Membership Approval

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

to amend its regulation on membership in the Federal Home Loan Banks

(Bank). The proposed rule will allow the 12 Banks, rather than the

Finance Board, to approve applications for Bank membership subject to

the standards provided in the rule. The proposed rule will require the

Banks to apply tests and criteria for determining compliance with the

statutory eligibility requirements for Bank membership currently used

by the Finance Board in approving applications. The proposed rule is

part of an effort by the Finance Board and the Banks to transfer as

many governance functions as possible from the Finance Board to the

Banks.

DATES: Comments must be submitted in writing to the Finance Board by

December 26, 1995.

ADDRESSES: Written comments may be mailed to: Elaine L. Baker,

Executive Secretary, Federal Housing Finance Board, 1777 F Street NW.,

Washington, DC 20006. Comments will be available for public inspection

at this address.

FOR FURTHER INFORMATION CONTACT: Amy R. Maxwell, Associate Director,

District Banks Secretariat, Office of Managing Director, (202) 408-

2882, or James H. Gray Jr., Associate General Counsel, Office of

General Counsel, (202) 408-2538, Federal Housing Finance Board, 1777 F

Street NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

In its role as primary regulator of the savings association

industry and as overseer of the Banks, the Finance Board's predecessor

agency, the former Federal Home Loan Bank Board (FHLBB), reviewed and

approved all applications for Bank membership from federal and state

chartered savings associations, institutions for which Bank membership

was required. The FHLBB delegated the authority to approve membership

applications from insurance companies and state-chartered savings banks

insured by the Federal Deposit Insurance Corporation (FDIC), for which

Bank membership was voluntary, to the Bank presidents acting as

Principal Supervisory Agents of the FHLBB. See 12 U.S.C. 1437 (1988),

repealed by Financial Institutions Reform, Recovery and Enforcement Act

of 1989, Pub. L. No. 101-73, 103 Stat. 183 (Aug. 9, 1989) (FIRREA).

FIRREA amended the membership provisions of the Federal Home Loan

Bank Act, 12 U.S.C. 1421-1449 (Bank Act). Section 704 of FIRREA amended

section 4 of the Bank Act to make commercial banks and credit unions

eligible for Bank membership for the first time. Section 704 of FIRREA

also revised the membership eligibility criteria. Section 702 of FIRREA

added sections 2A and 2B to the Bank Act, establishing the Finance

Board and enumerating its powers and duties. Section 2B of the Bank Act

limited the Finance Board's authority to delegate responsibilities to

the Banks. From the enactment of FIRREA in 1989 until July, 1993, all

Bank membership applications were reviewed and approved by the Finance

Board. In July 1993, the Finance Board delegated to its Managing

Director the authority to approve all applications for Bank membership

from institutions that met all of the statutory criteria and received a

composite rating of ``1,'' ``2'' or ``3'' under the Uniform Financial

Institutions Rating System (the regulatory examination rating system).

See Finance Board Res. No. 90-143 (Dec. 18, 1990); Chairman's Order No.

93-05 (July 19, 1993).

In August 1993, the Finance Board amended its membership regulation

to incorporate the FIRREA changes to the Bank Act. The revised

membership regulation established the Finance Board's general policies

pertaining to Bank membership, including specifying the appropriate

Bank district for applicants and, member stock requirements, outlining

procedures for consolidation of members with other members and with

nonmembers, and for withdrawal and removal from membership. Other than

defining certain terms, the membership regulation did not establish

standards for compliance with the statutory membership eligibility

criteria. See 58 FR 43542 (1993), codified at 12 CFR Part 933.

In November 1993, the Finance Board adopted policy guidelines to

assist staff in processing applications for Bank membership. See

Membership Application Processing Guidelines, Finance Board Res. No.

93-88 (Nov. 17, 1993) (Guidelines). The purpose of the Guidelines was

to clarify the more subjective membership eligibility criteria in the

Bank Act, such as ``character of management and * * * home-financing

policy * * * consistent with sound and economical home financing * *

*.'' 12 U.S.C. 1424(a)(2)(C). In the Guidelines, the Finance Board also

delegated to the Banks authority to approve a delineated subset of

membership applications; that is, applications from institutions

meeting all of the criteria in the Bank Act, the membership regulation

and the Guidelines.

The Guidelines set forth specific, objective primarily financial

criteria to be met in order for an applicant to be deemed in compliance

with the statutory criteria. However, the Guidelines establish neither

a minimum level of financial performance nor standards for evaluating

applicants that fail to meet the requirements in the Guidelines. So,

for instance, an application from an institution with a minimum

composite regulatory examination rating that does not satisfy the

criteria for delegated approval by the Banks must be evaluated by

Finance Board staff and approved by the Managing Director pursuant to

delegated authority. The Board of Directors of the Finance Board has

not itself considered or acted upon any membership applications since

authority to approve membership applications was delegated to the

Managing Director in July 1993. Since December 1993, the Banks have

approved 778 membership applications and the Finance Board's Managing

Director has approved 834 membership applications, all pursuant to

delegated authority.

[[Page 54959]]

The Finance Board and the Banks have been considering ways to

transfer a variety of governance responsibilities from the Finance

Board to the Banks since the completion of studies required by the

Housing and Community Development Act of 1992, Pub. L. No. 102-550, 106

Stat. 3672 (Oct. 28, 1992), including the Finance Board's own study

completed in April 1993. See Report on the Structure and Role of the

Bank System 153 (Apr. 28, 1993). Finance Board staff and Bank staff

have consistently identified membership application approval as one of

the governance responsibilities that should be devolved from the

Finance Board to the Banks because the Banks should be allowed broad

discretion to manage their affairs as long as the Banks comply with the

Bank Act and Finance Board regulations. This proposed rule is designed

to transfer authority to approve all Bank membership applications from

the Finance Board to the Banks. The proposed rule will codify many of

the tests and criteria for determining compliance with the statutory

eligibility requirements that are currently in the Finance Board's

Guidelines for approving applications.

II. Analysis of the Proposed Rule

A. Membership Application Process

1. Requirements

Section 933.2 of the proposed rule sets forth the procedures for

submission and review of membership applications. Under Sec. 933.2(a),

an applicant is required to submit an application which satisfies the

requirements of part 933 and to certify in writing that it has reviewed

the requirements of part 933, provided the most recent, accurate and

complete information available, and will supplement the application if

additional relevant information becomes available prior to the Bank's

decision on whether to approve the application and where applicable,

prior to the Finance Board's resolution of any appeal.

