funds are used in conjunction with AHP funds. These

issues are discussed in greater detail below in the Analysis of

Proposed Rule section.

II. Analysis of Proposed Rule

A. AHP Application Approval Process

The proposed rule makes a fundamental change to the AHP by vesting

the Banks, instead of the Board, with the authority to approve AHP

applications. The current application approval process implemented by

the Board's existing AHP regulation may be briefly described as

follows. The Banks receive AHP applications and first evaluate them for

satisfaction of certain threshold requirements contained in the

existing regulation. See 12 CFR 960.5(a)(1), (2). Those applications

meeting the threshold requirements are evaluated by the Banks to

determine if they meet at least three of the priorities contained in

the existing regulation. If they do, they are scored by the Banks on

the priorities and on other scoring objectives contained in the

existing regulation before applications that meet fewer than three

priorities. See id. Sec. 960.5(a)(3), (b) through (e). Under the

existing regulation, the Bank then forwards to the Board the highest

scoring applications, and submits a summary of such applications. See

id. Sec. 960.5(f)(1), (2). The Board reviews the applications to ensure

consistency with the threshold, priorities and scoring requirements,

and makes final funding decisions on the applications. See id.

Sec. 960.5(f)(3).

While section 10(j) of the Act requires each Bank to establish an

AHP, and vests in the Board broad authority to regulate the Banks' AHP

activities through regulations implementing the Act, section 10(j) does

not specifically assign the responsibility of operating the AHP to the

Board. See 12 U.S.C. 1430(j). The Board does have other statutorily

designated duties, including issuing regulations that specify

activities eligible to receive subsidized advances under the AHP,

ensuring advances are used to assist projects for which adequate long-

term monitoring is available, ensuring that a preponderance of

assistance provided under the AHP is ultimately received by low- and

moderate-income households, and ensuring that AHP subsidies provided by

Banks to members are passed on to the ultimate borrower. See id.

Section 1430(j)(9) (A), (C), (D), (E). However, section 10(j) does not

specify what entity is responsible for administering the AHP, and what

entity is responsible for determining which AHP applications are

approved for funding.

For the following reasons, the Board is proposing that the Banks

assume the responsibility for determining which AHP applications are

approved for funding. First, the Banks have had three and one-half

years of experience with the AHP, which experience has included

processing AHP applications, scoring the applications, and recommending

applications for approval to the Board as described above.

Consequently, the Banks are already processing and reviewing

applications under the existing system.

Second, decentralization of the AHP is consistent with the Bank

System's Strategic Plan, which calls for decentralization of a number

of functions currently conducted by the Board, with the exception of

those Board activities involving oversight and supervision of the

Banks. See ``System 2000: A Long-Term Strategic Plan For The Federal

Home Loan Bank System.''

The details of the proposed new application approval process are

discussed further below.

The Board specifically requests comments as to whether the Banks

should be given the authority to approve and disapprove AHP

applications.

The proposed rule also revises the Board's existing AHP regulation

by allowing each Bank to define more specifically its own priorities

and scoring criteria, subject to certain overall priority and scoring

parameters established in the proposed rule. The Bank would be required

to include such proposed priorities and scoring criteria in its AHP

implementation plan which must be approved by the Board. Under the

Board's existing AHP regulation, the Banks have much less flexibility

in defining priorities and scoring criteria. See 12 CFR 960.5 (a)

through (e). In addition, under the proposed rule, certain point values

for scoring categories would be revised.

The details of the proposed revisions for adopting priorities and

scoring criteria are discussed further below under the scoring of AHP

applications section.

B. Bank Establishment of AHP and Adoption of AHP Implementation Plan

Section 960.2(a) of the proposed rule generally reiterates the

statement in Sec. 960.2(a) of the Board's existing AHP regulation that

it is the policy of the Board and the Banks to promote decent and safe

affordable housing and to address critical affordable housing needs

through providing subsidized advances and direct subsidies to members

pursuant to the AHP. See 12 CFR 960.2(a).

Section 960.2(b) of the proposed rule provides that each Bank's

board of directors shall establish an AHP, which shall be funded

pursuant to the requirements of Sec. 960.18 of the proposed rule. (See

discussion below under the required annual AHP contributions section.)

The Bank is required to make subsidized advances to applicants pursuant

to its AHP and to operate its AHP in conformity with an annual AHP

implementation plan and the requirements of this part. Direct subsidies

provided by a Bank to applicants pursuant to its AHP also shall be

provided in conformity with the Bank's AHP implementation plan and the

requirements of this part. Each Bank's AHP implementation plan shall be

approved by the Board before it is effective.

Section 960.2(b) of the proposed rule further provides that the AHP

implementation plan must meet the requirements of this part, and shall

include:

(1) The Bank's AHP funding cycle schedule, including application

due dates, as required by proposed Sec. 960.6(a)(1);

(2) The Bank's priorities, and scoring criteria for applications,

as required by proposed Secs. 960.8(a) and 960.10;

(3) The Bank's procedures to ensure satisfaction of the long-term

requirement, as required by proposed Sec. 960.5 (a)(1) and (b);

(4) The Bank's requirements for and verification procedures

concerning (i) the use of subsidized advances or direct subsidies

within a reasonable period of time after approval of an AHP

application, as required by proposed Sec. 960.12(a), or (ii) the use of

loans or grants within a reasonable period of time after repayment of

such funds to a loan fund or loan consortium, as required by proposed

Sec. 960.17(c)(5);

(5) The Bank's verification procedures upon initial disbursement of

subsidized advances or direct subsidies, as required by proposed

Sec. 960.13;

(6) The Bank's monitoring plan, as required by proposed

Sec. 960.14(b);

(7) The Bank's reporting requirements for applicants during the

construction or rehabilitation phase, as required by proposed

Sec. 960.15(b)(2);

(8) An explanation of circumstances justifying undue hardship

waivers by the Bank of imposition of remedial actions, as required by

proposed Sec. 960.16 (c)(1) and (d)(1); and

(9) The Bank's determination regarding the number of persons that

may serve on the Bank's Advisory Council and their terms, as required

by proposed Sec. 960.21(a)(1) and (4).

Section 960.2(c) of the proposed rule provides that the Bank's

proposed AHP implementation plan shall be submitted to its Advisory

Council at least 45 calendar days before it is considered by the Bank's

board of directors. The Advisory Council shall review the proposed plan

and submit its recommendations to the Bank's board of directors at

least seven calendar days before the Bank's board of directors is

scheduled to vote on the proposed plan. The Bank's board of directors

shall vote on the proposed AHP implementation plan, and shall submit

its approved plan to the Board for action. The Board shall approve or

disapprove the proposed plan within 60 calendar days of receipt. The

Bank's plan is not effective until it is approved by the Board, and it

must become effective at least 45 calendar days before the due date for

AHP applications established by the Bank. Each Bank must submit its AHP

implementation plan to the Board for approval no later than 180

calendar days after the publication of this rule as a final rule in the

Federal Register.

Section 960.2(d) of the proposed rule provides that the Bank's

approved AHP implementation plan shall be made available by the Bank to

the public upon request.

Section 960.2(e) of the proposed rule provides that the Board will

approve or disapprove proposed amendments to a Bank's approved AHP

implementation plan submitted by the Bank within 60 calendar days of

receipt.

C. Authorized and Required Uses of AHP Subsidized Advances or Direct

Subsidies

Section 960.3 of the proposed rule states the general authorized

uses of AHP subsidized advances and direct subsidies by applicants,

Sec. 960.4 provides specific examples of such authorized and

unauthorized uses and other use requirements, and Sec. 960.5 sets forth

the long-term income-eligibility, affordability and income-targeting

requirements for such uses. These proposed sections are discussed

further below.

1. Authorized Uses of Subsidized Advances or Direct Subsidies

Section 960.3 of the proposed rule, consistent with Sec. 960.3(b)

(1) and (2) of the Board's existing AHP regulation, provides that

applicants may use subsidized advances or direct subsidies received

from a Bank under the AHP to either:

(a) Finance the purchase, construction or rehabilitation of owner-

occupied housing units by or for low- or moderate-income households; or

(b) Finance the purchase, construction or rehabilitation of rental

housing units, at least 20 percent of the units of which will be

occupied by and affordable for very low-income households. See 12 CFR

960.3(b) (1) and (2).

2. Specific Use Requirements for Subsidized Advances or Direct

Subsidies

Section 960.3(c) of the Board's existing AHP regulation provides

that ``Program funds may only be used for direct costs required to

produce and/or finance affordable housing units.'' 12 CFR 960.3(c). A

number of questions have arisen as to whether specific types of costs

associated with the financing or production of housing may be

considered ``direct costs'' for purposes of the Board's regulation.

Because of the confusion in this area, the Board believes that it would

be helpful to set forth in the rule examples of specific types of costs

it considers to be authorized and unauthorized for AHP purposes.

Accordingly, Sec. 960.4(a) (1) and (2) of the proposed rule sets forth

examples of specific costs related to the purchase, construction or

rehabilitation of housing that are authorized and unauthorized uses of

AHP subsidized advances or direct subsidies. However, because it is

impossible to anticipate all types of costs that may arise in the

course of financing or producing housing, the list of authorized and

unauthorized costs in proposed Sec. 960.4(a) is not exclusive. Other

costs not included arguably may or may not qualify as costs of

financing the purchase, construction or rehabilitation of housing. If

an applicant seeks to use funds under the AHP to pay for costs not

specifically included in this rule, it should consult with the Bank

before submitting its application for approval. The Board specifically

asks for comments as to whether these authorized and unauthorized costs

are appropriate.

Specifically, Sec. 960.4(a)(1) of the proposed rule provides that

authorized uses of subsidized advances or direct subsidies include, but

are not limited to, the following costs related to the purchase,

construction or rehabilitation of housing:

(i) Real property purchase and improvement costs;

(ii) Construction or rehabilitation costs, including labor and

materials, and contractor profit and overhead allowances;

(iii) Costs integral to the purchase or development of housing

including, but not limited to, project-related: Architectural,

inspection and engineering fees; local building permit and planning

fees; accounting costs; survey costs; appraisal fees; title insurance

and other insurance costs; performance bond and other bond fees;

recording fees; credit report fees; property taxes; residential

relocation costs where such costs are part of a relocation plan; legal

fees; syndication fees; costs of translating resident documents to

another language; loan commitment, loan origination and other loan

financing fees for administrative costs other than costs of

administering the AHP award; developer's fees; and marketing costs;

(iv) Prepayment fees imposed by the Bank on an applicant for a

subsidized advance that is prepaid in connection with the purchase,

construction or rehabilitation of housing, if the applicant requires

the borrower to pay such fee;

(v) Capitalization of reserve fund(s) necessary for the successful

operation of rental housing projects, including replacement reserves,

rent-up reserves, operating deficit reserves, and sinking fund reserves

used for the transfer of the project to nonprofit ownership when

associated with a low income housing tax credit transaction (26 U.S.C.

42);

(vi) Cancellation fees imposed by the Bank on an applicant for a

subsidized advance commitment that is canceled and converted to and

disbursed as a direct subsidy in connection with the purchase,

construction or rehabilitation of housing, if the applicant requires

the borrower to pay such fee;

(vii) Refinancing of an existing loan in conjunction with the

purchase, construction or rehabilitation of housing, provided the

subsidized advance or direct subsidy and the proceeds of the

refinancing are used only to retire existing debt and to benefit low-

or moderate-income households and, in the case of refinancing in order

to rehabilitate a project, there is a minimum of $2,500 per unit spent

on such rehabilitation; and

(viii) Tenant services, tenant counseling and homeowner counseling

costs that are a condition imposed by a lender to obtain financing from

such lender and which are necessary for the successful operation of the

project.

Cancellation fees identified in paragraph (vi) above, where there

is purchase, construction or rehabilitation of housing and the borrower

is required to pay the fee, are a cost of financing such purchase,

construction or rehabilitation and therefore are authorized uses of

funds under the AHP. Because the advance would be converted to a direct

subsidy, such cancellation fees would be payable only if the

application also meets the requirements for modification of

applications contained in Sec. 960.11 of the proposed rule. (These

requirements are discussed in greater detail in the modification

section below.) However, AHP subsidized advances or direct subsidies

may not be used to pay for cancellation fees in situations where the

cancellation of the advance is not part of a restructuring that results

in the purchase, construction or rehabilitation of housing.

The conditions identified in paragraph (vii) above on the use of

funds under the AHP for refinancing are intended to ensure that the

funds are not used by the borrower to take out its equity in the

project and to ensure that the funds are used for authorized purposes

under the AHP. The Board specifically requests comments on whether the

$2,500 minimum per unit is a reasonable minimum amount to be required

to be spent on rehabilitation in conjunction with a refinancing.

Questions have arisen as to whether funds under the AHP should be

used to pay for pre-development costs that may or may not result in the

purchase, construction or rehabilitation of AHP housing. Pre-

development costs are costs incurred prior to the closing of a

purchase, construction or rehabilitation loan for the purpose of

determining the feasibility of a proposed project. Examples of pre-

development costs include architectural and engineering fees, legal

fees, the costs of surveys and appraisals, local building permit and

planning fees, and earnest money deposits. Since AHP applications are

required to meet the threshold feasibility requirement provided in

proposed Sec. 960.9(d) in order to be scored, authorizing the use of

funds for pre-development costs raises the question how applications

for such costs can or should be scored since the funds would be

disbursed to applicants before the feasibility of a proposed project

could be established.

In addition, there is a greater likelihood that costs incurred

during the pre-feasibility period, rather than during the post-

feasibility period, will not result in the purchase, construction or

rehabilitation of housing. Thus, if applications for AHP funds to

finance pre-development costs are approved, AHP funds in perhaps

significant amounts could go towards pre-development costs that do not

result in the financing or production of housing. If such costs are

authorized, one option for dealing with this concern could be to cap

the total amount of AHP funds that may be used for pre-development

costs at a specific dollar amount or percentage, such as the lesser of

$200,000 or 5 percent of the Bank's total AHP contributions for the

year. These funds could be set aside and disbursed in a separate

competitive process.

The Board specifically requests comments on whether funds under the

AHP should be used for pre-development costs, how applications for such

costs can or should be scored, and what limits, if any, should be

placed on the amount of funds used for such purposes under the AHP.

3. Use of Funds Requirements

Section 960.4(b)(1)(i) of the proposed rule provides that the total

amount of a direct subsidy provided by the Bank to an applicant under

the AHP must be passed on by the applicant to the recipient. Consistent

with Sec. 960.9(c) of the Board's existing AHP regulation,

Sec. 960.4(b)(1)(ii) of the proposed rule provides that an applicant

receiving a subsidized advance shall extend credit to the borrower at a

rate of interest equal to the rate of interest charged on the

subsidized advance plus an interest rate spread approved by the Bank.

See 12 CFR 960.9(c). These provisions implement section 10(j)(9)(E) of

the Act, which provides that the Board's AHP regulation shall ensure

that AHP subsidies provided by Banks to applicants are passed on to the

ultimate borrower. See 12 U.S.C. 1430(j)(9)(E).

Section 960.4(b)(2) of the proposed rule provides that if an

applicant receives a subsidized advance or direct subsidy from a Bank

or prepayment of a loan originally made under the AHP, any interest or

other income earned by the applicant on such funds, not including any

approved fee or interest rate spread charged to the borrower, must be

forwarded to the Bank to be used for additional AHP projects, except

for interest or other income earned by the applicant within 30 calendar

days of receiving the subsidized advance or direct subsidy or of

receiving prepayment of a loan originally made under the AHP.