Under Sec. 933.2(b), a Bank is required to prepare a written digest

for each applicant that describes the reasons and findings that support

the Bank's determination whether the applicant meets the requirements

of this part. This requirement is consistent with the requirements in

the Guidelines.

Under Sec. 933.2(c), the Banks are required to maintain a

membership file for each applicant for at least three years that

includes the digest, all documents the Bank is required to obtain and

review under this part, any additional documents the Bank obtains

during the application process, and the Bank's decision resolution.

Under Sec. 933.2(d), the Banks are required to use regulatory

financial reports and other sources independent of the applicant to

evaluate and analyze all conclusions offered by the applicant regarding

its membership eligibility. ``Regulatory financial report'' is defined

in Sec. 933.1(z) of the proposed rule to include periodic financial

reports filed by the applicant with its primary regulator, including

quarterly call reports for commercial banks, thrift financial reports

for thrifts, quarterly or semi-annual call reports for credit unions,

the National Association of Insurance Commissioners' (NAIC) annual

statements or quarterly reports for insurance companies, and other

similar reports. ``Primary regulator'' is defined in Sec. 933.1(x) of

the proposed rule as the chartering authority for federally chartered

applicants, the insuring authority for federally-insured applicants

that are not federally chartered, or the appropriate state agency for

all other applicants. The Finance Board included Sec. 933.2(d) to

ensure that the Banks evaluate membership applications without relying

unduly on representations made by the applicants.

2. Decision on Application

Section 933.3 of the proposed rule establishes the Banks' authority

and method for making decisions on applications. Under Sec. 933.3(a),

the Finance Board authorizes the Banks to approve membership

applications, subject to the appeal procedure in proposed Sec. 933.5.

The proposed rule requires that the authority to approve applications

be exercised only by the Bank's board of directors, a committee of the

Bank's board of directors, the Bank president, or a senior officer who

reports directly to the Bank president other than an officer who has

responsibility for business development. Section 933.3(b) requires the

Bank to prepare for each applicant a decision resolution that includes

the Bank's decision on whether to approve the applicant and the reasons

therefor, and states that the information in the digest is accurate and

based on a diligent and comprehensive review of all available

information. If the application is approved, the decision resolution

also must state that the applicant is authorized under the laws of the

United States and the appropriate state to become a member of, purchase

stock in, do business with and maintain deposits in the Bank to the

which the applicant has applied, and that the applicant meets all of

the eligibility criteria set forth in the Bank Act and part 933. The

Guidelines currently require the Banks to make these certifications to

the Finance Board when recommending an application for approval.

Section 933.3(c) requires the Bank to act on an application within

60 calendar days of the date the Bank deems the application to be

complete. Within three business days of the Bank's decision on an

application, the Bank must provide the applicant and the Finance

Board's Executive Secretary with a copy of the Bank's decision

resolution. Section 933.3(c) is intended to ensure expeditious action

on membership applications. The current Guidelines do not establish

applications-processing time frames.

3. Automatic Membership

Section 933.4 of the proposed rule provides for automatic Bank

membership in appropriate circumstances. Section 933.4(a) continues the

automatic membership provision in current Sec. 933.2(d) for applicants

required by law to become a member of a Bank. Section 5(f) of the Home

Owners' Loan Act (HOLA) requires all federally chartered savings

associations and savings banks to be members of a Bank and to qualify

for Bank membership in the manner provided in the Bank Act. 12 U.S.C.

1464(f). The factors considered by the Office of Thrift Supervision

when reviewing an application for a federal charter include the factors

considered in determining eligibility for Bank membership. See 12

U.S.C. 1464(e). Therefore, it would be duplicative and unnecessarily

burdensome to require these institutions to file an additional

application for Bank membership. Section 933.4(b) continues the

provision in current Sec. 933.2(e) for automatic membership for insured

depository institution members that convert from one charter type to

another, provided that the converting institution continues to be an

insured depository institution and the assets of the institution

immediately before and immediately after the conversion are identical.

All relationships existing between the member and the Bank at the time

of such conversion may continue. Section 933.4(c) adds a new automatic

membership provision for members that transfer membership from one Bank

to another pursuant to Sec. 933.18(d) of this part.

4. Appeals

Section 933.5 of the proposed rule establishes a process for

appealing Bank membership decisions to the Finance Board. The appeal

procedure is intended to ensure that membership standards are applied

consistently by

[[Page 54960]]

the Banks, and that similarly situated applicants are treated

similarly. Under Sec. 933.5(a), applicants denied membership by a Bank

may, within 90 calendar days of the Bank's decision, appeal the denial

to the Finance Board by writing the Finance Board's Executive

Secretary, with a copy to the Bank. The applicant's appeal must include

a copy of the Bank's decision resolution, and a detailed statement of

the basis for the appeal, including sufficient supporting facts,

information, analysis and explanation.

Under Sec. 933.5(b), within 60 calendar days of the date that a

Bank approves an application for membership, another Bank (appellant

Bank) may appeal to the Finance Board the determination of the

appropriate district for membership, pursuant to Sec. 933.18 of this

part. The appeal must be in writing and addressed to the Finance

Board's Executive Secretary with a copy to the Bank that granted

membership, and must include a statement of the basis for the appeal

with sufficient facts, information, analysis and explanation to support

the appellant Bank's contentions. As the banking industry consolidates,

the Finance Board anticipates more questions from the Banks regarding

the determination of an applicant's principal place of business. The

appeals procedure will permit recourse to the Finance Board when Banks

cannot agree on an applicant's principal place of business. The Finance

Board invites comment on alternative means of addressing this concern.

-

Section 933.5(c) explains how the Finance Board will obtain the

information necessary to decide appeals under Sec. 933.5(a) and (b).

The Bank whose action has been appealed (appellee Bank) must provide to

the Finance Board a complete copy of the applicant's membership file

within five business days of receiving an appeal. Until the Finance

Board resolves the appeal, the appellee Bank is required to provide to

the Finance Board any new materials it receives. The Finance Board also

may request additional information from the appellant (Bank or

applicant), the appellee Bank, or any other party the Finance Board

deems appropriate.