Section 960.4(b)(3) of the proposed rule provides that a direct

subsidy received by an applicant from a Bank that is provided by such

applicant to a sponsor may be lent by the sponsor in connection with an

AHP rental housing project involving low-income housing tax credits

(LIHTC), provided the subsidy is lent by the sponsor for a term of not

less than 30 years, with all principal and interest payments deferred

until the end of such term. If such a loan is repaid before the end of

the 30-year term, the entire amount of the direct subsidy must be

repaid to the Bank.

For various tax reasons, sponsors prefer to structure LIHTC

projects so that the AHP direct subsidy is lent to the project for a

specific long-term period, with principal and interest payments

deferred until the end of such term. The lending of a direct subsidy by

a sponsor raises the question whether the subsidy is being passed on to

the ultimate recipient, as required under section 10(j)(9)(E) of the

Act and proposed Sec. 960.4(b)(1)(i), since the subsidy ultimately is

being repaid to the Bank. See 12 U.S.C. 1430(j)(9)(E). The Board

believes that the lending of a direct subsidy for the long-term period

of income eligibility and affordability required by Sec. 960.5 of the

proposed rule, with all principal and interest payments deferred until

the end of such term, satisfies section 10(j)(9)(E) and proposed

Sec. 960.4(b)(1)(i), because the project will have had the use of such

funds for the period the project must remain occupied by and affordable

for low- or moderate-income households, even though the funds may be

repaid at the end of such term. As discussed below, Sec. 960.5(a)(1) of

the proposed rule defines this long-term period generally as not less

than 30 years for rental housing projects. Accordingly, the direct

subsidy must be lent for a term of 30 years or more, with all principal

and interest payments deferred until the end of such term.

Section 960.4(b)(4) of the proposed rule provides that if an

applicant receives a subsidized advance or a direct subsidy from a

Bank, and in turn provides both a loan and a grant to a borrower and

charges an origination fee for providing the loan, then any fee charged

by the applicant for providing the grant may not be paid with the AHP

subsidized advance or direct subsidy. The fee may not be paid with the

AHP subsidized advance because the applicant has already covered the

underwriting costs for the loan and the grant in its origination fee

for the loan. The fee may not be paid with the direct subsidy because

otherwise the entire amount of the AHP subsidy would not be passed

through to the borrower, as required by section 10(j)(9)(E) of the Act

and proposed Sec. 960.4(b)(1)(i). See 12 U.S.C. 1430(j)(9)(E).

4. Long-term Requirements

a. Owner-occupied housing units. (1) Long-term requirement. Section

10(j)(1) of the Act states that pursuant to regulations promulgated by

the Board, each Bank shall establish a Program to subsidize the

interest rate on advances to members engaged in lending for long-term,

low- and moderate-income, owner-occupied housing at subsidized interest

rates. Id. Sec. 1430(j)(1). In addition, section 10(j)(2)(A) of the Act

states that the Board's regulations shall permit Bank members to use

subsidized advances received from the Banks to finance homeownership by

families with incomes at or below 80 percent of the median income for

the area. Id. Sec. 1430(j)(2)(A).

The Act permits more than one possible interpretation of the

requirement that owner-occupied housing must be ``long-term.'' One way

to interpret this requirement is that owner-occupied housing units

assisted under the AHP must be added to and retained as part of the

stock of affordable housing for a long-term period. Alternatively, the

Act may be interpreted to require that under the AHP, assistance must

be provided to low- or moderate-income households to make owner-

occupied housing units affordable to such households for as long as

they own the unit. These two possible interpretations are incorporated

in options A and B described below. The Board specifically requests

comments on these two options.

Option A. Under option A, the long-term requirement would be met by

providing that owner-occupied housing units be required to be retained

as affordable units for 30 years or, at the election of the sponsor,

the remaining useful life of the units, regardless of changes in

occupancy. In order to enforce this retention requirement, owner-

occupied units assisted with a loan or a grant under the AHP would have

to be subject to a deed restriction or other legally enforceable

mechanism restricting transfer of the unit to a low- or moderate-income

household if the unit were sold within 30 years of the purchase,

construction, or rehabilitation or prior to the end of the remaining

useful life of the unit, as the case may be.

A household purchasing such a unit would have to qualify as a low-

or moderate-income household only at the time of purchase or at the

time of closing on the financing for the unit. A household

rehabilitating a unit would have to qualify as a low- or moderate-

income household only at the time the household received a commitment

for funding through the AHP.

If an owner-occupied unit assisted by a loan under the AHP were

sold prior to the end of the 30-year period or the remaining useful

life of the unit, as the case may be, to a household that was not a

low- or moderate-income household, then the applicant would have to

either: (1) Repay to the Bank that portion of the advance used to make

the loan to the seller, or (2) convert that portion of the advance used

to make the loan to the seller to a market rate advance with an

interest rate equal to the market rate of interest at the time the

advance was made, and any unused AHP subsidy which had been set aside

by the Bank to subsidize that portion of the advance used to make the

loan to the seller would be made available by the Bank for additional

AHP projects.

If an owner-occupied unit assisted by a grant under the AHP were

sold prior to the end of the 30-year period or the remaining useful

life of the unit, as the case may be, to a household that was not a

low- or moderate-income household, then the seller would have to repay

to the applicant a pro rata portion of the grant from any profit

realized upon the sale of the unit, and any amount repaid to the

applicant would have to be forwarded to the Bank and made available for

additional AHP projects. The Bank would have the discretion to waive

this recapture requirement if imposition of the requirement would cause

undue hardship on the seller, as defined in the Bank's AHP

implementation plan. In addition, for owner-occupied units assisted by

a grant, the Bank would have to monitor the unit during the required

long-term period by reviewing land title records or reports or

certifications from the sponsor or a regulatory agency, as determined

by each Bank in its AHP implementation plan, to determine whether the

unit had been sold to a household whose income exceeded a low-or

moderate-income.

As an alternative to requiring that each owner-occupied unit

assisted by a grant be subject to a restriction on transfer, the Bank

could have a legally binding agreement with the sponsor providing that

if such unit were sold prior to the end of the required long-term

period to a household that was not a low- or moderate-income household,

the sponsor would make another unit available to a low- or moderate-

income household.

Option B. Under option B, the long-term requirement would be met by

providing that an owner-occupied unit assisted by a grant or a loan

under the AHP must be affordable for the initial household for the

duration of that household's occupancy of the unit. However, to

minimize opportunities for speculation, the unit would have to be

subject to a deed restriction or other legally enforceable mechanism

restricting transfer of the unit to a low- or moderate-income household

if the unit were sold within five years of the purchase, construction,

or rehabilitation of the unit.

As under option A, a household purchasing such a unit under option

B would have to qualify as a low- or moderate-income household only at

the time of purchase or at the time of closing on the financing for the

unit, and a household rehabilitating a unit would have to qualify as a

low- or moderate-income household only at the time the household

received a commitment for funding through the AHP.

If an owner-occupied unit assisted by a loan under the AHP were

sold prior to the end of the five-year period to a household that was

not a low- or moderate-income household, then the applicant would have

to either: (1) Repay to the Bank that portion of the advance used to

make the loan to the seller, or (2) convert that portion of the advance

used to make the loan to the seller to a market rate advance with an

interest rate equal to the market rate of interest at the time the

advance was made, and any unused AHP subsidy which had been set aside

by the Bank to subsidize that portion of the advance used to make the

loan to the seller would be made available by the Bank for additional

AHP projects.

If an owner-occupied unit assisted by a grant under the AHP were

sold prior to the end of the five-year period to a household that was

not a low- or moderate-income household, then the seller would have to

repay to the applicant a pro rata portion of the grant from any profit

realized upon the sale of the unit, and any amount repaid to the

applicant would have to be forwarded to the Bank and made available for

additional AHP projects. The Bank would have the discretion to waive

this recapture requirement if imposition of the requirement would cause

undue hardship on the seller, as defined in the Bank's AHP

implementation plan. In addition, for owner-occupied units assisted by

a grant, the Bank would have to monitor the unit during the required

long-term period by reviewing land title records or reports or

certifications from the sponsor or a regulatory agency, as determined

by each Bank in its AHP implementation plan, to determine whether the

unit had been sold to a household whose income exceeded a low or

moderate income.

As under option A, as an alternative to requiring that each owner-

occupied unit assisted by a grant be subject to a restriction on

transfer, the Bank under option B could have a legally binding

agreement with the sponsor providing that if such unit were sold prior

to the end of the required long-term period to a household that was not

a low- or moderate-income household, the sponsor would make another

unit available to a low- or moderate-income household.

(2) Definitions of ``low- or moderate-income household'' and ``very

low-income household''. Section 10(j)(13)(A) of the Act defines the

term ``low- or moderate-income household'' as a household which has an

income of 80 percent or less of the area median. 12 U.S.C.

1430(j)(13)(A). Section 10(j)(13)(B) of the Act defines the term ``very

low-income household'' as a household that has an income of 50 percent

or less of the area median. Id. section 1430(j)(13)(B). Thus, the term

low- or moderate-income household incorporates households that meet the

definition of very low-income household.

The Board's existing AHP regulation defines ``low- and moderate-

income households'' as households for which the aggregate income is 80

percent or less of the area median income, and ``very low-income

households'' as households for which the aggregate income is 50 percent

or less of the area median income. See 12 CFR 960.1(g), (o). ``Median

income'' is defined as ``the median family income for an area as

determined and published by the U.S. Department of Housing and Urban

Development.'' Id. Sec. 960.1(h). ``Area'' is defined as ``a

metropolitan statistical area, a county, or a nonmetropolitan area, as

established by the U.S. Office of Management and Budget.'' Id.

Sec. 960.1(c).

(i) Adjustments of income limit. On November 5, 1993, the Board

published a proposed rule to amend the definitions of these terms. See

58 FR 58988 (November 5, 1993). As discussed in the preamble to the

proposed amendment, under section 3 of the United States Housing Act of

1937, the Secretary of the U.S. Department of Housing and Urban

Development (Secretary) establishes income limits to be used in

determining whether a family qualifies as a ``low-income family'' or as

a ``very low-income family'' that is eligible to receive assistance

under the Department of Housing and Urban Development's (HUD) housing

programs. See 42 U.S.C. 1437a(b)(2). These income limits are calculated

as a percentage of the median income of a four-person family living in

a particular area. In general, the income limit for qualifying as a

``low-income family'' is set at 80 percent of the area median income,

and the income limit for qualifying as a ``very low-income family'' is

set at 50 percent of the area median income.

The Secretary may adjust the income limits for very low-income

families and low-income families upward or downward to take into

account unusually high or low family incomes in an area. See id. In

addition, the income limit for low-income families may be adjusted to

take into account prevailing levels of construction costs. See id. Then

an adjustment in this figure is made to establish the comparable income

limits for larger and smaller families living in the area. See id.

In 31 higher-income metropolitan statistical areas (MSAs) and 18

counties, the Secretary adjusts the area-based income limit for a four-

person, low-income family downward if it would otherwise exceed the

U.S. median income for a four-person family. In these areas, the

Secretary caps the income limit for a four-person, low-income family at

the U.S. median income for a four-person family.

In four MSAs and 107 counties, the Secretary adjusts the area-based

income limit for four-person, very low- and low-income families

downward because housing costs are low compared to incomes.

Adjusting the income limit downward decreases the number of

households in an area that are eligible to receive assistance under

HUD's housing programs.

As discussed in the proposed amendment, the Board believes that

affordable housing financed through the AHP should be available to the

greatest number of households possible, within the limits established

by the Act. Further, households should not be excluded from affordable

housing in a particular local market on the basis that housing costs

are lower or household incomes are higher in that market than in other

regions of the United States.

Applying the income limits that have been adjusted downward for

prevailing construction costs, low housing costs, or unusually high

household incomes for purposes of administering the AHP reduces the

number of households eligible to live in affordable housing financed

through the AHP. This limits a member's ability to use funds under the

AHP to fulfill its obligation under the Community Reinvestment Act. See

12 U.S.C. 2901 et seq. It also limits a member's ability to use funds

under the AHP to meet the ``community investment or service''

requirement of section 10(g) of the Act, 12 U.S.C. 1430(g), and the

Board's Community Support Regulation, 12 CFR part 936.

Accordingly, the Board is proposing that in administering the AHP

and in defining the standards governing the ``community investment or

service'' requirement of the Act, the income limits used to determine

whether a household in a particular area qualifies as a ``very low-

income household'' or as a ``low- or moderate-income household'' should

not be adjusted downward based on prevailing construction costs, low

housing costs, or unusually high household incomes.

Therefore, as set forth in the Board's proposed amendment,

Sec. 960.1 of this proposed rule defines ``low- or moderate-income

household'' as a household which has an income of 80 percent or less of

the median income for the area, as adjusted and published by HUD,

except in areas where the Secretary adjusts this figure downward

because of prevailing construction costs, low housing costs, or

unusually high household incomes. For areas where the Secretary makes

this downward adjustment, ``low- or moderate-income household'' would

be defined to mean a household which has an income of 80 percent or

less of the median income for the area, as published by HUD, with

adjustment for household size, but without the adjustments made by the

Secretary for prevailing construction costs, low housing costs, or

unusually high household incomes.

In addition, as set forth in the Board's proposed amendment,

Sec. 960.1 of this proposed rule defines ``very low-income household''

as a household which has an income of 50 percent or less of the median

income for the area, as adjusted and published by HUD, except in areas

where the Secretary adjusts this figure downward because of prevailing

construction costs, low housing costs, or unusually high household

incomes. For areas where the Secretary makes this downward adjustment,

``very low-income household'' would be defined to mean a household

which has an income of 50 percent or less of the median income for the

area, as published by HUD, with adjustment for household size, but

without the adjustments made by the Secretary for prevailing

construction costs, low housing costs, or unusually high household

incomes.

While HUD publishes tables with adjusted income information that

incorporates the adjustments for family size, prevailing construction

costs, low housing costs, and unusually high family incomes, it does

not publish tables with income information that adjusts only for family

size and not these other factors. Therefore, as set forth in the

Board's proposed amendment, Sec. 960.1 of this proposed rule adds a

definition of ``adjustment for household size'' in order to provide

additional guidance in calculating this adjustment.

An adjustment for household size is made by taking a specified

percentage of the income limit of a four-person household for a

particular area, according to the following scale:

------------------------------------------------------------------------

No. persons Percent adjustment

------------------------------------------------------------------------

1.................................. 70.

2.................................. 80.

3.................................. 90.

4.................................. Base.

5.................................. 108.

6.................................. 116.

7.................................. 124.

8.................................. 132.

------------------------------------------------------------------------

For each person in excess of eight, eight percent of the four-

person household base income limit should be added to the income limit

for an eight-person household for the area. These adjustment factors

are the same as those used by HUD in administering its housing

programs.

Section 960.1 of the proposed rule retains the definition of

``area'' from the Board's existing AHP regulation. See 12 CFR 960.1(c).

``Area'' means, for purposes of defining ``median income for the

area,'' a metropolitan statistical area, a county, or a nonmetropolitan

area, as established by the U.S. Office of Management and Budget.

Consistent with the proposed amendment, Sec. 960.1 of this proposed

rule does not include a definition of ``median income'' because it is

included in the proposed definitions of ``very low-income household''

and ``low- or moderate-income household.''

(ii) Definition of ``income''. The Act is silent on how to define

the term ``income,'' i.e., what are eligible sources of household

income that should be considered in determining whether the household

satisfies the definition of ``low- or moderate-income household'' or

``very low-income household.'' The Board has determined not to define

the term ``income'' in the proposed rule. Homeownership projects

typically involve the participation of a lender which provides

permanent financing for the homeowner over an extended period of time.