Section 933.5(d) provides that the Finance Board must resolve

appeals based on the requirements of the Bank Act and part 933, within

90 calendar days of the date the appeal is filed with the Finance

Board, after considering the record for appeal described in

Sec. 933.5(c). When it decides an appeal, the Finance Board must follow

the presumptions in part 933, unless the appellant or appellee Bank

presents compelling evidence to rebut a presumption. The current

Guidelines do not include any provision for appeals.

B. Membership Eligibility Requirements

1. Setting Membership Standards

Like the current Guidelines, the proposed rule establishes

objective standards for approving applications for Bank membership. The

standard for each of the two objective statutory membership eligibility

criteria and each of the four subjective statutory membership

eligibility criteria are discussed below. For the objective statutory

eligibility criteria, failure to comply with the standards established

by the proposed rule will render an applicant ineligible for

membership.

For the subjective statutory eligibility criteria, including the

requirement that an applicant's financial condition be such that

advances may be safely made, id. Sec. 1424(a)(2)(B), and that the

character of an applicant's management and its home financing policy be

consistent with sound and economical home financing, id.

Sec. 1424(a)(2)(C), the proposed rule, like the Guidelines, establishes

objective, yet flexible, standards.

The proposed rule establishes the presumption that if an applicant

complies with the regulatory standards, it will be deemed to satisfy

the statutory criteria; conversely, if an applicant does not meet the

regulatory standards, it will be presumed, subject to rebuttal, not to

satisfy the statutory eligibility criteria. The proposed rule, like the

Guidelines, does allow an applicant to rebut any negative presumption,

by presenting additional information.

The Finance Board considered establishing more rigid ``bright-

line'' standards, but believed that the results--i.e., that an

applicant not meeting every standard would be ineligible for

membership, regardless of any other evidence the applicant could have

presented to demonstrate its compliance with the statutory eligibility

criteria--would be too harsh. ``Bright-line'' tests eliminate all

discretion in the approval process. The Finance Board specifically

requests comment on whether the membership eligibility standards should

be adopted as ``bright-line'' tests or as presumptions.

2. General Eligibility Requirements

Section 4(a)(1) of the Bank Act defines the types of financial

institutions eligible to become Bank members as any building and loan

association, savings and loan association, cooperative bank, homestead

association, insurance company, savings bank, or any insured depository

institution. Id. Sec. 1424(a)(1). The definition of insured depository

institution in the Bank Act includes commercial banks and credit

unions. Id. Sec. 1422(12).

The eligibility criteria set forth in section 4(a)(1) of the Bank

Act apply to all applicants for Bank membership. Under section 4(a)(1)

of the Bank Act, an institution is eligible for Bank membership if the

institution:

(A) Is duly organized under the laws of any State or of the

United States;

(B) Is subject to inspection and regulation under the banking

laws, or under similar laws, of the State or of the United States;

and

(C) Makes such home mortgage loans as, in the judgment of the

[Finance] Board, are long-term loans * * *.

Id. Sec. 1424(a)(1).

Section 4(a)(2) of the Bank Act establishes the following

membership eligibility criteria for ``insured depository institutions''

that were not Bank members on January 1, 1989 (section 4(a)(2)

criteria):

(A) The insured depository institution has at least 10 percent

of its total assets in residential mortgage loans;

(B) The insured depository institution's financial condition is

such that advances may be safely made to such institution; and

(C) The character of its management and its home-financing

policy are consistent with sound and economical home financing.

Id. Sec. 1424(a)(2). Although the section 4(a)(2) criteria apply only

to ``insured depository institutions,'' the Finance Board has

determined to extend that requirement to insurance company applicants.

-

Sections 933.10 through 933.13 of the proposed rule apply the

section 4(a)(2) criteria to insured depository institution applicants.

Section 933.16 of the proposed rule applies these criteria to insurance

company and all other applicants. Under the Finance Board's current

membership regulation, the financial condition criterion, section

4(a)(2)(B), and the character of management and home financing policy

requirement, section 4(a)(2)(C), id. Sec. 1424(a)(2)(B), (C), apply to

every applicant. See 12 CFR 933.4(a)(4), (5). In addition, prior to the

enactment of FIRREA in 1989, the financial condition, character of

management and home financing policy criteria were applicable to

insurance companies. See 47 Stat. 726 (July 22, 1932). The proposed

rule would maintain the current law requirements, and would extend the

section 4(a)(2)(A) 10 percent requirement to all applicants. The

reasons for this approach are explained more fully below in the

discussion of the 10 percent requirement.

[[Page 54961]]

3. Duly Organized Requirement -

Section 4(a)(1)(A) of the Bank Act provides that an institution is

eligible for Bank membership if it is duly organized under the laws of

any State or of the United States. Under Sec. 933.7 of the proposed

rule, an applicant is deemed to be duly organized as required by

section 4(a)(1)(A) of the Bank Act and Sec. 933.6(a)(1) of this part,

if the applicant establishes that it is chartered by a state or federal

agency as a building and loan association, savings association,

cooperative bank, homestead association, insurance company, savings

bank or insured depository institution. If an applicant does not

satisfy this requirement, the applicant is ineligible for membership.

This standard is consistent with the current Guidelines.

4. Subject to Inspection and Regulation Requirement

Section 4(a)(1)(B) of the Bank Act provides that an institution is

eligible for Bank membership if it is subject to inspection and

regulation under the banking laws, or under similar laws, of any State

or of the United States. Under Sec. 933.8 of the proposed rule, an

applicant is deemed to meet the inspection and regulation requirement

if the applicant can establish that it is subject to inspection and

regulation by the Federal Deposit Insurance Corporation, the Federal

Reserve Board, the National Credit Union Administration, the Office of

the Comptroller of the Currency, the Office of Thrift Supervision, a

state insurance commissioner, or other state regulatory agency

authorized to regulate depository institutions or insurance companies.

If an applicant does not satisfy this requirement, the applicant is

ineligible for membership. This standard is consistent with the current

Guidelines.