The lender generally verifies a household's income prior to issuing a

financing commitment during the underwriting of the loan. Eligible

sources of income are identified by the lender during the mortgage

underwriting process. Identifying eligible sources of income in the

rule could cause inconsistency with lenders' customary and usual

underwriting practices, or with the standards applied by the entity

providing the major source of financing for the project.

b. Rental housing units. Section 960.5(a)(1) of the proposed rule

provides generally that at least 20 percent of the rental housing units

in a project financed under the AHP with subsidized advances or direct

subsidies shall remain affordable for and occupied by very low-income

households for a minimum period of 30 years or, at the election of the

sponsor, the remaining useful life of such units.

Proposed Sec. 960.5(a)(1) implements section 10(j)(2)(B) of the

Act, which provides that Bank members may use subsidized advances

received from the Banks to finance the purchase, construction, or

rehabilitation of rental housing, at least 20 percent of the units of

which will be occupied by and affordable for very low-income households

for the remaining useful life of such housing or the mortgage term. 12

U.S.C. 1430(j)(2)(B).

Proposed Sec. 960.5(a)(1) provides that the applicant and project

sponsor shall state in the AHP application their commitment regarding

satisfaction of the long-term income-eligibility, affordability and

income-targeting requirements. In addition, an applicant may commit to

maintain additional units as affordable for and occupied by low- or

moderate-income households, which commitment shall be a minimum period

of 30 years or, at the election of the sponsor, the remaining useful

life of such units.

(1) Long-term requirement. Section 10(j) of the Act does not define

``remaining useful life'' as used in section 10(j)(2)(B) of the Act.

See 12 U.S.C. 1430(j). However, the legislative history of section

21A(c) of the Act regarding residential properties sold by the

Resolution Trust Corporation (RTC), which was enacted as part of the

same legislation that enacted section 10(j), states that the remaining

useful life of such RTC property is intended to cover the property as

long as it is habitable and assumes good faith efforts by the purchaser

to maintain the property and to rehabilitate it as necessary. See Joint

Explanatory Statement of the Committee of the Conference, H.R. Conf.

Rep. No. 101-222, 101st Cong., 1st Sess., 419 (1989) (FIRREA Conference

Report); 12 U.S.C. 1441a(c). The RTC has in fact adopted a specific

uniform period of useful life for all buildings instead of a period of

useful life based on physical habitability. See 12 CFR 1609.2(kk). The

legislative history of a recently enacted affordable housing statute,

the Low Income Housing Preservation and Residential Homeownership Act

(LIHPRHA), provides further support for a definition of ``remaining

useful life'' based on the period of physical habitability of a

property by explicitly rejecting the RTC's regulatory definition.

Accordingly, Sec. 960.1 of the proposed rule defines ``remaining

useful life'' as the period during which the housing remains in a

condition suitable for occupancy, assuming normal maintenance and

repairs are made and major systems and capital components are replaced

or repaired as becomes necessary.

Section 10(j) of the Act does not define ``mortgage term'' as used

in section 10(j)(2)(B) of the Act. See 12 U.S.C. 1430(j). The

legislative history of section 10(j) states that the conferees expect

that the Board will encourage the use of the longest practicable

mortgage term in order to aid in making the housing affordable for very

low-income households. See FIRREA Conference Report at 431.

Accordingly, the Board believes that ``mortgage term'' should be

defined as the mortgage term only of long-term mortgage loans and

believes that 30 years is consistent with Congress' intent in section

10(j)(2)(B) of the Act to ensure that AHP-assisted rental housing

projects remain occupied by and affordable for income-eligible

households for a long-term period.

(2) Definitions of ``low- or moderate-income household'' and ``very

low-income household''. The definitions of ``low- or moderate-income

household'' and ``very low-income household'' discussed above for AHP-

assisted owner-occupied housing projects apply for AHP-assisted rental

housing projects as well.

With respect to the definition of ``income,'' rental housing

projects typically have multiple providers of financing, each of which

may specify the eligible sources of income, which sometimes conflict

with each other. However, as with AHP-assisted owner-occupied housing

projects, the Board has determined that the proposed rule should not

specify the eligible sources of income for rental housing projects, but

rather that applicants should be permitted to follow their usual

underwriting guidelines, or may follow those of the predominant source

of financing in the project.

(3) Increase in household income or sale of project before end of

required long-term period. (i) Increase in household income. Section

960.5(a)(2) of the proposed rule provides that all households occupying

a rental housing unit subject to the income-targeting requirement of

paragraph (a)(1) of this section must satisfy the income-eligibility

requirement applicable to such income-targeted unit, as committed to in

the AHP application, upon initial occupancy. The household may continue

to occupy the income-targeted unit even if its income increases above

the income-eligibility requirement for such unit. The unit may continue

to count toward meeting the income-targeting requirement committed to

in the AHP application, provided the rent charged remains affordable to

the household as defined in proposed Sec. 960.1 (as further discussed

below). However, if the household's income rises above 140 percent of

the income-targeting level committed to in the AHP application, the

sponsor must make the next available rental housing unit in the project

affordable to and available for occupancy by a household whose income

is at or below the income-targeting level committed to in the AHP

application for the original unit. Once the next available rental

housing unit is so occupied, the rent charged on the unit occupied by

the household whose income has risen shall no longer be subject to the

requirement that it be affordable for households at the income-

targeting level committed to in the AHP application.

This approach is consistent with the approach followed in the LIHTC

program. Under the LIHTC program, a unit is in compliance with the

occupancy requirements until the tenant's income has risen to 140

percent of the qualifying income. See 26 U.S.C. Sec. 42(g)(2)(D)(i).

The next available unit must then be rented to an income-eligible

tenant at an affordable rent. See id. Section 42(g)(2)(D)(ii). This

approach allows the household to achieve stability by allowing

increases in income without fear of displacement or increased rents. In

addition, it does not cause destabilization of the project's cash flow

by having the project sponsor provide additional income-eligible units

with reduced rents that may reduce the income of the project. It also

would be consistent with the treatment of rents under the AHP's 20

percent requirement (also known as the maximum subsidy rule), which is

currently an interim rule of the Board, and which is incorporated in

Sec. 960.9(c) of this proposed rule. (See discussion of 20 percent

requirement below.)

Section 960.1 of the proposed rule defines ``affordable for very

low-income households'' to mean:

(1) For purposes of rental housing units, that rents, including

reasonable utility costs, charged to households for such units do not

exceed 30 percent of the income of a household (assuming a household

size of 1.5 persons per bedroom or 1.0 person per unit without a

separate bedroom) which has an income of 50 percent of the median

income for the area, as adjusted and published by HUD, except that in

areas where the Secretary adjusts this income figure downward because

of prevailing construction costs, low housing costs, or unusually high

household incomes, then ``affordable for very low-income households''

means that rents, including reasonable utility costs, charged to

households for such units do not exceed 30 percent of the income of a

household which has an income of 50 percent of the median income for

the area, as published by HUD, with adjustment for household size, but

without the adjustments made by the Secretary for prevailing

construction costs, low housing costs, or unusually high household

incomes;

(2) If a rental unit is targeted to a household whose income is

less than 50 percent of the median income for the area, then

``affordable for very low-income households'' means that the rent,

including reasonable utility costs, charged to a household for such

unit does not exceed 30 percent of the maximum qualifying income of the

targeted households of the size expected to occupy the unit.

This proposed definition implements section 10(j)(13)(D) of the

Act, which defines ``affordable for very low-income households'' to

mean that rents charged to tenants for units made available for

occupancy by low-income families shall not exceed 30 percent of the

adjusted income of a family whose income equals 50 percent of the

income for the area (as determined by the Secretary of HUD) with

adjustment for family size. 12 U.S.C. 1430(j)(13)(D). Section 960.1(b)

of the Board's existing AHP regulation contains a definition of the

term that is similar to the statutory definition. See 12 CFR 960.1(b).

The Board has determined that an estimate for reasonable utility

costs should be included in the determination of rents charged to

households under this section, if they are not already included in the

projected rents. Including utility costs would reduce the housing cost

burden for very low-income households under the AHP, and would allow

all rental projects to be treated equally, since some projects include

the cost of utilities in the rent, while others do not include such

costs in the rent. Including utility costs would be consistent with the

treatment of rents in other federal housing programs, such as HUD's

Section 8 program and the LIHTC program. It also would be consistent

with the treatment of rents under the AHP's 20 percent requirement,

which is currently an interim rule of the Board, and which is

incorporated in Sec. 960.9(c) of this proposed rule. (See discussion of

20 percent requirement below.)

The definition of ``affordable for low- or moderate-income

households'' in Sec. 960.1 of the proposed rule is similar to the above

definition, except that the household must have an income of 80

percent, instead of 50 percent, of the median income for the area,

since the Act defines a ``low- or moderate-income household'' as any

household which has an income of 80 percent or less of the area median.

12 U.S.C. 1430(j)(13)(A).

(ii) Sale of AHP-assisted rental housing project. Section

960.5(a)(3) of the proposed rule provides that an owner of an AHP-

assisted rental housing project may sell the project prior to the end

of the long-term period during which the project's rental units, or

applicable portion thereof, must remain affordable for and occupied by

households with incomes at or below the levels committed to in the AHP

application; however, either:

a. The purchaser must agree to continue the project's rental units,

or applicable portion thereof, as affordable for and occupied by

households with incomes at or below the levels committed to in the AHP

application for the remainder of the long-term period committed to in

the AHP application, and must agree to be subject to the same

restrictions on resale that applied to the seller; or

b. If the purchaser does not satisfy the requirements in paragraph

a. above, and if the Bank provided a direct subsidy to the applicant

which was passed on as a grant to the seller, the seller must repay a

pro rata portion of the grant as provided in Sec. 960.16(d)(1); or

c. If the purchaser does not satisfy the requirements in paragraph

a. above, and if the Bank provided a subsidized advance to the

applicant which in turn provided a below market rate loan to the

seller, then the provisions of Sec. 960.16(d)(2) shall apply.

Proposed Sec. 960.5(b) further provides that the Bank's AHP

implementation plan shall permit the owner of an AHP-assisted rental

housing project to sell such project as provided for in paragraph

(a)(3).

D. Establishment of AHP Funding Cycles and Available AHP Subsidies

Section 960.6(a)(1) of the proposed rule requires each Bank to

establish at least two but no more than four AHP funding cycles per

year during which applications for AHP subsidized advances or direct

subsidies will be accepted. This is a change from the Board's existing

AHP regulation, which provides that the Banks may accept AHP

applications during two of four quarterly periods each year. See 12 CFR

960.4(a).

Section 960.6(a)(1) of the proposed rule also provides that the AHP

funding cycle schedule, including application due dates, is to be

determined by the Bank in its discretion, but shall allow for

sufficient time intervals to ensure an adequate pool of applicants to

compete in each funding cycle. The funding cycles schedule, including

application due dates, shall be described in detail in the Bank's AHP

implementation plan. This is also a change from the Board's existing

AHP regulation, which sets forth specific application due dates. See 12

CFR 960.4(a).

Section 960.6(a)(2) of the proposed rule provides that each Bank

shall inform the general public and its members of the number and dates

of its AHP funding cycles for the year and the approximate amount of

available AHP subsidies for each funding cycle at least 45 calendar

days before the due date for AHP applications for the first funding

cycle for the year. This is a change from the Board's existing AHP

regulation, which requires each Bank to announce its funding cycles by

December 1 of the preceding year, and to notify only its members of the

approximate amount of AHP subsidies to be offered in each funding

cycle. See 12 CFR 960.4(a), (b).

Consistent with Sec. 960.4(b) of the Board's existing AHP

regulation, Sec. 960.6(b) of the proposed rule provides that each Bank

shall allocate comparable amounts of AHP subsidies for each AHP funding

cycle during the year. See 12 CFR 960.4(b).

E. Specific Application and Scoring Requirements

1. Application Requirements

The proposed rule does not mandate use of a uniform AHP application

form by all of the Banks. Rather, the Board believes that, consistent

with current practice under the AHP, each Bank should continue to

devise its own AHP application form, because each Bank will have its

own special information requirements as a result of the specific

priorities and scoring criteria adopted by the Bank.

However, as discussed further below, all AHP applications must

satisfy certain threshold requirements in order to be considered for

scoring under the proposed rule. Thus, certain information from

applicants must be received by all Banks in order for the Banks to be

able to determine whether the applications satisfy the threshold

requirements in the proposed rule and to score the applications under

the scoring criteria. Accordingly, Sec. 960.7(a) of the proposed rule

provides that each Bank shall require applicants for subsidized

advances or direct subsidies under the AHP to submit to the Bank an

application which, at a minimum, contains all of the information

described below and any other information which the Bank determines is

necessary in order to take action on such application, including the

following:

(1) A concise description of the purpose of the request and

proposed uses of the funds, and its relationship to the priorities

identified in proposed Sec. 960.10(d), the targeting criterion

identified in proposed Sec. 960.10(e), and the other objectives

identified in proposed Sec. 960.10(f);

(2) A statement of how the project will satisfy the authorized uses

and long-term requirements, including a description of legal mechanisms

to be used to ensure compliance by the project with such requirements,

contained in proposed Secs. 960.3 and 960.5;

(3) A statement of how the project will comply with the fair

housing law requirement contained in proposed Sec. 960.9(b);

(4) A statement of how the project will satisfy the feasibility

requirement contained in proposed Sec. 960.9(d);

(5) A statement of how the project's sponsor satisfies the

qualification requirement contained in proposed Sec. 960.9(e);

(6) A statement of whether a subsidized advance or direct subsidy

has been requested and the amount of such funds requested;

(7) A disclosure of whether or not the applicant has a direct or

indirect interest in the property or project. If the applicant has an

interest in the property and the application is approved, then prior to

the transfer of AHP funds to the project, an independent current

appraisal of the fair market value of such property must be provided,

unless the applicant demonstrates that the property is being sold or

otherwise transferred to the sponsor at a price substantially below the

fair market value;

(8) A statement of the project's costs; and

(9) A certification from the applicant's, the sponsor's and the

loan fund's or loan consortium's board of directors, or president or

senior officer if so delegated by the board of directors, that the

applicant, the sponsor and the loan fund or loan consortium will comply

with all requirements of this part and all obligations committed to in

the AHP application.

Section 960.4(c) of the Board's existing AHP regulation also

generally requires an applicant to include in its AHP application the

information identified in paragraphs (3) through (6) above, as well as

any other information the Bank may require. See 12 CFR 960.4(c).

Section 960.4(c)(6) of the Board's existing AHP regulation also

requires an applicant to disclose in its AHP application any direct or

indirect interest of the applicant in the property or project. See 12

CFR 960.4(c)(6). Under Sec. 960.7(a)(7) of the proposed rule, if such

an interest exists and the application is approved, then prior to the

transfer of AHP funds to the project, the applicant generally is

required to provide an appraisal of the property or project. This is to

ensure that the sales price of such property or project owned by the

applicant has not been inflated and that the applicant is not receiving

the benefit of the AHP subsidy.

Section 960.4(c)(7) of the Board's existing AHP regulation requires

the applicant to include in its AHP application an explanation of how

the applicant intends to monitor the use of any funds received under

the AHP, including an explanation of how the structure of the project

ensures that a preponderance of the subsidy is ultimately received by

the targeted beneficiaries. See 12 U.S.C. 1430(j)(9)(D); 12 CFR

960.4(c)(7). As discussed in greater detail in the monitoring section

below, as long as adequate monitoring is otherwise provided for, the

proposed rule does not require the applicant in all instances to

monitor the AHP-assisted project for compliance with the long-term

requirement of the proposed rule. Accordingly, this provision of the

existing regulation is deleted in the proposed rule.