5. Makes Long-Term Home Mortgage Loans Requirement

Section 4(a)(1)(C) of the Bank Act provides that an institution is

eligible for Bank membership if it makes such ``home mortgage loans''

as, in the judgment of the Finance Board, are long-term home mortgage

loans. Under Sec. 933.9(a) of the proposed rule, an applicant is deemed

to meet this requirement if it originates or purchases ``long-term''

``home mortgage loans,'' as those terms are defined in the regulation.

If an applicant does not satisfy this requirement, the applicant is

ineligible for membership, unless the Finance Board, in its sole

discretion, determines on the basis of additional information supplied

by the applicant or otherwise, that the applicant does satisfy the

requirement. This standard is consistent with the current Guidelines.

The proposed rule makes one change to the current definition of

``home mortgage loan'' at 12 CFR 933.1(j). A ``home mortgage loan'' is

defined in the Bank Act as a loan made by a member upon the security of

a ``home mortgage.'' 12 U.S.C. 1422(5). The Bank Act defines a ``home

mortgage'' as a mortgage on real estate upon which is located one or

more homes or other dwelling units, ``all of which may be defined by

the Board,'' including ``first mortgages'' and such classes of ``first

liens'' as are commonly given to secure advances on real estate. Id.

Sec. 1422(6). Based on the Bank Act definition, a ``home mortgage

loan'' essentially is a loan secured by a first mortgage on real

property with one or more structures designed primarily for residential

use.

The definition of ``home mortgage loan,'' in Sec. 933.1(m) of the

proposed rule, includes:

a. A domestic loan, whether or not fully amortizing, or an interest

in such a loan, which is secured by a mortgage, deed of trust or other

security agreement that creates a first lien on one of the following

interest in property:

(1) One-to-four family property or multifamily property, in fee

simple;

(2) A leasehold on one-to-four family property or multifamily

property under a lease of not less than 99 years which is renewable or

under a lease having a period of not less than 50 years to run from the

date the mortgage was executed; or

(3) Combination business or farm property where at least 50 percent

of the total appraised value of the combined property is attributable

to the residential portion of the property; or

b. A mortgage pass-through security that represents an undivided

ownership interest in:

(1) Long-term loans, provided that, at the time of issuance of the

security, all of the loans meet the requirements of this section; or

(2) A security that represents an undivided ownership interest in

long-term loans, provided that, at the time of issuance of the

security, all of the loans meet the requirements of this definition.

The Finance Board has deleted the provision allowing it to include

additional items within this definition. Instead, Sec. 933.9(b) of the

proposed rule allows the Finance Board the discretion to determine on

appeal in appropriate cases that an applicant satisfies the long-term

home mortgage loans requirement in section 4(a)(1)(C) of the Bank Act,

even though the applicant does not make long-term home mortgage loans

as the terms ``long-term'' and ``home mortgage loan'' are defined in

Sec. 933.1(m) and (q) of the proposed rule.

Section 933.1(i) of the proposed rule adds a definition for

``domestic loan.'' A domestic loan is defined as a loan on property

located in a state or the United States.

Section 933.1(q) of the proposed rule revises the definition of

``long-term'' at current 12 CFR 933.1(l) to delete the provision

allowing the Board to change this definition without engaging in

rulemaking.

Section 4(a)(1)(C) of the Bank Act provides that an institution is

eligible for Bank membership if it ``makes'' such home mortgage loans

as, in the judgment of the Finance Board, are long-term loans. 12

U.S.C. 1424(a)(1)(C). Thus, it is necessary to determine what

constitutes ``making'' a home mortgage loan. Both the Finance Board and

the FHLBB have interpreted ``makes'' to include originating and

purchasing qualifying loans and purchasing mortgage pass-through

securities backed by qualifying loans. Section 933.9 of the proposed

rule does not change the substance of the current Finance Board

regulation, 12 CFR 933.4(a)(3), which includes all such transactions

within the scope of the ``makes'' requirement.

6. Ten Percent Residential Mortgage Loans Requirement

Section 4(a)(2)(A) of the Bank Act provides that an insured

depository institution is eligible for Bank membership if it has at

least 10 percent of its total assets in residential mortgage loans.

Under Sec. 933.10(a) an applicant is deemed to comply with the 10

percent requirement in section 4(a)(2)(A) of the Bank Act if the

applicant has at least 10 percent of its total assets in ``residential

mortgage loans'' as defined in Sec. 933.1(aa) of the proposed rule.

Since mortgage debt securities count toward satisfaction of the 10

percent requirement, the proposed rule, like the current regulation,

excludes the assets used to secure mortgage debt securities in

determining whether the applicant has 10 percent of its assets in

residential mortgage loans. Under Sec. 933.10(b), if an applicant does

not satisfy the requirement of this section, the applicant is

ineligible for membership, unless the Finance Board, in its sole

discretion, determines on the basis of additional information supplied

by the applicant or otherwise that the applicant satisfies the

requirements of section 4(a)(2)(A) of the Bank Act. Once approved, an

institution is not required to maintain a 10 percent residential

mortgage loan ratio to retain Bank membership.

[[Page 54962]]

The Finance Board is considering whether to extend the 10 percent

test or another specific asset test to insurance company applicants

similar to the 10 percent test that applies to insured depository

institution applicants. This would represent a change from the current

Finance Board regulation, which requires applicants that are not

insured depository institutions to have ``mortgage-related assets that

reflect a commitment to housing finance, as determined by the [Finance]

Board.'' 12 CFR 933.4(c). Noninsured depository institution applicants

are not currently required to meet the 10 percent requirement, nor does

there exist in the current regulation any objective standard to meet

this requirement. 12 CFR 933.4 (b) and (c). The Finance Board realizes

that, even though an insurance company may be one of the largest

mortgage loan investors in its state, it might not be able to meet the

10 percent test because the dollar amount of residential mortgage loan

assets it holds, when compared to the total assets of the company,

could constitute less than 10 percent of the company's total assets.

However, the Finance Board also sees value in applying consistent

membership eligibility standards to all applicants to ensure that all

Bank members demonstrate a quantifiable minimum commitment to

residential housing finance before they are admitted to membership.