Section 960.4(c)(8) of the Board's existing AHP regulation requires

the applicant to certify that the maximum subsidy limitation

requirements of the AHP rule will not be violated. See 12 CFR

960.4(c)(8). However, since the maximum subsidy limitation requirements

are threshold requirements that all AHP applications must satisfy (see

discussion below of the 20 percent requirement), this requirement is

incorporated into proposed Sec. 960.7(a)(9), which provides generally

that the applicant and sponsor must certify that all requirements of

the AHP regulation will be satisfied.

Section 960.4(c)(8) of the Board's existing AHP regulation also

requires the applicant to explain in its AHP application how any AHP

subsidy that exceeds the maximum subsidy requirements will be

recaptured. See 12 CFR 960.4(c)(8). Since AHP applications must satisfy

the threshold maximum subsidy limitation requirements at the outset in

order to be scored and approved for AHP funding, this issue does not

arise and therefore has been deleted in the proposed rule.

As discussed above, the requirement in Sec. 960.4(c)(9) of the

Board's existing AHP regulation that the applicant's managing officer

must certify that the AHP subsidy shall be only for authorized uses is

expanded in proposed Sec. 960.7(a)(9) to require a certification by the

applicant, the sponsor and the loan fund or loan consortium not only

that funds received under the AHP will be used for authorized uses, but

also a certification of compliance with all requirements of the AHP

regulation and all obligations committed to in the AHP application. See

12 CFR 960.4(c)(9). In addition, the proposed rule requires the

applicant, the sponsor and the loan fund or loan consortium, not just

the applicant, as in the Board's existing AHP regulation, to make the

certification in the AHP application. This change is proposed because

the applicant, the sponsor and the loan fund or loan consortium are all

subject to specific requirements under the AHP and therefore should be

required to certify that they will comply with such requirements.

2. Action on Applications

As discussed above, the proposed rule makes a major change in the

Board's existing AHP regulation by taking the Board out of the approval

process for AHP applications. Section 960.7(b)(1) of the proposed rule

provides that each Bank shall review, score and take action on an AHP

application pursuant to the requirements contained in proposed

Secs. 960.8, 960.9 and 960.10, and shall notify the applicant of such

action no later than 60 calendar days after the application due date

for the AHP funding cycle. Section 960.5(f)(1) of the existing

regulation requires the Banks to forward to the Board their recommended

applications no later than 30 days after each offering deadline. See 12

CFR 960.5(f)(1). Since the Banks would have greater responsibilities in

the approval process under the proposed rule, the 30-day period is

proposed to be extended to 60 calendar days.

Section 960.7(b)(2) of the proposed rule provides specifically that

the board of directors of each Bank shall have the authority to approve

or disapprove AHP applications received, and may delegate such

authority to the president or other senior officers of the Bank.

Section 960.7(b)(3) of the proposed rule provides that within 30

calendar days of each Bank's approval of the AHP applications for a

given AHP funding cycle, the Bank shall forward to the Board a summary

of each approved AHP application. The summary shall:

(i) Briefly describe the project, including the applicant, the loan

fund or loan consortium, if applicable, and the sponsor--whether

nonprofit, for-profit or public agency, the type of housing, the

location, the long-term period committed to, the number of housing

units including the number of units affordable for very low-, low- or

moderate-income households or for households at any other income levels

committed to in the AHP application, the development cost, other

financing sources, and special needs populations served;

(ii) State the reason for the points awarded under each of the

Bank's scoring criteria for the project;

(iii) Indicate whether a subsidized advance or direct subsidy was

approved by the Bank for the project, the use of such funds, and the

amount of such funds approved; if a subsidized advance was approved,

the summary shall indicate the amount of the advance, the advance rate,

the amortization schedule for the advance, the term to maturity, the

applicable cost of funds, and the date as of which the cost of funds

was determined;

(iv) Indicate whether the project received approval in a prior AHP

funding cycle, or whether the project is an extension, expansion,

continuation or reconfiguration of a previously approved AHP project;

(v) Describe how the project will be monitored and by what entity;

(vi) Describe the legal mechanisms to be used to ensure compliance

by the project with the long-term requirement contained in Sec. 960.5

of the proposed rule;

(vii) Include a summary in chart form showing all AHP applications

received by the Bank in the particular AHP funding cycle, with the

score each application received for each scoring criterion, and the

total score received by each project; and

(viii) Include any other information required by the Board.

The Board has general oversight responsibility over the AHP under

section 10(j) of the Act. See 12 U.S.C. 1430(j). In addition, section

10(j)(12)(A) of the Act requires the Board to monitor and report

annually to the Congress and the Advisory Council for each Bank the

support of low-income housing and community development by the Banks

and the utilization of advances for these purposes. Id.

Sec. 1430(j)(12)(A). Since the Board would no longer be receiving and

approving AHP applications under the proposed rule, the Board would no

longer have these applications as a source of data to assist the Board

in exercising its oversight and monitoring responsibilities and

preparing the annual report to the Congress and the Advisory Councils.

Accordingly, the Board will need the Banks to provide this additional

information to the Board in the summary, as required in proposed

Sec. 960.7(b)(3).

F. Requirements For Approval of AHP Applications

1. General

Section 960.8(a) of the proposed rule provides that each Bank shall

evaluate the AHP applications received to determine if they satisfy the

threshold criteria in proposed Sec. 960.9. All applications that meet

the threshold criteria shall be scored pursuant to the criteria

contained in proposed Sec. 960.10 as set forth in the Bank's approved

AHP implementation plan.

Section 960.8(b) of the proposed rule provides that the Bank shall

approve the applications in descending order starting with the highest

scoring application until the total AHP funding amount for the

particular funding cycle, except for any amount insufficient to fund

the next highest scoring project, has been allocated. The Bank also may

approve the next four highest scoring applications as alternates and,

within one year of approval by the Bank, may fund such alternates if

any previously committed AHP funds become available.

2. Threshold Criteria for Approval of AHP Applications

Section 960.9 of the proposed rule provides that an AHP application

must meet all of the threshold criteria set forth in a. through f.

below in order to be considered for scoring under proposed Sec. 960.10

and for AHP funding approval. These criteria are discussed in detail

below.

a. Authorized and required uses requirements. The AHP application

must indicate that the use of the subsidized advance or direct subsidy

set forth in the AHP application for the proposed project will comply

with the requirements for authorized and required uses of such funds

contained in proposed Secs. 960.3, 960.4 and 960.5. See proposed

Sec. 960.9(a).

This proposed provision is consistent with the intent of

Sec. 960.5(a)(1) of the Board's existing AHP regulation. See 12 CFR

960.5(a)(1).

b. Fair housing law requirements. The AHP application must indicate

that the project sponsor will comply with any applicable fair housing

law requirements and must indicate how the sponsor proposes to

affirmatively further compliance with such requirements. See proposed

Sec. 960.9(b).

This proposed provision is consistent with the requirement of

compliance with fair housing laws contained in Sec. 960.5(a)(2)(i) of

the Board's existing AHP regulation, and the requirement under existing

practice that applications indicate how the sponsor proposes to

affirmatively further such compliance. See 12 CFR 960.5(a)(2)(i).

c. The twenty percent requirement and alternatives. Section

960.9(c) of the proposed rule incorporates the existing maximum subsidy

limitation requirement and alternatives contained in Sec. 960.9 of the

Board's interim rule, with minor changes in language and one

substantive modification discussed below. See 12 CFR 960.9 (58 FR 17968

(April 7, 1993)). The 20 percent requirement and the alternatives

discussed below implement the maximum subsidy limitation requirement

contained in section 10(j)(9)(F) of the Act. See 12 U.S.C.

1430(j)(9)(F). Since the 20 percent requirement or an alternative must

be satisfied by all AHP applications to avoid over-subsidization of a

project, it is set forth as a threshold requirement in the proposed

rule.

(i) The twenty percent requirement. Section 960.9(c)(1)(i) of the

proposed rule provides generally that a Bank shall not offer subsidized

advances or direct subsidies to applicants in excess of that amount

needed to reduce the monthly housing costs for income-eligible

households, as committed to in the AHP application, to 20 percent of

the household's gross monthly income (the 20 percent requirement). In

projects where other forms of federal, state, local or private

subsidized assistance are being used in conjunction with AHP subsidized

advances or direct subsidies, the total amount of subsidized

assistance, including funds provided under the AHP, shall not be in

excess of the amount needed to reduce the monthly housing costs for the

income-eligible households, as committed to in the AHP application, to

20 percent of the household's gross monthly income.

Monthly housing costs are defined in proposed Sec. 960.9(c)(1)(ii)

as:

(1) For households in AHP-assisted owner-occupied housing units,

mortgage principal and interest payments, real property taxes,

homeowners' insurance, a reasonable estimate of utility costs excluding

telephone service, and for households in AHP-assisted condominium,

cooperative, mutual housing or other housing projects involving common

ownership, those portions of any regular operating assessment or fee

allocated for principal and interest payments, taxes, insurance and a

reasonable estimate of utilities attributable to the household's share

of the common area and/or the individual unit; and

(2) For households in AHP-assisted rental housing units, rent

payments, and where they are not already included in rent payments, a

reasonable estimate of utility costs excluding telephone service.

Section 960.9(c)(1)(iii) of the proposed rule provides that a

household subject to the 20 percent requirement is required to meet

such requirement only at the time it initially purchases or occupies a

unit.

(ii) Alternative requirements. Section 960.9(c)(2)(i) of the

proposed rule provides that the 20 percent requirement shall not apply

where a Bank provides subsidized advances or direct subsidies to an

applicant for a rental housing project, which project also receives

funds from a federal or state rental housing program that requires

qualifying households to pay as rent a certain percentage of their

monthly income or a designated amount, provided that the household

meets the housing payment requirements of the other program.

Section 960.9(c)(2)(ii)(A) of the proposed rule provides that the

20 percent requirement shall not apply where the total amount of AHP

funds provided through a Bank subsidized advance or direct subsidy used

to finance rehabilitation of a housing unit by a very low-income

household that already owns and occupies the housing unit is $10,000 or

less per such household. In addition, proposed Sec. 960.9(c)(2)(ii)(B)

provides that the 20 percent requirement shall not apply where the

total amount of AHP funds provided through a Bank subsidized advance or

direct subsidy used to finance the purchase of a housing unit by a very

low-income household is $5,000 or less per such household. This is a

change from the interim rule which permits this alternative to the 20

percent requirement only for households that are above the threshold

income level for very low-income households and at or below the income

level to qualify as low- or moderate-income households. The Board did

not intend to exclude very low-income households from taking advantage

of this alternative when it adopted the interim rule. Accordingly,

proposed Sec. 960.9(c)(2)(ii)(B) corrects this error.

Section 960.9(c)(2)(iii) of the proposed rule provides that the 20

percent requirement shall not apply where the total amount of AHP funds

provided through a Bank subsidized advance or direct subsidy used to

finance rehabilitation or purchase of a housing unit by a low- or

moderate-income household is $5,000 or less per such household.

Section 960.9(c)(2)(iv) of the proposed rule provides that the 20

percent requirement shall not apply where a Bank provides subsidized

advances or direct subsidies ultimately benefiting a household with an

income at or below the level committed to in the AHP application, which

is participating in a self-help, sweat equity or similar housing

program. Under the proposed rule, the household is required to

contribute its skilled or unskilled labor valued at a minimum of $2,000

per household. The household must work cooperatively with others to

construct or rehabilitate housing which the household or other program

participants are purchasing or already own and occupy, and the program

must involve supervision of the work performed by skilled builders or

rehabilitators.

d. Project feasibility. The AHP application must indicate that the

proposed project is feasible. This determination must be based on an

analysis of project sources and uses of funds, project multi-year

operating pro formas for rental housing projects, projections of sales

and prices for owner-occupied housing units, and local market

conditions. The analysis must show that the project is financially

viable and likely to be completed within a reasonable period of time,

and is likely to operate or sell and remain affordable to the

designated income-eligible households over the long-term period

committed to in the AHP application. See proposed Sec. 960.9(d).

A feasibility requirement also is contained in Sec. 960.5(a)(2)(ii)

of the Board's existing AHP regulation. See 12 CFR 960.5(a)(2)(ii).

e. Qualifications of sponsor. The AHP application must indicate

that the sponsor has the qualifications and ability to perform its

responsibilities as committed to in the AHP application. See proposed

Sec. 960.9(e).

This proposed provision is not included as a threshold requirement

in the Board's existing AHP regulation, although it is required under

the regulation to be included by an applicant in its AHP application.

See 12 CFR 960.4(c)(4). The Board believes that this provision should

be included as a threshold requirement, since a project should not be

funded if the sponsor lacks the qualifications and ability to undertake

the project.

f. Creditworthiness of applicant. Consistent with the Board's

existing AHP regulation, Sec. 960.9(f) of the proposed rule provides

that the applicant must have the ability to qualify for an advance from

the Bank to fund the project described in the AHP application. See 12

CFR 960.5(a)(2)(iii).

The Board's existing AHP regulation also includes as a threshold

requirement the ability of the project to begin using Bank assistance

within 12 months. See 12 CFR 960.5(a)(2)(iv). Since this involves the

use of funds after a project has been approved for funding, it does not

belong as a threshold requirement and has been omitted in this section

of the proposed rule. The requirements under the proposed rule for use

of funds under the AHP within a reasonable period of time after

approval of the application are discussed below in the use and

verification section.

Finally, it has been suggested that a threshold criterion should be

added requiring that the project costs set forth in the AHP application

are reasonable and appropriate for the type and location of the

housing.

Section 10(j)(9)(F) of the Act requires the Board to establish

maximum subsidy limitations under the AHP. 12 U.S.C. 1430(j)(9)(F).

Section 10(j)(9)(D) of the Act also requires the Board to ensure that a

preponderance of assistance provided under the AHP is ultimately

received by low- and moderate-income households. Id. Section

1430(j)(9)(D). Requiring that project costs be reasonable is one way of

controlling the amount of AHP subsidies that fund a project in order to

keep the project from being over-subsidized, and to ensure that a

preponderance of the funds are being received by the ultimate

households by lowering their housing costs and not providing undue

benefit to the intermediaries in the development process.

A project costs requirement is not explicitly prescribed in the

threshold requirements under the Board's existing AHP regulation,

although some Banks do currently review project costs to determine if

they are reasonable under the feasibility requirement in the existing

regulation. See 12 CFR 960.5(a)(2)(ii). The feasibility requirement as

defined in the proposed rule would not incorporate a project costs

limit requirement.

The Board specifically requests comments on how the Banks currently

deal with applications with excessive project costs, whether the

project costs option discussed above should be required as a threshold

criterion in approving AHP applications, and how such a requirement

could be implemented by the Banks.

3. Scoring of AHP Applications

Section 960.10(a) of the proposed rule provides that the Bank shall

score AHP applications that satisfy all of the threshold criteria in

proposed Sec. 960.9 according to the scoring methodology set forth in

proposed Sec. 960.10, which shall be included in the Bank's approved

AHP implementation plan. Section 960.10 of the proposed rule modifies

the existing scoring methodology, and the Board specifically requests

comments on this proposed new scoring methodology.

a. Priority treatment and scoring. Section 960.10(b) of the

proposed rule provides that each application is first evaluated to

determine if it will receive priority treatment. The Board's existing

AHP regulation contains seven priorities: Homeownership projects;

rental projects; projects using government properties; projects with a

non-profit or public agency sponsor; projects promoting empowerment;

homeless housing projects; and projects meeting a Bank priority. Under

the existing AHP regulation, an application must meet at least three of

the seven priorities to receive priority treatment. The proposed rule

would contain only five priorities. The proposed rule would eliminate

the priorities for homeownership and rental properties because a

project must be either a rental or homeownership project in order to

qualify for AHP funding. The proposed rule would replace the

empowerment and homeless housing priorities with a priority for

``special needs'' housing. In addition, the proposed rule would add a

new priority for projects promoting economic mobility.

Under Sec. 960.10(b) of the proposed rule, for purposes of

determining priority, an application can receive a maximum of eight

points for each of the five priority categories described below. A Bank

in its AHP implementation plan shall define more specifically each of

the five priority categories and explain specifically how points will

be awarded for satisfying each category. An application will be deemed

to meet a particular priority category if it is awarded at least four

points for that priority category. Applications meeting at least two

priority categories shall receive priority treatment.

Section 960.10(c) of the proposed rule provides that applications

that qualify for such priority treatment shall be scored before

applications that do not qualify for priority treatment. The

applications that do not qualify for priority treatment will not be

scored unless there are insufficient priority treatment applications to

utilize the total AHP funding amount for the funding cycle. Under the

proposed rule, the total points available for the priorities would be

increased from 25 to 40. Section 960.10(d) of the proposed rule

provides that the Bank shall total the points received by each

applicant for purposes of determining priority for all of the five

priority categories and shall award 40 points to the application(s)

that receive the highest number of total points, and the remaining

application scores shall be adjusted and awarded points on a declining

scale basis.

The five priority categories are set forth below.

(1) Government-owned properties. Applications for projects that

finance the purchase or rehabilitation of housing owned or held by the

United States Government or any agency or instrumentality of the United

States, including but not limited to HUD, the RTC, Farmers Home

Administration, Veterans Administration, Federal National Mortgage

Association, or Federal Home Loan Mortgage Corporation. (See proposed

Sec. 960.10(d)(1).)

(2) Nonprofit or state or local government sponsored projects.

Applications for projects that finance the purchase, construction or

rehabilitation of housing sponsored by a nonprofit organization, a

state or political subdivision of a state, a local housing authority or

a state housing finance agency. (See proposed Sec. 960.10(d)(2).)

(3) Special needs projects. Applications for projects that address

special needs, which shall be defined by the Bank in its AHP

implementation plan, which special needs may include but are not

limited to:

(i) Empowering the households or residents through programs such as

resident management of the property, self-help housing, homesteading,

and sweat equity;

(ii) Providing housing for special needs populations such as

homeless persons, abused or battered persons, persons with AIDS,

mentally or physically disabled persons, or persons with substance

abuse problems;

(iii) Providing housing in rural areas or areas targeted by local,

state or federal governments for community development or

revitalization through the development of affordable housing or

economic investment; or

(iv) Providing housing with special services to meet the needs of

low- or moderate-income households including, but not limited to, child

care, job training, medical care, substance abuse programs, independent

living skill training, and rental household and homeowner household

counseling. (See proposed Sec. 960.10(d)(3).)

In defining the special needs priority in its AHP implementation

plan, a Bank is not required to include all of the special needs listed

as examples above. Rather, a Bank may be selective in giving priority

to some special needs and not others in devising its scoring system. In

addition, the Bank may select other special needs not listed as

examples above if the special needs chosen are similar in nature to

such examples.

(4) District Bank priority. Applications for projects that meet one

or more priorities recommended by the Bank's Advisory Council and

adopted by the Bank's board of directors that each address a housing

need in the Bank's district and are consistent with the purposes of

this part. The Bank shall describe in its AHP implementation plan how

the points for the priority or priorities will be distributed. (See

proposed Sec. 960.10(d)(4).)

(5) Economic mobility priority. Applications for projects that

provide housing for low- or moderate-income households that move from

low- or moderate-income neighborhoods or housing projects to

neighborhoods, mixed-income buildings or owner-occupied housing

developments in which at least 50 percent of the households have

incomes above the median income for the area, as published by the U.S.

Department of Housing and Urban Development. (See proposed

Sec. 960.10(d)(5).)

b. Scoring for objectives. The Board's existing AHP regulation

contains the following ``objectives'' scoring criteria: Targeting;

long-term retention; effectiveness; community involvement; community

stability; and innovation. The proposed rule makes long-term retention

a threshold criteria and adds a new objective called ``applicant

participation.'' A description of this new objective and the other

criteria are set forth below.

c. Scoring for targeting objective. Section 960.10(e) of the

proposed rule provides that an application can receive a maximum of 20

points for the targeting objective category. This is an increase from

15 points under the existing regulation. The proposed rule provides

that the Bank shall award points to applications based on the extent to

which the project(s) serve(s) the greatest percentage of very low-,

low- and moderate-income households, in that priority order. In the

alternative, if a weighted-average scoring methodology is provided in

the Bank's AHP implementation plan, the Bank shall award points to an

application based on the extent to which the project has the lowest

weighted-average income determined by multiplying the percentage of

units reserved for households at certain income levels by those incomes

expressed as a percentage of median income, and adding the totals.

Applications shall be scored relative to each other with the maximum

number of points allowable awarded to the application(s) that best

achieve(s) the targeting objective, and the remaining application

scores shall be adjusted and awarded points on a declining scale basis.

However, owner-occupied housing projects shall be scored as one group

and rental housing projects shall be scored as a separate group.

d. Scoring for other objectives. Section 960.10(f) of the proposed

rule sets forth five other objectives categories for scoring AHP

applications. The proposed rule requires the Bank in its AHP

implementation plan to define more specifically each of the five other

objectives categories and explain specifically how points will be

awarded for satisfying each category. For each category, the Bank shall

award the maximum number of points allowable for such category to the

application(s) that best achieve(s) the objective, and the remaining

application scores shall be adjusted and awarded points on a declining

scale basis. The five other objectives categories are set forth below.

(1) AHP subsidy per unit. An application can receive a maximum of

10 points for this category. The Bank shall award points to

applications based on the extent to which the project proposes to use

the least amount of AHP subsidy per AHP-subsidized unit. Projects

should be scored relative to each other; however, owner-occupied

housing projects shall be scored as one group and rental housing

projects shall be scored as a separate group. This scoring criterion

may not include a leveraging criterion whereby the application is

scored based on the percentage of the project's total development cost

that is to be financed with the AHP subsidy. This replaces the

effectiveness criterion that can receive a maximum of 15 points in the

existing scoring methodology.

(2) Applicant participation. An application can receive a maximum

of five points for this category. The Bank shall award points to

applications based on the extent to which the project involves

participation by applicants other than the receipt of a subsidized

advance or direct subsidy under the AHP. Such participation can be

financial or non-financial, including but not limited to debt or equity

financing of the project, grants to the project, applicant involvement

on the boards of nonprofit sponsors, and applicant provision of

technical assistance to the nonprofit sponsors for the project. This is

a new scoring criterion.

(3) Community involvement. An application can receive a maximum of

10 points for this category. The Bank shall award points to

applications based on the extent to which there is demonstrated support

for the project by local community organizations and individuals other

than as project sponsors, such as through the commitment by such

organizations and individuals of funds, goods and services, and

volunteer labor. The Banks should not award points for this category

based solely on the number of letters of support received for the

project.

(4) Community stability. An application can receive a maximum of 10

points for this category. The Bank shall award points to applications

based on the extent to which the project(s) maximize(s) community

stability, such as by: committing to maintain a greater long-term

period pursuant to Sec. 960.5; revitalizing vacant or abandoned

properties or being integrally part of a neighborhood stabilization

plan, if such revitalization or stabilization is not identified as a

special needs category by the Bank pursuant to Sec. 960.10(d)(3)(iii);

and not displacing low- or moderate-income households, or if such

displacement will occur, indicating how such households will be

assisted to minimize the impact of such displacement.

(5) Innovation. An application can receive a maximum of five points

for this category. This is a reduction from 10 points under the

existing regulation. The Bank shall award points to applications based

on the extent to which the project(s) involve(s) a particularly new or

unusual approach, either financial or non-financial, for meeting the

requirements of this part.

G. Modifications of Approved AHP Applications

Section 960.11(a) of the proposed rule provides that an applicant

that seeks a modification of an approved AHP application before

completion and occupancy of the project must submit a request for such

modification in writing to the Bank for review and approval. A

modification is any change that affects or could potentially affect the

material facts under which the application was originally evaluated and

scored. Modifications are changes in the specifics of an application

such as requests for additional AHP subsidy or changes in approved

income targeting.

Section 960.11(b) of the proposed rule provides that a request for

a modification of an approved AHP application must include, at a

minimum:

1. A description of how the proposed modification differs from the

original application;

2. The reason for the proposed modification; and

3. Any other information that the Bank determines is necessary to

review the proposed modification.

Section 960.11(c)(1) of the proposed rule provides that the Bank

shall review the request for modification, shall re-score the

application as proposed to be modified according to the scoring

criteria used in the AHP funding cycle in which the application was

originally approved, and may approve such request if the following

factors are satisfied:

1. The project as proposed to be modified continues to meet all of

the requirements of this part; and

2. The project as proposed to be modified continues to score high

enough that it would have been approved in its AHP funding cycle.

Section 960.11(c)(2) of the proposed rule provides that if the

application does not satisfy the requirements in paragraph (c)(1), the

Bank in its discretion may approve the request for modification if the

reason for the modification is due to circumstances outside the control

of the applicant or sponsor.

Section 960.11(d) of the proposed rule provides that the Bank shall

forward to the Board a detailed summary of any modification of an AHP

application approved by the Bank, including how the Bank re-scored the

project, within 30 calendar days of the approval of such modification.

H. Use, Calculation and Verification at Initial Disbursement of AHP

Subsidized Advances or Direct Subsidies

1. Use of Subsidized Advances or Direct Subsidies Within Reasonable

Period of Time and Verification of Reasonable Progress

As discussed above, the threshold requirement in the Board's

existing AHP regulation that the project have the ability to begin

using Bank assistance within 12 months is omitted as a threshold

requirement in the proposed rule. See 12 CFR 960.5(a)(2)(iv). In

addition, setting a fixed period of 12 months may not be appropriate in

all cases, because what is a reasonable period of time will vary from

project to project depending on the type of project and the

circumstances of the project. However, the Board does believe that

funds received under the AHP should be used within a reasonable period

of time after approval of an AHP application. Because what is a

reasonable period of time is so project specific, the Board believes

that the determination of such periods should be left to the discretion

of the Banks.

Accordingly, Sec. 960.12(a) of the proposed rule provides that the

Bank shall in its AHP implementation plan identify what constitutes

reasonable progress by the sponsor towards using subsidized advances or

direct subsidies within a reasonable period of time after the approval

of an AHP application for different types of projects, and explain how

it intends to verify such reasonable progress.

Section 960.12(b) of the proposed rule provides that the sponsor

must demonstrate that reasonable progress is being made towards using

the requested funds within a reasonable period of time after approval

of the AHP application, as determined by the Bank.

Section 960.12(c) of the proposed rule provides that the Bank shall

verify the efforts of the sponsor to determine whether it has satisfied

the requirement in paragraph (b).

Section 960.12(d) of the proposed rule provides that if the sponsor

fails to satisfy the requirement in paragraph (b), the Bank shall

cancel the AHP award, and shall not disburse any subsidized advances or

direct subsidies through the applicant to the sponsor, and the full

amount of any previously disbursed subsidized advances or direct

subsidies shall be returned to the Bank.

2. Calculation of AHP Subsidy

The Board is considering adopting rules on the calculation of AHP

subsidies for subsidized advances and specifically requests comments on

the following proposals. Under consideration is whether AHP application

approvals should commit to provide a dollar amount of subsidy, or

should commit to make a subsidized advance at a specific interest rate.

Another possibility is that the Bank can select on a case-by-case basis

to do one or the other or both but the choice must be specified in its

approval. The rule could require the Bank's AHP implementation plan to

describe the Bank's procedures in this area.

The Board specifically requests comments as to whether an AHP

approval should commit to provide a specific dollar amount of subsidy

for a subsidized advance. If interest rates rise after the approval,

should the interest rate on the subsidized advance be increased so that

the present value of the amount needed to subsidize the reduction in

interest rate is equal to the subsidy amount originally approved?

Should the applicant be given the option of either reducing the

principal amount of the loan and keeping the originally requested

interest rate unchanged, or increasing the interest rate on the loan

and keeping the principal amount of the loan unchanged? If interest

rates fall after the approval, should the specific dollar amount of

approved subsidy stay the same, or be adjusted?

Alternatively, if the AHP approval commits to make a subsidized

loan at a specified interest rate, then a number of issues are raised.

First, should the amount of the subsidy to be charged against the AHP

fund be calculated at the time the application is approved, or at the

time of disbursement. If the calculation is not done at the time the

application is approved but is done at the time of funding and interest

rates have fallen since the approval, the amount of the subsidy

provided to subsidize the advance would decrease and the amount of

subsidy charged against the AHP fund would decrease. If the calculation

is done at the time of funding and interest rates have risen since the

approval, the amount of the subsidy provided to subsidize the advance

would increase and the amount of subsidy charged against the AHP fund

would increase. If the increase in subsidy is permitted to be charged

against the AHP fund, should there be any limits on the amount of

increase in subsidy? If the amount that could be charged against the

AHP fund could be increased without limit, these charges could reduce

the amount of funds available for future cycles of AHP funding. One

option would be to put an upper limit, for example a specified number

of basis points, as the maximum amount by which additional AHP funds

would be provided to cover the interest rate increase. Another option

would be to approve the amount of the subsidy as well as the interest

rate on the advance at the time the advance is approved and permit the

subsidy to be increased up to a specified amount. Another issue is

whether funds from future AHP funding cycles should be used to pay for

increased subsidies due to interest rate increases. The Board

specifically requests comments on these options.

The Board is concerned about the calculation of subsidies where

non-amortizing subsidized advances are used by members to fund

amortizing AHP loans from members to sponsors. Since principal is

repaid on a different schedule for amortizing loans than non-amortizing

loans, the Banks must adjust their subsidy calculation methodologies to

ensure that they have properly adjusted for these differences. As AHP

principal is repaid to a member but not repaid to the Bank, the benefit

of these subsidized funds may not be passed on to the ultimate

borrower, as required in section 10(j)(9)(E) of the Act. See 12 U.S.C.

1430(j)(9)(E). Without proper adjustment for differences in the cash

flows for an amortizing loan and an interest-only advance, the amount

of subsidy actually received by a project will be less than the amount

incurred by the Bank as an AHP expense. The Board specifically requests

comments as to whether an amortizing advance structure is required to

assure that the subsidy amount incurred by the Bank as an AHP expense

matches the amount of the subsidy actually received by a sponsor. In

addition, the Board requests comments as to whether there are

alternative appropriate methods to deal with the discrepancy in the

subsidy amounts where such advances are used to fund amortizing loans.

3. Verification at Initial Disbursement of Subsidized Advances or

Direct Subsidies

Section 960.13 of the proposed rule provides that at the time of

initial disbursement of a subsidized advance or a direct subsidy by a

Bank for an approved AHP application, the Bank shall verify in writing

that the project complies with all applicable requirements contained in

proposed Sec. 960.9 and all obligations committed to in the approved

AHP application. The Bank shall verify the amount of subsidy being

provided in connection with the application and being charged against

the AHP fund. The Bank shall include in its AHP implementation plan its

verification procedures for such purposes.

I. Monitoring Requirements

Section 960.14 of the proposed rule sets forth the requirements for

monitoring AHP-assisted housing projects. Section 960.14 is intended to

implement the statutory requirement of section 10(j)(9)(C) of the Act,

which provides that the Board's regulations shall ensure that advances

made under the AHP be used only to assist projects for which adequate

long-term monitoring is available. See 12 U.S.C. 1430(j)(9)(C).

The Board's existing AHP regulation provides that each Bank must

monitor housing projects funded through its AHP. See 12 CFR 960.7(b).