The Finance Board also is considering continuing the status quo by

applying the 10 percent requirement only to depository institution

applicants. The proposed rule continues this approach and does not

specifically require that insurance companies have 10 percent of their

assets in residential mortgage loans. The Finance Board requests

comment on whether the 10 percent requirement should apply to insurance

company applicants and whether a different test that would achieve the

same objectives as the 10 percent test should be applied to insurance

company applicants, and if so, what that test should be.

a. Definition of ``residential mortgage loans.''

To implement the Bank Act's 10 percent requirement, Sec. 933.10 of

the proposed rule provides that an applicant is eligible for membership

if it has at least 10 percent of its total assets in ``residential

mortgage loans.'' The term ``residential mortgage loans'' is not

defined in the Bank Act. The definition of ``residential mortgage

loans'' in Sec. 933.1(aa) of the proposed rule includes the current

definition, see 12 CFR 933.1(r), and additional loans the Finance Board

has decided to add to the definition or is considering adding to the

definition.

The definition of ``residential mortgage loans'' in Sec. 933.1(aa)

of the proposed rule, includes any one of the following types of

domestic loans, whether or not fully amortizing:

(1) Home mortgage loans;

(2) Funded residential construction loans;

(3) Loans secured by manufactured housing whether or not defined by

state law as secured by an interest in real property;

(4) Loans secured by junior liens on one-to-four family property or

multifamily property; -

(5) Qualified private activity exempt facility bonds where 95

percent or more of the net proceeds are used for the construction of

qualified residential rental projects as defined in 26 U.S.C.

142(a)(7).

(6) Mortgage pass-through securities representing an undivided

ownership interest in:

(i) Loans that meet the requirements of this definition at the time

of issuance of the security;

(ii) Securities representing an undivided ownership interest in

loans, provided that, at the time of issuance of the security, all of

the loans meet the requirements of this definition; or

(iii) Mortgage debt securities as defined herein;

(7) Mortgage debt securities secured by:

(i) Loans, provided that, at the time of issuance of the security,

all of the loans meet the requirements of this definition;

(ii) Securities that meet the requirements of this definition; or

(iii) Securities secured by assets, provided that, at the time of

issuance of the security, all of the assets meet the requirements of

this definition; or

(8) Home mortgage loans secured by leasehold interests, as defined

in Sec. 933.1(m)(1)(ii) of the proposed rule, except that the period of

the lease term may be for any duration.

The Finance Board proposes to add qualified private activity exempt

facility bonds where 95 percent or more of the net proceeds are used

for the construction of qualified residential rental property as

defined in 26 U.S.C. 142(a)(7). The Internal Revenue Code (IRC)

excludes the income from these bonds from a taxpayer's gross income,

when used to construct qualified residential rental property. See 26

U.S.C. 103, 141(e)(1)(A), 142(a)(7). To be ``qualified'' under the IRC,

a multifamily residential rental project must meet one of two tests to

ensure that it serves moderate- or low-income tenants:

(1) 20-50 test. Twenty percent or more of the units occupied by

individuals whose income is 50 percent or less of the area median

income; or

(2) 40-60 test. Forty percent or more of the units are occupied by

individuals whose income is 60 percent or less of the area median

income. 26 U.S.C. 142(d). The Finance Board has determined that such

bonds are consistent with other instruments that are treated as

``residential mortgage loans.'' Further, treating such bonds as

``residential mortgage loans'' is consistent with the purpose of the 10

percent requirement, to ensure that new members hold at least 10

percent of their assets in instruments that facilitate home mortgage

lending.

The Finance Board also is considering including within the

definition of ``residential mortgage loans'' shares of open-end

management companies, also known as ``mutual funds,'' where the assets

in the open-end management company's portfolio are comprised solely of

instruments that are ``residential mortgage loans.''

The Finance Board has deleted the provision allowing it to include

additional items within the definition of residential mortgage loans.

Instead, Sec. 933.10(b) of the proposed rule allows the Finance Board

the discretion to determine on appeal in appropriate cases that the

applicant has 10 percent of its assets in ``residential mortgage

loans'' as required by section 4(a)(2)(A) of the Bank Act, even though

the applicant does not have 10 percent of its assets in ``residential

mortgage loans'' as that term is defined in Sec. 933.1(aa) of the

proposed rule.

The Finance Board specifically requests comment on how it should

define ``residential mortgage loans'' in the final rule.

b. Definition of ``total assets.''

Section 4(a)(2)(a) of the Bank Act and Sec. 933.10 of the proposed

rule provide that an applicant is eligible for membership if it has at

least 10 percent of its ``total assets'' in residential mortgage loans.

Section 933.1(cc) of the proposed rule adds a definition of ``total

assets'' that includes all assets of a financial institution's

consolidated subsidiaries located in a state or the United States, and

all assets otherwise required to be reported on a regulatory financial

report. Applicants will use this definition of total assets to

determine whether they comply with the 10 percent requirement.

7. Financial Condition Requirement

Section 4(a)(2)(B) of the Bank Act requires that, in order to be

eligible for Bank membership, an insured depository institution's

financial condition must be such that advances

[[Page 54963]]

may be safely made to it. 12 U.S.C. 1424(a)(2)(B). Section 933.11 of

the proposed rule implements this requirement and applies it to all

applicants for membership, including applicants (such as insurance

companies) that are not insured depository institutions. However, as

discussed below, Sec. 933.16 of the proposed rule establishes financial

condition standards for insurance companies that recognize the

specialized nature of the insurance business. Section 933.11 of the

proposed rule is modeled on the current Guidelines.

a. Review requirement.

Section 933.11(a) of the proposed rule, like the current

Guidelines, sets forth the documents pertaining to financial condition

that must be reviewed for each applicant. These documents include:

(1) The regulatory financial reports for at least the last six

calendar quarters and three year-ends;

(2) The most recent annual audited financial statement, or if

unavailable, any other such independent external annual financial

report as the applicant's primary regulator may require, or if

unavailable, such financial statements as the applicant may otherwise

have available;

(3) The most recent available regulatory examination report, a

summary of the applicant's strengths and weaknesses as cited in the

examination report, and a summary of actions taken by the applicant to

respond to examination weaknesses;

(4) A description of any outstanding enforcement actions, responses

by the applicant and reports as required by the enforcement action; and

(5) Any other relevant information that comes to the Bank's

attention or reasonably should come to the Bank's attention in

reviewing the applicant's financial condition.

The final review requirement, that a Bank consider other relevant

information that comes to its attention or reasonably should come to

its attention in reviewing the applicant's financial condition, is

intended to incorporate a due diligence concept into the membership

approval process. For example, if the Bank were to receive information

through the media or other sources that is inconsistent with the

information supplied by the applicant, the Bank should evaluate the

reliability of the alternative source. The Finance Board does not

intend to hold the Banks accountable for finding information that might

have been discovered only through extraordinary means, but the Finance

Board does expect the Banks to make reasonable efforts to find

information relevant to an applicant's financial condition.

b. Standards of adequate ``financial condition.''

The Bank Act does not define the term ``financial condition'' for

purposes of membership, except that financial condition must be ``such

that advances may be safely made.'' 12 U.S.C. 1424(a)(2)(B). The

Finance Board believes that specific, uniform and quantifiable

standards for evaluating financial condition are necessary to ensure

that Bank funding may be extended in a safe and sound manner. For

applicants other than insurance companies, Sec. 933.11(b) enumerates

those factors to be reviewed. Because of the special nature of

insurance companies, the Finance Board is proposing a separate section,

Sec. 933.16 discussed below, to establish the minimum standards for

evaluating the financial condition of insurance company applicants.

Section 933.11(b) of the proposed rule establishes a standard for

adequate financial condition similar to the interpretation of the term

``financial condition'' in the current Guidelines and Finance Board

practice. An applicant that complies with the standard is presumed to

be in adequate financial condition for purposes of section 4 of the

Bank Act. This presumption is rebuttable if the Bank obtains

information to the contrary. Under Sec. 933.11(b), an applicant is

presumed to be in adequate financial condition if:

(1) The applicant received a composite regulatory examination

rating by its primary regulator within two years from the date of the

application. The Finance Board requires that the applicant be examined

within two years of the date of the application to ensure the accuracy

of critical information used for eligibility determinations. Federal

and state examiners typically examine regulated entities at least every

two years.

(2) The applicant meets all of its minimum statutory and regulatory

capital requirements as reported in its most recent quarter-end

regulatory financial report filed with its primary regulator. This

provision, modeled on the current Guidelines, supports the other

banking regulators' efforts to ensure the safety and soundness of the

industry by recognizing the importance of capital adequacy and

compliance with statutory and regulatory minimum capital standards.

(3) The applicant's most recent composite regulatory examination

rating was ``1;'' or was ``2'' or ``3'' and the applicant also

satisfies certain performance trend criteria. -

The term ``regulatory examination rating'' is defined in

Sec. 933.1(y) of the proposed rule, as a rating of capital, assets,

management, earnings and liquidity following the guidelines of the

Uniform Financial Institutions Rating System contained in a written

report of examination conducted by the applicant's appropriate

regulator, including a CAMEL rating, a MACRO rating or other similar

ratings. The composite regulatory examination rating for an insured

depository institution is determined according to the Uniform Financial

Institutions Rating System (CAMEL, MACRO or equivalent scale). This

rating system is based on an evaluation of the five critical dimensions

of an institution's operations that reflect, in a comprehensive

fashion, an institution's financial condition, compliance with banking

statutes and regulations, and overall operating soundness. A composite

regulatory examination rating of ``1'' is the highest possible rating

on a 5 point scale. A ``5'' rating is assigned to institutions that

require immediate corrective action and constant supervisory attention.

The probability of failure for ``5'' rated institutions is high.

The importance of the composite regulatory examination rating in

the membership approval process may be illustrated in the breakdown of

the ratings assigned to applicants approved by the Finance Board since

FIRREA--all but one institution approved for membership have been rated

``1,'' ``2'' or ``3''; the single ``4'' rated institution approved for

membership has since been upgraded. No ``5'' rated institutions have

been approved for membership.

Using the Uniform Financial Institutions Rating System to evaluate

membership applicants reduces the documentation requirements for

applicants, limits the potential for the Banks to be perceived by

applicants as another layer in the financial regulatory structure, adds

considerable efficiency to the application process and provides an

independent assessment by those responsible for the soundness of the

entity. The Uniform Financial Institutions Rating System is not used to

evaluate insurance company applicants.

Under the proposed rule, an applicant with a recent composite

regulatory examination rating of ``1'' meets the minimum performance

standard in Sec. 933.11(b)(3). A composite regulatory examination

rating of ``2'' or ``3'' may be an acceptable performance standard

under Sec. 933.11(b)(3) if the applicant also meets additional

performance trend

[[Page 54964]]

thresholds. These thresholds are designed to identify trends in the

institution's key performance areas by reviewing six calendar quarters

of financial data. The performance trend measures include: (1) positive

earnings in 4 of the 6 most recent calendar quarters, (2) nonperforming

assets not exceeding 10 percent of the applicant's total assets in the

most recent calendar quarter, and (3) a ratio of loan loss reserves to

nonperforming assets of 60 percent or greater during 4 of the 6 most

recent calendar quarters. These performance trends are in the current

Guidelines. The Finance Board also is considering setting the

performance trend for nonperforming assets at eight percent of the

applicant's total assets in the most recent calendar quarter and

specifically requests comment on this alternative.

The term ``nonperforming assets'' is defined in Sec. 933.1(u) of

the proposed rule as the sum of loans and leases reported on a

regulatory financial report that have been past due for 90 days or

longer; loans and leases on a nonaccrual basis; restructured loans and

leases (not already reported as nonperforming); and foreclosed real

estate, except that nonperforming assets shall be as defined by the

National Credit Union Administration (NCUA) for credit union

applicants. The Finance Board is considering substituting a specific

list of assets that the NCUA would regard as nonperforming assets for a

credit union. The term ``loan loss reserves'' is defined in

Sec. 933.1(p) of the proposed rule as a specified balance sheet account

held to fund potential losses on loans or leases. The Finance Board

requests comment on all aspects of the standard for adequate financial

condition.

The Finance Board has designed the proposed rule to ensure that no

single measure of financial condition is determinative. An applicant

with a regulatory examination rating of ``1'' may not have an adequate

financial condition if the Bank uncovers compelling evidence to the

contrary, as described below in the discussion of Sec. 933.17 of the

proposed rule. Similarly, an applicant with a low regulatory

examination rating could be admitted to membership if the applicant

demonstrates other compelling evidence of an adequate financial

condition. The Finance Board encourages all financial institutions

interested in home mortgage lending to apply for Bank membership.