Section 960.14(a) of the proposed rule carries forward this

requirement, and Sec. 960.14(e) through (h) of the proposed rule sets

forth the specific monitoring requirements for the Banks, which are

discussed further below. Section 960.14(b) of the proposed rule

provides that each Bank shall include in its AHP implementation plan an

explanation of how it intends to meet the monitoring requirements of

Sec. 960.14 of the proposed rule.

Under Sec. 960.14(c) of the proposed rule, a Bank may contract with

an applicant, a state housing finance agency, or another entity to

perform the tasks required to carry out the Bank's monitoring

responsibilities; however, the Bank remains ultimately responsible for

meeting the monitoring requirements set forth in Sec. 960.14 (e)

through (h) of the proposed rule. Thus, a Bank may decide in its

monitoring plan that applicants will have no long-term monitoring

responsibilities. Alternatively, the Bank may decide to require

applicants to perform long-term monitoring as a condition of approval

of an AHP award, or the Bank may determine what entity has the

responsibility for monitoring on a project-by-project basis.

1. Applicant Monitoring of Construction or Rehabilitation

Section 960.14(d) of the proposed rule adds a new requirement that

if a subsidized advance or direct subsidy is used to finance

construction or rehabilitation of a project, the Bank shall require the

applicant to monitor the construction or rehabilitation until

completion, and to make progress reports to the Bank. Where an

applicant finances construction or rehabilitation, the applicant

usually monitors the progress of the project in connection with

approving disbursements of funds to the borrower. Therefore, the Board

believes that where an applicant uses a subsidized advance or direct

subsidy to make loans for construction or rehabilitation of an AHP-

assisted project, the applicant is in the best position to monitor the

progress of such construction or rehabilitation and to make progress

reports to the Bank.

2. Bank Monitoring Requirements

Section 960.14 (e) through (h) of the proposed rule sets forth the

specific aspects of an AHP project that a Bank is required to monitor.

Section 960.14(e) of the proposed rule sets for the monitoring

responsibilities that are long-term in nature, as required by section

10(j)(9)(C) of the Act. See 12 U.S.C. 1430(j)(9)(C). Section 960.14(f)

and (h) of the proposed rule sets forth the short-term monitoring

responsibilities for compliance with the special needs and economic

mobility priorities. Section 960.14(g) sets forth the monitoring

responsibilities for the District Bank priority or priorities, which

may or may not be long-term, depending on the nature of the priority

selected by the Bank.

a. Monitoring of long-term requirements. Section 960.14(e) of the

proposed rule sets forth the requirements for monitoring the long-term

requirements for owner-occupied and rental housing projects assisted

under the AHP.

(i) Owner-occupied housing units. Section 960.14(e)(1)(i) of the

proposed rule provides that at the time a household enters into a

purchase contract for an AHP-assisted housing unit or by the closing on

the financing for such unit, or at the time a household that already

owns the housing unit receives a commitment of a loan or a grant

pursuant to the AHP, the Bank or its designee shall obtain a

certification from the sponsor that the household has an income at or

below the level committed to in the AHP application.

Section 960.14(e)(1)(ii)(A) of the proposed rule provides that

during the required long-term period applicable to an owner-occupied

housing unit assisted by a grant provided under the AHP, the Bank or

its designee shall monitor the unit to determine whether it has been

sold to a household with an income that exceeds the level committed to

in the AHP application.

The Board requests comments on two proposed options for

implementing this requirement. These options incorporate the use of

sampling to monitor AHP-assisted projects. The Board recognizes that as

the number of AHP-assisted projects in existence grows, the costs of

monitoring these projects may place an undue financial burden on the

Banks and the AHP. Monitoring AHP-assisted projects on a sample basis

may be one way to minimize the costs of monitoring while continuing to

meet the monitoring requirements of the Act.

Section 960.14(e)(1)(ii)(B) of the proposed rule proposes that

monitoring shall include, but is not limited to, periodic review of

relevant reports or certifications obtained from the sponsor, including

any reports or certifications received pursuant to

Sec. 960.15(c)(1)(ii) of the proposed rule and, at least on a sample

basis, periodic review of land title records at intervals determined by

the Bank, based on the amount of funds received by the project pursuant

to the AHP, the type and complexity of the project, or other factors

deemed relevant by the Bank.

An alternative option would be to require that the Bank only would

have to review land title records on a sample basis, as determined by

the Bank.

(ii) Rental housing projects. Section 960.14(e)(2)(i) of the

proposed rule provides that the Bank shall require an AHP-assisted

rental housing project to be subject to a deed restriction or other

legally enforceable mechanism which requires that upon sale of the

project prior to the end of the long-term period during which the

project's rental units, or portion thereof, must remain affordable for

and occupied by households with incomes at or below the level committed

to in the AHP application, the Bank or its designee must receive notice

of the sale, and:

(1) The project's rental units, or portion thereof, must continue

to be affordable for and occupied by households with incomes at or

below the levels committed to in the AHP application for the remainder

of the long-term period committed to in the AHP application, and the

purchaser agrees to be subject to the same restrictions on resale that

applied to the seller; or

(2) If the purchaser does not satisfy the requirements in (1)

above, and if the Bank provided a direct subsidy to the applicant which

was passed on as a grant to the seller, the seller must repay a pro

rata portion of the grant to the applicant, as provided in

Sec. 960.16(d)(1) of the proposed rule; or

(3) If the purchaser does not satisfy the requirements in (1)

above, and if the Bank provided a subsidized advance to the applicant

which in turn provided a below market rate loan to the seller, then the

provisions of Sec. 960.16(d)(2) shall apply.

Section 960.14(e)(2)(ii) of the proposed rule provides that upon

initial full occupancy of the units in an AHP-assisted rental housing

project or one year after initial disbursement of the subsidized

advance or direct subsidy, whichever occurs first, the Bank or its

designee shall obtain a certification from the sponsor or the owner

that the project's units, or portion thereof, are affordable for and

occupied by households with incomes at initial occupancy at or below

the levels committed to in the AHP application.

Section 960.14(e)(2)(iii)(A) of the proposed rule provides that

during the long-term period for which the units, or portion thereof, of

a rental housing project must remain affordable for and occupied by

households with incomes at or below the levels committed to in the AHP

application, the Bank or its designee shall monitor the project to

determine whether the project's units, or portion thereof, remain

affordable for and occupied by households with incomes at or below the

levels committed to in the AHP application. The Board requests comments

on several options for implementing this requirement.

Section 960.14(e)(2)(iii)(B) of the proposed rule proposes that

monitoring shall include, but is not limited to, periodic review of

relevant household income and rent reports or certifications obtained

from the sponsor or the owner and, at least on a sample basis, periodic

inspections of the project at intervals to be determined by the Bank,

based on the amount of AHP assistance received by the project, the type

and complexity of the project, and other factors deemed relevant by the

Bank.

Another option would be that where funds other than funds provided

under the AHP are the predominant source of financing for an AHP-

assisted rental housing project and the monitoring activities of such

other funding source are sufficient to determine the project's

compliance with the requirements of the AHP, as committed to in the AHP

application, the monitoring requirement would be deemed to be

fulfilled. However, if the monitoring activities of such other funding

source are not sufficient to determine the project's compliance with

the requirements of the AHP, as committed to in the AHP application,

the Bank would be required to monitor the project by conducting

inspections, at least on a sample basis, as determined by the Bank,

based on the amount of the funds received by the project under the AHP,

the type and complexity of the project, or other factors deemed

relevant by the Bank. In the alternative, if the monitoring activities

of such other funding source are not sufficient to determine the

project's compliance with the requirements of the AHP, as committed to

in the AHP application, could the Bank rely on monitoring activities of

the predominant funding source as long as it is monitoring for

compliance with requirements that are substantially similar to the AHP

requirements?

The Board specifically requests comments on how random sampling

could be used to monitor AHP-assisted rental housing projects to

determine whether, during the long-term period committed to in the AHP

application, the project's units continue to be affordable for and

occupied by households with incomes at or below the levels committed to

in the AHP application. For example, sampling could involve monitoring

a portion of AHP-assisted rental projects at fixed intervals. The

sampling method could be devised so that each project is monitored at

least once during the long-term period committed to in the AHP

application. Alternatively, the sampling method might be structured so

that some, but not all, AHP-assisted rental projects are monitored

during the long-term period committed to in the AHP application.

The Act requires that the AHP regulation must ensure that the AHP

will be used only to assist projects for which adequate long-term

monitoring is available to guarantee that affordability standards and

other requirements of the Act are satisfied. See 12 U.S.C.

1430(j)(9)(C). The Board requests comments as to whether it is

appropriate to interpret this requirement in a manner that permits

monitoring to be done by sampling that could result in some AHP-

assisted rental projects not being monitored during the long-term

period committed to in the AHP application. In addition, the Board

specifically requests comments on whether there are sampling techniques

that would ensure that each project is monitored in satisfaction of the

monitoring requirement in the Act.

b. Monitoring of special needs projects. Section 960.14(f) of the

proposed rule sets forth the requirements for monitoring a project that

commits to meet a special need pursuant to proposed Sec. 960.10(d)(3),

either through providing units for persons with a special need or

through providing a special service to occupants, as defined in the

Bank's AHP implementation plan. If an applicant commits to fund a

project that provides owner-occupied or rental housing units for

persons with a special need, as defined in the Bank's AHP

implementation plan, Sec. 960.14(f)(1) of the proposed rule requires

the Bank or its designee to obtain a certification from the sponsor or

the owner upon completion and occupancy of the project that the

project's units, or portion thereof, are occupied by persons with such

special need.

If an applicant in its AHP application commits to fund a project

that will provide a continuing special service to its occupants, as

defined in the Bank's AHP implementation plan, such as child care, job

training, medical care, or other services designed to meet the special

needs of occupants, then Sec. 960.14(f)(1) of the proposed rule

provides that the Bank or its designee shall obtain a certification

from the sponsor or owner upon completion and occupancy of the project

that the special service is being provided to the occupants, as

committed to in the AHP application.

Section 960.14(f)(2) of the proposed rule provides that, where an

applicant in its AHP application commits to fund a housing project that

will provide a continuing special service, the Bank or its designee

shall monitor the project, as determined by the Bank in its AHP

implementation plan, for at least one year from the date of initial

full occupancy of the project to verify that the special service

continues to be provided to the occupants, as committed to in the AHP

application.

c. Monitoring of District Bank priority or priorities. Section

960.14(g) of the proposed rule sets forth the requirement for

monitoring compliance with the District Bank priority or priorities

established pursuant to proposed Sec. 960.10(d)(4). Section

960.14(g)(1) of the proposed rule provides that if an applicant in its

AHP application commits to fund a project that meets a District Bank

priority or priorities, the Bank or its designee shall monitor the

project to verify that it continues to meet the priority or priorities.

Section 960.14(g)(2) of the proposed rule provides that the Bank shall

set forth in its AHP implementation plan the nature, frequency and

duration for monitoring compliance with the District Bank priority or

priorities.

d. Monitoring of economic mobility priority. Section 960.14(h) of

the proposed rule sets forth the requirement for monitoring compliance

with the economic mobility priority set forth under Sec. 960.5(d)(5) of

the proposed rule. Section 960.14(h) provides that if an applicant in

its AHP application commits to fund a project that meets the

requirements of Sec. 960.5(d)(5), the Bank or its designee shall obtain

a certification from the sponsor or the owner upon completion and full

occupancy of the project, as required under Sec. 960.15(c)(4), that the

sponsor or the owner has met such requirements, as committed to in the

AHP application.

J. Reporting Requirements

Section 960.15 of the proposed rule sets forth the reporting

requirements for the Banks, the applicants, and the sponsors or owners

of AHP-assisted projects. Section 960.15(a) of the proposed rule

provides that each Bank shall provide accurate and timely reports and

documentation to, and in the format requested by, the Board concerning

the Bank's AHP, as the Board may from time to time require. See 12 CFR

960.6(a).

1. Applicant Reporting Requirements

Section 960.15(b)(1) of the proposed rule carries forward the

requirement in the Board's existing AHP regulation that each Bank shall

require an applicant receiving a subsidized advance or direct subsidy

to report at least annually to the Bank on the manner in which it has

used the funds, with such reports continuing until the funds have been

fully disbursed by the applicant. See 12 CFR 960.6(b).

The proposed rule eliminates the requirement in the Board's

existing AHP regulation that the applicant certify that the AHP subsidy

has been passed through to the borrower and continues to be used for

approved purposes because, as discussed previously in the section on

monitoring requirements, under the proposed rule applicants are not

required to monitor the use of a subsidy in AHP-assisted projects,

except during the period when a subsidized advance or direct subsidy is

used to finance construction or rehabilitation of a project or where

the applicant has agreed to undertake monitoring. See 12 CFR 960.6(c).

Section 960.15(b)(2) of the proposed rule adds a new requirement

that if subsidized advances or direct subsidies are used to finance

construction or rehabilitation of an AHP-assisted project, the Bank

shall require the applicant to report to the Bank at reasonable

intervals determined by the Bank, and described in the Bank's AHP

implementation plan, on the progress of the construction or

rehabilitation, until completion. This reporting requirement coincides

with the requirement in Sec. 960.14(d) of the proposed rule that the

Bank shall require the applicant to monitor the construction or

rehabilitation of an AHP-assisted project and make progress reports to

the Bank where AHP subsidized advances or direct subsidies are used to

finance such construction or rehabilitation.

2. Sponsor and Owner Reporting Requirements

Section 960.15(c) of the proposed rule sets forth the reporting

requirements for sponsors and owners. These requirements coincide with

the monitoring requirements set forth in Sec. 960.14(e) through (h) of

the proposed rule. Section 960.15(c)(1)(i) of the proposed rule

provides that where a subsidized advance or direct subsidy is used to

finance the purchase of an owner-occupied housing unit, the Bank shall

require the sponsor to certify at the time a household enters into a

purchase contract for such unit or at the closing on the financing for

such unit that the unit has been sold to a household with an income at

or below the level committed to in the AHP application. Where a

subsidized advance or direct subsidy is used to finance the

rehabilitation of an owner-occupied housing unit, the Bank shall

require the sponsor to certify at the time a loan or grant is committed

to fund such rehabilitation that the household that owns and occupies

the unit has an income at or below the level committed to in the AHP

application.

Section 960.15(c)(1)(ii) of the proposed rule provides that if an

owner-occupied housing unit assisted by a grant provided under the AHP

is not subject to a deed restriction or other legally enforceable

mechanism restricting transfer of ownership to a household with an

income at or below the level committed to in the AHP application, the

Bank shall require the sponsor to report to the Bank or its designee,

at least annually for the required long-term period, the number of any

such units that are sold to households whose incomes exceed the level

committed to in the AHP application, and to certify to the Bank that it

is continuing to satisfy its commitment pursuant to its legally binding

agreement with the Bank.

Section 960.15(c)(2) of the proposed rule provides that the Bank

shall require the sponsor or the owner to certify upon initial full

occupancy of the units in an AHP-assisted rental housing project, but

no later than one year after initial disbursement of the subsidized

advance or direct subsidy, and annually thereafter, that the project's

units, or portion thereof, are affordable for and occupied by

households with incomes at or below the levels committed to in the AHP

application.

Section 960.15(c)(3) of the proposed rule provides that if an

applicant in its AHP application commits to fund a project that will

provide housing units for persons with a special need, or will provide

a continuing special service to occupants pursuant to Sec. 960.10(d)(3)

of the proposed rule, the Bank shall require the sponsor or the owner

to certify upon completion and full occupancy of the project that the

project's units, or portion thereof, are occupied by persons with such

special needs or that a special service is being provided to occupants,

as committed to in the AHP application.