The performance trend thresholds in Sec. 933.11(b)(3) measure

financial performance based on quarterly financial data. However,

Sec. 933.11(b)(3)(iv) provides that applicants that are not required to

report financial data on a quarterly basis to their primary regulator

may report the information required in Sec. 933.11(b)(3)(i)-(iii) on a

semiannual basis.

c. Eligible collateral not considered.

The Bank Act requires that an institution have a ``financial

condition such that advances may be safely made.'' 12 U.S.C.

1424(a)(2)(B). The Finance Board considered interpreting the Bank Act

to presume that any applicant with ``eligible collateral'' would meet

the financial condition requirement of section 4(a)(2)(B) of the Bank

Act. However, since the Finance Board seeks to avoid having the Banks

become lenders of last resort to failing or weak institutions, the

Finance Board has determined that a minimum level of financial analysis

should be required for all applicants as a prerequisite to membership.

Section 933.11(c) of the proposed rule states that the availability of

sufficient eligible collateral to secure advances to the applicant is

presumed and will not be considered in determining whether an applicant

meets the financial condition criteria required by section 933.6(a)(5).

The Finance Board seeks public comment on whether the financial

condition standards incorporated in the proposed rule or other

performance trends or measures of financial condition should be

incorporated in the final regulation.

8. Character of Management Requirement

Section 4(a)(2)(C) of the Bank Act requires that the ``character''

of an applicant's management be ``consistent with sound and economical

home financing.'' 12 U.S.C. 1424(a)(2)(C).

a. Review requirement. Section 933.12 of the proposed rule sets out

the review requirement and the standards to be used to determine

whether an applicant may be presumed to have the character of

management required by the Bank Act and Sec. 933.6(a)(6) of this part.

Section 933.12(a) requires the Bank to review the following to evaluate

an applicant's character of management:

(1) The names of directors and senior officers;

(2) The most recent regulatory financial report;

(3) The most recent audited financial statement, or if unavailable,

other such independent external financial report that the applicant's

primary regulator may require, or if unavailable, such financial

statements that the applicant may otherwise have available;

(4) Enforcement actions;

(5) Certain pending criminal, civil or administrative matters;

(6) Information concerning potential monetary liabilities, material

pending law suits or unsatisfied judgments; and

(7) Any other document that comes to the Bank's attention or

reasonably should come to the Bank's attention in reviewing the

applicant's character of management.

The term ``enforcement action'' is defined in Sec. 933.1(k) of the

proposed rule as any written notice, directive, order or agreement

initiated by an applicant or its appropriate regulator to address any

operational, financial, managerial or other deficiencies of the

applicant identified by the appropriate regulator. ``Appropriate

regulator'' is defined in Sec. 933.1(e) of the proposed rule and

includes the applicant's primary regulator and any officer, agency,

supervisor or other entity that has regulatory authority over, or is

empowered to institute enforcement action against, an applicant.

As explained above in the discussion of the financial condition

review requirement, the Finance Board realizes that Sec. 933.12(a)(7)

makes the Bank responsible for determining what additional documents it

should review to evaluate an applicant's character of management. The

Banks will have to make this determination on a case-by-case basis. The

Finance Board expects the Banks to exercise due diligence, but does not

expect the Banks to take extraordinary measures or incur great expense

to comply with this review requirement. For example, in the past,

several Banks have performed computer database searches to verify that

an applicant was making full disclosure of potential character of

management issues. The Finance Board cites this practice as one

relatively quick and inexpensive means by which a Bank may verify

character of management.

b. Standards of adequate ``Character of Management.''

Section 933.12(b) of the proposed rule establishes the character of

management standards. An applicant that meets these standards is deemed

to have the character of management required by the Bank Act and

Sec. 933.6(a)(6) of this part. This presumption is rebuttable. The

elements of the character of management standard are that:

(1) Neither the applicant nor any of its directors or senior

officers is subject to or operating under any enforcement action

instituted by an appropriate regulator;

(2) Neither the applicant nor any of its directors or senior

officers has been the subject of criminal, civil or administrative

proceedings reflecting upon creditworthiness, business

[[Page 54965]]

judgment or moral turpitude since the most recent examination;

(3) There are no known or potential civil, criminal, or

administrative monetary liabilities, material pending law suits or

unsatisfied judgments against the applicant, its directors or senior

officers since the most recent examination; and

(4) The applicant provides the written certification required in

Sec. 933.12(c), described below.

An applicant that does not meet the character of management

standards can still be considered for membership as provided in

Sec. 933.17 of the proposed rule, if the applicant presents a

sufficient explanation of its failure to meet the character of

management standards. The character of management standards in the

proposed rule are based on the current Guidelines.

c. Written certification.

Section 933.12(c) of the proposed rule requires a written

certification either by a majority of the board of directors of the

applicant, or by an individual with authority to act on behalf of the

board of directors of the applicant, concerning the character of

management standards described above. An applicant must provide either

an unqualified certification that there are no enforcement actions,

objectionable proceedings, or objectionable liabilities, or, if that is

not possible, the applicant must provide a qualified certification that

includes a detailed explanation regarding any exceptions noted. An

applicant that provides a qualified certification is presumed not to

have the character of management required by the Bank Act and

Sec. 933.6(a)(6) of this part, but this presumption may be rebutted.

The Finance Board is continuing the current policy of applying the

character of management requirements in Sec. 933.12 to all applicants,

rather than just insured depository institution applicants.

The Finance Board has found the written certification to be the

best way to surface any character of management issues, and to get an

explanation of those issues because the burden of disclosure is placed

on the applicant. The Finance Board requests public comment on the

character of management review requirement and standards incorporated

in the proposed rule, including alternative character of management

measures that should be considered for the final regulation.

9. Home Financing Policy Requirement

Section 4(a)(2)(C) of the Bank Act also requires that an

applicant's home financing policy be ``consistent with sound and

economical home financing.'' 12 U.S.C. 1424(a)(2)(C).

Section 933.13(a) of the proposed rule establishes the standards a

Bank must use to evaluate an applicant's home financing policy. If an

applicant meets the standards, the applicant is deemed to comply with

the home financing policy requirement of section 4(a)(2)(C) of the Bank

Act and Sec. 933.6(a)(7) of this part. This presumption is rebuttable.