Section 960.15(c)(4) of the proposed rule provides that if an

applicant in its AHP application commits to fund a housing project that

meets the requirements of the economic mobility priority under

Sec. 960.10(d)(5) of the proposed rule, the Bank shall require the

sponsor or the owner to certify upon completion and full occupancy of

the project that the sponsor or owner has met such requirements, as

committed to in the AHP application.

Section 960.15(d) of the proposed rule provides that each Bank

shall require applicants or sponsors to provide such other reports to

the Bank, in addition to the reports and documentation required by

Sec. 960.15 of the proposed rule, as the Bank deems necessary in order

to fulfill its monitoring obligations under Sec. 960.14 of the proposed

rule.

K. Corrective and Remedial Actions for Fraud or Non-Compliance With AHP

Requirements

Section 10(j) of the Act is silent on what specific corrective and

remedial actions should be imposed when there is fraud or non-

compliance with the requirements of the AHP. See 12 U.S.C. 1430(j).

Accordingly, the Board has the discretion to determine, as a matter of

policy, what those requirements should be.

The Board's existing AHP regulation provides that, where funds

provided under the AHP will not be or are no longer being used for

their approved purposes, the amount of committed but unused subsidy or

improperly used subsidy shall be recovered and made available by the

Bank for future AHP projects. See 12 CFR 960.8(a). The existing

regulation requires the Bank, in recapturing such funds, to take any or

all of the following actions, without limitation on other remedies, in

its discretion:

a. Reprice the advance at the interest rate charged to members on

non-subsidized advances of comparable type and maturity at the time of

the original advance;

b. Call the advance;

c. Assess a prepayment fee; or

d. Require the member to reimburse the Bank for the amount of the

unused or improperly used subsidy on the advance or other assistance.

Id. Sec. 960.8(b). In addition, some Banks have adopted procedures

that require a direct subsidy to be converted to an advance if the

project is found to be in non-compliance with the requirements of the

AHP regulation.

A number of concerns have been raised about this recapture

requirement. First, it may not be equitable to require the applicant to

reimburse the Bank when it is the sponsor that is in non-compliance

with the AHP requirements. Second, requiring recapture of the AHP

subsidy could in some situations result in the applicant having to

foreclose against a property in order to recover the funds to repay an

advance to the Bank, thereby eliminating affordable housing units even

when only a few of the units in the project may be out of compliance

with AHP requirements.

In short, it has become clear through the operation of the AHP that

the recapture remedy may not be the appropriate remedial action in all

circumstances. Other less severe remedial actions may be more

appropriate depending on the nature of the non-compliance that has

occurred. In addition, the remedial actions should be directed only at

the parties that are in non-compliance. Accordingly, the proposed rule

contains provisions that tailor the remedial actions required to the

nature of the non-compliance and the party committing the non-

compliance, which are discussed further below.

1. Fraud or Willful Non-Compliance

Fraud and willful non-compliance are the most extreme examples of

non-compliance with the AHP requirements. Accordingly, the proposed

rule applies the most severe remedial actions--exclusion or suspension

from future participation in the AHP and recovery of the full amount of

the AHP subsidy--to parties that have committed fraud or are in willful

non-compliance with respect to the AHP requirements.

Specifically, Sec. 960.16(a)(1) of the proposed rule provides that

in the event of an applicant's, sponsor's or owner's fraud with respect

to the AHP requirements, the Bank shall exclude the applicant, sponsor

or owner, respectively, on a permanent basis, from future participation

in the AHP. In the event of an applicant's, sponsor's or owner's

willful non-compliance with the AHP requirements, the Bank shall

suspend the applicant, sponsor or owner, respectively, at least on a

temporary basis, from future participation in the AHP during the period

such willful non-compliance continues, and may exclude such party

permanently from future participation in the AHP. The Board

specifically requests comments as to whether the Banks should be able

to determine whether fraud or willful non-compliance has occurred, or

whether such determination should be made by the Board, or by either

the Bank or the Board.

In addition, Sec. 960.16(a)(2) of the proposed rule provides that

in the event of an applicant's fraud or willful non-compliance with

respect to the AHP requirements, the Bank shall recover from the

applicant the full amount of the AHP subsidy provided to the project.

Section 960.16(a)(3)(i) of the proposed rule provides that in the

event of a sponsor's or owner's fraud or willful non-compliance with

respect to the AHP requirements, the full amount of the AHP subsidy

shall be recovered from the sponsor or owner by the applicant and

returned to the Bank or, if previously agreed to by the Bank, shall be

recovered by the Bank from the sponsor or owner. If efforts to recover

the AHP subsidy from the sponsor or owner are unsuccessful, the

applicant shall not be liable for such funds.

In order to be able to implement this recapture requirement, the

applicant is required, under proposed Sec. 960.16(a)(3)(ii), to have in

place either:

(1) A legally binding agreement or other legally enforceable

mechanism that permits it to recover these funds from the sponsor or

owner; or

(2) If the Bank agrees and such an agreement is legally

enforceable, a three-party agreement that includes the Bank, the

sponsor or owner and the applicant that permits the Bank to recover

these funds from the sponsor or owner.

Section 960.16(a)(4) of the proposed rule provides that the Board

in its discretion may grant a waiver of any required remedial actions

under this paragraph (a) upon written request by the Bank, applicant,

sponsor or owner.

2. Other Types of Non-Compliance

Non-compliance by a party with the AHP requirements, such as due to

inadvertent errors by such party or changes in circumstances that are

outside such party's control, does not warrant imposition of the most

severe remedial actions since the party lacked the intent to violate

such requirements. In addition, in many such cases, the non-compliance

can be rectified within a reasonable period of time.

Accordingly, Sec. 960.16(b) of the proposed rule provides that in

the event of inadvertent non-compliance by an applicant, sponsor or

owner, the Bank shall provide such party with a reasonable period of

time in which to take reasonable efforts, pursuant to a compliance plan

approved by the Bank, to remedy the non-compliance. The Bank in its

discretion may exclude such party from participation in the AHP while

it is under a compliance plan, or in its discretion may require the

applicant to increase the long-term period committed to in its AHP

application for the project by the amount of time the project has been

in non-compliance.

Section 960.16(b) of the proposed rule further provides that if the

applicant, sponsor or owner takes no reasonable efforts to comply with

the compliance plan, then such party is in willful non-compliance with

the requirements of this part and is subject to the remedial actions

contained in paragraph (a) of this section. If the applicant, sponsor

or owner takes reasonable efforts pursuant to the compliance plan to

remedy the non-compliance under paragraph (b) and such efforts are

unsuccessful, the applicant, sponsor or owner would be subject to the

remedial actions for fraud or willful non-compliance, but may apply to

the Bank for a waiver of any such required remedial actions. The Bank

shall report to the Board in writing on any waivers approved pursuant

to paragraph (b) within 30 calendar days of such approval.

3. Sale of AHP-assisted Owner-Occupied Housing Unit to Income-

Ineligible Household

a. Recapture requirement. Section 960.16(c) of the proposed rule

provides generally that in the event that a household sells its AHP-

assisted owner-occupied housing unit to a household whose income

exceeds the level committed to in the AHP application prior to the end

of the required long-term period, then:

(i) If the Bank provided a direct subsidy to the applicant which

was passed on as a grant to the seller, the Bank shall require the

seller to repay a pro rata share, except for de minimis amounts, of the

grant received by such seller. The amount to be repaid shall be reduced

for every year the seller owned the unit, to be repaid from any net

gain from the sale of the unit after deduction for sales expenses, and

to be returned to the Bank. The proposed rule provides, however, that

the Bank in its discretion may waive such requirement if the imposition

of such requirement will cause undue hardship on the seller, as defined

by the Bank in its AHP implementation plan; or

(ii) If the Bank provided a subsidized advance to the applicant and

the applicant provided a below market rate loan to the seller, then the

applicant shall either repay to the Bank that portion of the advance

used to make the loan to the seller or the Bank shall convert that

portion of the advance used to make the loan to the seller to a market

rate advance with an interest rate equal to the market rate of interest

at the time the advance was made, and any unused AHP subsidy which had

been set aside by the Bank to subsidize that portion of the advance

used to make the loan to the seller shall be made available by the Bank

for additional AHP projects.

b. Exception to recapture requirement. Section 960.16(c)(3) of the

proposed rule provides that the recapture requirements described above

shall not apply provided the sponsor, pursuant to a legally binding

agreement with the Bank, assists another household with an income at or

below the level committed to in the AHP application in the manner

originally committed to in the AHP application.

This alternative approach is discussed in greater detail above

under the monitoring section.

4. Sale of AHP-Assisted Rental Housing Project

Section 960.16(d) of the proposed rule provides that in the event

that the owner of an AHP-assisted rental housing project sells the

project prior to the end of the long-term period during which the

project's rental units, or portion thereof, must remain affordable for

and occupied by households with incomes at or below the levels

committed to in the AHP application, and the purchaser does not agree

to maintain the project according to such commitments and to be subject

to the same restrictions on resale that applied to the seller, then:

(i) If the Bank provided a direct subsidy to the applicant which

was passed on as a grant to the seller, the Bank shall require the

seller to repay a pro rata share, except for de minimis amounts, of the

grant received by such seller, reduced for every year the seller owned

the unit, to be repaid from any net gain from the sale of the project

after deduction for sales expenses, and to be returned to the Bank,

except that the Bank in its discretion may waive such requirement if

the imposition of such requirement will cause undue hardship on the

seller, as defined by the Bank in its AHP implementation plan; or

(ii) If the Bank provided a subsidized advance to the applicant and

the applicant provided a below market rate loan to the seller, then the

applicant shall either repay the advance to the Bank or the Bank shall

convert the advance to a market rate advance with an interest rate

equal to the market rate of interest at the time the advance was made,

and any unused AHP subsidy which had been set aside by the Bank to

subsidize the advance shall be made available by the Bank for

additional AHP projects.

L. AHP Applications Involving Loan Funds and Loan Consortia

Section 960.17 of the proposed rule sets forth specific

requirements governing the use of loans and grants received by loan

funds and loan consortia pursuant to the AHP. The Board's existing AHP

regulation does not address specifically the use of loans or grants by

loan funds or loan consortia pursuant to the AHP. See 12 CFR part 960.

However, the Board has adopted policy guidelines for the Banks

governing the award of subsidized advances and direct subsidies to

applicants that then make loans or grants to loan funds and loan

consortia (policy guidelines). See Board Resolution No. 93-54, June 23,

1993. The provisions in Sec. 960.17 of the proposed rule, if adopted in

final form by the Board, would incorporate the policy guidelines, with

some modifications.

Section 960.17(a)(1) of the proposed rule provides generally that

an applicant may use a subsidized advance or a direct subsidy to make a

loan or a grant to a loan fund or loan consortium. Section 960.17(a)(2)

of the proposed rule provides that AHP applications involving the use

of loans or grants by loan funds or loan consortia are governed by the

provisions of part 960, except as provided in Sec. 960.17 of the

proposed rule.

Section 960.17(b) of the proposed rule provides that the

requirements for approval of an AHP application that proposes to use

subsidized advances or direct subsidies to make a loan or a grant to a

loan fund or loan consortium are the same as the requirements for

approval applicable to all other AHP applications under Sec. 960.8 of

the proposed rule, except that an AHP application that involves a loan

fund or loan consortium will be scored on the criteria that the loan

fund or loan consortium proposes to use to select projects that will

ultimately receive a loan or grant from the loan fund or loan

consortium that is subsidized by the AHP.

This provision is intended to address the fact that loan funds and

loan consortia do not have specific proposed projects in place at the

time they apply for funds under the AHP. Section 960.17(b)(1) of the

proposed rule therefore requires the Banks to score AHP applications

involving loan funds or loan consortia based on the criteria that the

loan fund or loan consortium commits to use when selecting the projects

it will fund. This provision carries forward a requirement of the

Board's existing policy guidelines.

In addition, Sec. 960.17(b)(2) of the proposed rule provides that

the Bank shall review and shall require the applicant to review each

new rental housing project funded by a loan fund or loan consortium

prior to disbursing a loan or grant to ensure that the project meets

the threshold requirements of Sec. 960.9 of the proposed rule and the

project selection criteria committed to in the approved AHP

application.

This is a change from the provision in the Board's existing policy

guidelines that requires the Bank and the applicant to review both

rental and owner-occupied housing projects prior to funding by a loan

fund or loan consortium under the AHP. This change is intended to

eliminate duplicative review of loan fund or loan consortium activities

where funds are used to finance owner-occupied housing units under the

AHP. However, since rental housing projects are more complex than

owner-occupied housing projects, the Board believes that the applicant

and the Bank should continue to review each rental housing project

funded by a loan fund or loan consortium prior to disbursement of any

funds to ensure that the project meets the feasibility, maximum

subsidy, and other threshold requirements of Sec. 960.9 of the proposed

rule.

Section 960.17(c)(1) of the proposed rule carries forward the

requirement in the Board's existing policy guidelines that if an

applicant receives a subsidized advance and uses the proceeds of the

advance to make a loan to a loan fund or loan consortium, the total

value of the interest rate subsidy must be passed on to the borrower of

the funds. Thus, Sec. 960.17(c)(1) provides that a loan fund or loan

consortium shall extend credit to the borrower at a rate of interest

equal to the rate of interest charged on the subsidized advance plus a

reasonable interest rate spread approved by the Bank. The applicant and

the loan fund or loan consortium may determine between themselves what

proportion of the interest rate spread the applicant and the loan fund

or loan consortium will share.

Section 960.17(c)(2)(i) of the proposed rule provides that a loan

fund or loan consortium that receives a grant from an applicant

pursuant to the AHP must either:

(A) Pass the entire grant on to the recipient;

(B) Use the entire grant to lower the interest rate on a loan to

the borrower; or

(C) Lend the entire grant to the borrower to finance a rental

housing project for a term of not less than 30 years, with all

principal and interest payments deferred until the end of such term. If

such loan is repaid before the end of the 30-year term, the entire

amount of the grant must be repaid to the applicant, which in turn must

forward the funds to the Bank to be used for additional AHP projects.

This is a change from the provision in the Board's existing policy

guidelines that prohibits a loan fund or loan consortium from using a

grant from an applicant to make a loan to the borrower. The Board

believes that if a loan fund or loan consortium lends a grant to a

sponsor to finance rental housing units that will remain affordable for

and occupied by income-eligible households for not less than 30 years,

with all principal and interest payments deferred until the end of the

loan term, then the loan fund or loan consortium has passed on the full

amount of the AHP subsidy to the recipient or borrower of the funds, as

required by section 10(j)(9)(E) of the Act. See 12 U.S.C.

1430(j)(9)(E). However, if the borrower repays the loan before

maturity, the entire amount of the subsidy must be repaid to the

applicant and forwarded by the applicant to the Bank to be returned to

the AHP fund. Therefore, a loan fund or loan consortium may use a grant

under the AHP to make a loan to the borrower under the conditions

specified in Sec. 960.17(c)(2)(i)(C) of the proposed rule.

Section 960.17(c)(2)(ii) of the proposed rule provides that if a

loan fund or loan consortium provides both a loan and a grant to the

borrower and the loan fund or loan consortium charges an origination

fee for providing the loan, then any fee charged by the loan fund or

loan consortium for providing the grant may not be paid with AHP

subsidized advances or direct subsidies. The Board does not believe

that such funds should be used to pay a fee for providing a grant to a

project if the loan fund or loan consortium charges a fee for

underwriting a loan to the same project.

Section 960.17(c)(2)(iii) of the proposed rule provides that when a

loan fund or loan consortium receives a grant from an applicant

pursuant to the AHP and uses the grant to lower the interest rate on a

loan to the borrower, the interest rate calculation must be consistent

with the procedure used by the Bank for calculating the amount of AHP

subsidy needed for a subsidized advance, taking into account the source

of funds used by the loan fund or loan consortium for its loans and the

rate that normally would be charged for a loan of the type and term

that is provided to the borrower.

Section 960.17(c)(3) of the proposed rule provides that any

interest or other income earned by a loan fund or loan consortium on a

loan or a grant received from an applicant, other than any approved fee

or interest rate spread charged to the borrower, either (i) must be

used by the loan fund or loan consortium to provide funds for

additional projects meeting the threshold requirements in Sec. 960.9 of

the proposed rule and the criteria committed to in the approved AHP

application, or (ii) must be forwarded to the applicant, which in turn

must forward the funds to the Bank to be used for additional AHP

projects. This is a change from the provision in the Board's existing

policy guidelines that allows loan funds and loan consortia to earn and

retain de minimis amounts of income on loans or grants received from

applicants. The Board believes that accounting for de minimis amounts

of interest or other income earned on loans or grants received from an

applicant is no less of an administrative burden than accounting for

all such interest or other income earned. Therefore, the proposed rule

requires all interest or other income earned on loans or grants

received from an applicant to be used by the loan fund or loan

consortium for additional AHP projects or returned to the applicant.

Section 960.17(c)(4) of the proposed rule provides that if loans or

grants received by a loan fund or loan consortium pursuant to one AHP

funding cycle are combined with loans or grants received by such entity

pursuant to another AHP funding cycle in a single rental housing

project, the loan fund or loan consortium shall require the recipient

of the funds to follow the requirements for the use of such funds from

the AHP funding cycle that is more restrictive as to the approved AHP

criteria. This requirement does not apply when loans or grants received

by a loan fund or loan consortium pursuant to separate AHP funding

cycles are combined to finance a single owner-occupied housing project.

The reason for this provision is that funds are more easily traceable

to separate units in an owner-occupied housing project than to separate

units in a rental housing project. Therefore, for purposes of owner-

occupied housing projects, it is possible to use loans or grants from

different AHP funding cycles according to the different criteria

approved by the Bank in each of the respective funding cycles. However,

the loan fund or loan consortium in its discretion may require the

recipient of the funds to follow the requirements for the use of such

funds from the AHP funding cycle that is more restrictive as to the

approved AHP criteria.

Section 960.17(c)(5) of the proposed rule provides that any loans

provided by a loan fund or loan consortium pursuant to the AHP that are

repaid to such entity must be re-lent or provided as grants by such

entity within a reasonable period of time after such repayments, or

must be repaid to the applicant, which in turn must repay such funds to

the Bank, and must be made available by the Bank for additional AHP

projects. The Bank shall in its AHP implementation plan identify what

constitutes a reasonable period of time for such purposes.

Section 960.17(d) of the proposed rule sets forth the monitoring

and reporting requirements where an applicant makes loans or grants

pursuant to the AHP to a loan fund or loan consortium which uses the

funds to finance owner-occupied or rental housing units. Section

960.17(d)(1)(i) of the proposed rule requires the Bank to monitor such

units, according to the monitoring requirements of Sec. 960.14(e)

through (h) of the proposed rule, to determine compliance with the

long-term requirements, as well as compliance with the special needs

priority, the District Bank priority or priorities, and the economic

mobility priority, where applicable. In addition, Sec. 960.17(d)(1)(ii)

of the proposed rule provides that the Bank shall require the sponsor

or owner of a project receiving a loan or grant from the loan fund or

loan consortium to submit to the Bank such reports and certifications

as are required under Sec. 960.15(c) of the proposed rule. Section

960.17(d)(1)(iii) of the proposed rule provides that the Bank shall

require the loan fund or loan consortium to report to the Bank any new

loan or grant made using repayments of loans by the borrower. If a loan

fund or loan consortium receives loans or grants from an applicant

pursuant to separate AHP funding cycles, the use of such funds must be

reported separately.

Section 960.17(d)(2) of the proposed rule provides that the Bank

may contract with either the applicant or the loan fund or loan

consortium to meet the monitoring requirements of Sec. 960.14(e)

through (h). Under Sec. 960.17(d)(2)(i) of the proposed rule, if the

Bank contracts with the applicant to meet such monitoring requirements,

the Bank shall require the applicant to monitor the AHP-assisted

housing units according to the monitoring requirements of

Sec. 960.14(e) through (h) of the proposed rule. The Bank also shall

require the applicant to require the sponsor or owner of the project to

submit to the applicant such reports and certifications as are required

under Sec. 960.15(c) of the proposed rule. In addition, the applicant

shall require the loan fund or loan consortium to report to the

applicant any new loan or grant made using repayments of loans by the

borrower. If a loan fund or loan consortium receives loans or grants

from an applicant pursuant to separate AHP funding cycles, the use of

such funds must be reported separately.

Under Sec. 960.17(d)(2)(ii) of the proposed rule, if the Bank

contracts with the loan fund or loan consortium to meet the monitoring

requirements in Sec. 960.14(e) through (h) of the proposed rule, the

Bank shall require the loan fund or loan consortium to monitor the AHP-

assisted housing units according to the monitoring requirements of

Sec. 960.14(e) through (h) of the proposed rule. The Bank also shall

require the loan fund or loan consortium to require the sponsor or

owner of the project to submit to the loan fund or loan consortium such

reports and certifications as are required under Sec. 960.15(c) of the

proposed rule. In addition, the loan fund or loan consortium shall

report to the Bank any new loan or grant made using repayments of loans

by the borrower. If a loan fund or loan consortium receives loans or

grants from an applicant pursuant to separate AHP funding cycles, the

use of such funds must be reported separately.

The monitoring and reporting requirements in Sec. 960.17(d) of the

proposed rule are a change from the provisions on monitoring and

reporting in the Board's existing policy guidelines, which require the

applicant to monitor the loan fund or loan consortium and require the

Bank to monitor the applicant. This change is intended to conform the

monitoring and reporting requirements for projects involving loan funds

or loan consortia with the proposed monitoring and reporting

requirements applicable to AHP-assisted housing projects generally

under Secs. 960.14 and 960.15 of this proposed rule.

Section 960.17(e)(1) of the proposed rule provides that a loan fund

or loan consortium receiving loans or grants from applicants pursuant

to the AHP and the project sponsors and owners receiving loans or

grants from loan funds or loan consortia are subject to the corrective

and remedial actions contained in Sec. 960.16 of the proposed rule for

fraud and non-compliance with respect to the AHP requirements.

Section 960.17(e)(2)(i) of the proposed rule provides that in the

event of a loan fund's or loan consortium's fraud or willful non-

compliance with respect to the requirements of this part, the full

amount of the AHP subsidy shall be recovered from the loan fund or loan

consortium by the applicant and returned to the Bank, or if previously

agreed to by the Bank, shall be recovered by the Bank from the loan

fund or loan consortium.

Section 960.17(e)(2)(ii) of the proposed rule requires an applicant

that provides a loan or a grant to a loan fund or loan consortium

pursuant to the AHP to have in place either:

(1) A legally binding agreement or other legally enforceable

mechanism that permits the applicant to recover from the loan fund or

loan consortium, in the event of fraud or willful non-compliance by the

loan fund or loan consortium with respect to the AHP requirements, the

full amount of the AHP subsidy; or

(2) If the Bank agrees and such an agreement is legally

enforceable, a three-party agreement that includes the Bank, the

applicant, and the loan fund or loan consortium, that permits the Bank

to recover from the loan fund or loan consortium, in the event of fraud

or willful non-compliance by the loan fund or loan consortium with

respect to the AHP requirements, the full amount of the AHP subsidy.

Section 960.17(e)(3)(i) of the proposed rule provides that in the

event of a sponsor's or owner's fraud or willful non-compliance with

respect to the AHP requirements, the full amount of the AHP subsidy

shall be recovered by the loan fund or loan consortium from the sponsor

or owner to be used for additional AHP projects.

Section 960.17(e)(3)(ii)(A) of the proposed rule provides that the

loan fund or loan consortium shall have in place a legally binding

agreement or other legally enforceable mechanism that permits it to

recover from the sponsor or owner the full amount of the AHP subsidy

provided to the project in the event of the sponsor's or owner's fraud

or willful non-compliance with respect to the AHP requirements, and the

applicant shall have in place a legally binding agreement or other

legally enforceable mechanism that permits it to recover from the loan

fund or loan consortium such amount recovered by the loan fund or loan

consortium from the sponsor or owner.

Section 960.17(e)(3)(ii)(B) of the proposed rule also provides that

the applicant shall have in place, if the Bank agrees and such

agreement is legally enforceable, a four-party agreement that includes

the Bank, the applicant, the loan fund or loan consortium, and the

sponsor or owner, that permits the Bank to recover from the sponsor or

owner the full amount of the AHP subsidy provided to the project in the

event of the sponsor's or owner's fraud or willful non-compliance with

respect to the AHP requirements.

Section 960.17(e)(4) of the proposed rule provides that the Board

in its discretion may grant a waiver of any required remedial actions

for fraud or willful non-compliance with respect to the AHP

requirements, upon written request by the Bank, applicant, loan fund or

loan consortium, sponsor or owner.

M. Required Annual AHP Contributions

Section 960.18 of the proposed rule requires each Bank to fund its

AHP annually in accordance with the formula set forth in section

10(j)(5) of the Act. See 12 U.S.C. 1430(j)(5). Proposed Sec. 960.18 is

consistent with Sec. 960.10 of the Board's existing AHP regulation,

except for minor wording changes and deletion of language regarding

required funding in 1990 through 1993 which is no longer necessary. See

12 CFR 960.10.

Specifically, proposed Sec. 960.18 provides that each Bank shall

fund its AHP in accordance with the following formula:

(a) In 1994, the greater of:

(1) 6 percent of the Bank's net earnings for the previous year; or

(2) That Bank's pro rata share of an aggregate of $75 million to be

contributed in total by the Banks, such proration being made on the

basis of the net earnings of the Banks for the previous year.

(b) In 1995 and each year thereafter, the greater of:

(1) 10 percent of the Bank's net earnings for the previous year; or

(2) That Bank's pro rata share of an aggregate of $100 million to

be contributed in total by the Banks, such proration being made on the

basis of the net earnings of the Banks for the previous year.

The term ``net earnings of a Bank'' is defined in proposed

Sec. 960.1. The definition has been revised from the definition in the

Board's existing AHP regulation in order to more accurately track its

definition in section 10(j)(8) of the Act. See 12 CFR 960.1(j); 12

U.S.C. 1430(j)(8).

N. Temporary Suspension of AHP Contributions

Section 960.19 of the proposed rule sets forth the provisions

governing temporary suspensions by Banks of their required annual AHP

contributions. A number of revisions have been made to this section in

the Board's existing AHP regulation in order to more accurately track

the language in section 10(j)(6) of the Act concerning this section and

to provide greater clarity. See 12 CFR 960.11; 12 U.S.C. 1430(j)(6).

1. Application for Temporary Suspension

Section 960.19(a)(1) of the proposed rule provides that if a Bank

finds that the contributions required pursuant to proposed Sec. 960.18

are contributing to the financial instability of the Bank, the Bank

shall notify the Board promptly, and may apply in writing to the Board

for a temporary suspension of such contributions.

Section 960.19(a)(2) of the proposed rule provides that a Bank's

application for a temporary suspension of contributions shall:

(i) State the period of time for which the Bank seeks a suspension;

(ii) State the grounds for a suspension;

(iii) Include a plan for returning the Bank to a financially stable

position; and

(iv) Be accompanied by the Bank's preceding year's annual financial

report, if available, and the Bank's most recent quarterly and monthly

financial statements and any other financial data the Bank wishes the

Board to consider.

The requirement in paragraph (ii) above is not explicitly required

in the Board's existing AHP regulation. See 12 CFR 960.11(a).

Paragraph (iv) above adds to the Board's existing regulation that

the Bank may include any other financial data it wishes the Board to

consider.

2. Board Review of Application for Temporary Suspension

a. Grounds for approval of application. Section 960.19(b)(1) of the

proposed rule provides that, in reviewing a Bank's application for a

temporary suspension of contributions to determine the Bank's financial

instability, the Board shall consider the following factors:

(i) Whether the Bank's earnings are severely depressed. This

language was added to track the statutory standard in section 10(j)(6)

of the Act. See 12 U.S.C. 1430(j)(6). In addition, the Board shall

consider the extent to which the Bank's quarterly or annual net

earnings have decreased from the preceding quarter or year, and whether

such decline is projected to continue;

(ii) Whether there has been a substantial decline in the Bank's

membership capital. The Board shall consider the extent to which the

Bank's paid-in membership capital has declined in any given quarter or

year, and whether such decline is projected to continue;

(iii) Whether there has been a substantial reduction in the Bank's

advances outstanding. The Board shall consider the extent to which the

Bank's level of advances has declined in any given quarter or year, and

whether such decline is projected to continue; and

(iv) Whether any other financial condition exists with respect to

the Bank which has resulted in, or is likely to result in, the

financial instability of the Bank.

b. Limitations on grounds for approval of application. Section

960.19(b)(2) of the proposed rule provides that the Board shall

disapprove an application for a temporary suspension if it determines

that the Bank's reduction in earnings is a result of:

(i) A change in the terms of advances (other than subsidized

advances) to members which is not justified by market conditions;

(ii) Inordinate operating and administrative expenses; or

(iii) Mismanagement.

The ``reduction in earnings'' language replaces the term

``financial instability'' used in the Board's existing regulation,

because the former is the term used in the Act. See 12 CFR 960.11(c);

12 U.S.C. 1430(j)(6).

In addition, the requirement in Sec. 960.11(c)(5) of the Board's

existing regulation that the Bank shall disapprove an application if

for any other reason the temporary suspension is not warranted, is

deleted in the proposed rule because it is not required by the Act, and

limits the Board's discretion to balance reasons warranting approval of

an application for a temporary suspension. See 12 CFR 960.11(c)(5); 12

U.S.C. 1430(j)(6).

3. Board Decision

Section 960.19(c) of the proposed rule provides that the Board

shall approve or disapprove a Bank's application for a temporary

suspension within 30 calendar days of receipt of such application, and

the Board's decision shall be in writing and shall be accompanied by

specific findings and reasons for its action. A copy of the Board's

decision shall be forwarded to each of the Banks.

4. Board Approval of Application for Temporary Suspension

Section 960.19(d)(1) of the proposed rule provides that if the

Board approves a Bank's application for a temporary suspension, the

Board's written decision shall specify the period of time such

suspension shall remain in effect.

Section 960.19(d)(2) of the proposed rule provides that during the

term of a temporary suspension approved by the Board, the affected Bank

shall provide to the Board such financial reports as the Board shall

require to monitor the financial condition of the Bank, and the Board

shall continue to monitor the Bank's financial condition. The

requirement that the Board shall monitor the Bank's financial condition

is added because it is required by the Act. See 12 U.S.C.

1430(j)(6)(D).

Section 960.19(d)(3) of the proposed rule provides that if, prior

to the conclusion of the temporary suspension period, the Board

determines that the Bank has returned to a position of financial

stability, the Board may, upon written notice to the Bank, terminate

the temporary suspension.

5. Application for Extension of Temporary Suspension Period

Section 960.19(e)(1) of the proposed rule provides that if a Bank's

board of directors determines that the Bank has not returned to, or is

not likely to return to, a position of financial stability at the

conclusion of the temporary suspension period, the Bank may apply in

writing for an extension of the temporary suspension period, stating

the grounds for such extension.

Proposed Sec. 960.19(e)(2) provides that the Board shall approve or

disapprove a Bank's application for an extension of a temporary

suspension period within 30 calendar days of receipt of such

application.

Proposed Sec. 960.19(

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