Section 933.13(a) of the proposed rule is based on the home financing

policy standards in the Guidelines.

Under Sec. 933.13(a), an applicant that has been evaluated for

Community Reinvestment Act (CRA) performance within four years from the

date of application and has received a CRA rating of ``satisfactory''

or better on its most recent compliance examination, is presumed to

meet the home financing policy requirement.

Section 933.13(b) requires an applicant that is not subject to the

CRA, or an applicant that received a ``needs to improve'' rating on its

most recent CRA performance evaluation but received a ``satisfactory''

or better rating on its prior CRA performance evaluation, to file as

part of its application a written justification that demonstrates how

and why the applicant's credit policies and lending practices (if

applicable) are consistent with the Bank System's housing finance

mission.

The Finance Board acknowledges that CRA is not a perfect method for

evaluating whether an institution's home financing policy is

``consistent with sound and economical home financing.'' CRA

evaluations are based on whether a financial institution meets the

credit needs of its assessment area, rather than on its mortgage

lending activity. See 60 FR 22180 (May 4, 1995) to be codified at 12

CFR 25.22. Further, CRA does not consider whether a financial

institution's home financing policy is ``sound and economical.'' Id.

The Finance Board seeks comment on the use of CRA as a proxy for the

home financing policy criterion and suggestions for alternative

measures that the Finance Board might consider.

Since neither the Congress nor the Finance Board have yet

specifically defined the Bank System's housing finance mission, the

Finance Board also acknowledges limitations in requesting a written

justification demonstrating how and why an applicant's policies are

consistent with the Bank System's housing finance mission. The Finance

Board requests comment on how institutions might best provide the

requisite justification.

The Finance Board is continuing its current policy of applying the

home financing policy requirements in Sec. 933.17 to all applicants.

Currently, to determine whether an insurance company applicant's home-

financing policy is adequate, the Guidelines require that the applicant

provide evidence that the applicant engages in, or intends to engage

in, various housing related activities. Under the proposed rule, an

insurance company will be subject to the same requirements as all other

applicants.

An applicant that does not comply with the home financing policy

standard may still be considered for membership if the applicant can

rebut the presumption that it does not have an adequate home financing

policy, as provided in Sec. 933.17 of the proposed rule.

The Finance Board requests comment on the home financing policy

standards in the proposed rule and on alternative measures of the

adequacy of an applicant's home financing policy that should be

considered for the final regulation.

10. De Novo Insured Depository Institution Applicants

Section 933.14 of the proposed rule codifies certain exceptions to

the membership eligibility standards for de novo or newly chartered

insured depository institution applicants that are currently in the

Guidelines. An insured depository institution applicant that provides

to a Bank written confirmation from its primary regulator that it has

been chartered for less than three years or is otherwise considered a

de novo insured depository institution by the applicant's primary

regulator will receive special consideration for membership

eligibility.

Under Sec. 933.14(a)(1), a de novo applicant that has not filed

regulatory financial reports for the last six quarters and three year-

ends shall provide any such regulatory financial reports as the

applicant has filed. Under Sec. 933.14(a)(2), a de novo applicant shall

provide its most recent annual audited financial statement, or if

unavailable, other such independent external annual financial report as

the applicant's primary regulator may require, or if unavailable, a de

novo applicant shall, at a minimum, provide financial reports for at

least six calendar quarters of operation.

Section 933.14(a)(3) of the proposed rule provides that if a de

novo applicant has not yet received a composite regulatory examination

rating from its primary regulator, the applicant shall provide a

preliminary or informal

[[Page 54966]]

written regulatory examination rating from the applicant's primary

regulator, if a preliminary or informal rating is acceptable to the

Bank. Under Sec. 933.14(a)(4) of the proposed rule, a de novo applicant

need not meet the performance trend criteria in Sec. 933.11(b)(3)(i)-

(iii) of the proposed rule, if the de novo applicant has completed

regulatory financial reports for at least six full quarters of

operation and has complied with its regulatory business plan, either as

confirmed in writing by the de novo applicant's primary regulator or

based on a written analysis provided by the applicant that demonstrates

its substantial compliance with its regulatory business plan as

determined by the Bank.

Section 4(a)(2) of the Bank Act makes a special exception to the 10

percent requirement for de novo insured depository institution

applicants. The Bank Act specifically provides that a de novo applicant

may be admitted to membership if it complies with the 10 percent

requirement within 1 year after commencement of its operations. See 12

U.S.C. Sec. 1424(a)(2). The proposed rule continues the practice in

current Guidelines requiring that applicants, other than mandatory

members, must provide financial reports for at least six calendar

quarters of operation in order for the Bank to evaluate the applicant's

financial condition. Therefore, most de novo applicants already will

have been in operation for more than one year at the time of

application. However, the provision in section 4(a)(2) of the Bank Act

currently applies and, under the proposed rule, will continue to apply

during the first year of operation of a de novo applicant that is

required by law to be a member and is automatically admitted to

membership without satisfying the 10 percent requirement pursuant to

Sec. 933.4(a) of the proposed rule.

Under Sec. 933.14(b) of the proposed rule, the Bank may presume

that a de novo applicant that has not yet received a CRA performance

evaluation has a home financing policy as required by section

4(a)(2)(C) of the Bank Act and Sec. 933.6(a)(7), if the Bank's digest

establishes that the de novo applicant has a preliminary or informal

written CRA performance evaluation of ``satisfactory'' or better.

Alternatively, the Bank may presume compliance with the home financing

policy requirement if the Bank's digest establishes that the de novo

applicant has submitted a written justification acceptable to the Bank

of how the applicant intends to support the Bank System's housing

finance mission. The Guidelines are consistent with the approach taken

in the proposed rule.

11. Recent and Pending Merger Applicants

The Finance Board, based on its general supervisory authority over

the Banks, 12 U.S.C. 1422a, 1422b(a)(1), and its authority to interpret

the statutory membership eligibility requirements, id. Sec. 1424,

proposes special standards for applicants involved in a recent or

pending merger to ensure that the information evaluated to determine

eligibility is appropriate for the entity that results from the merger.

Standards for recent and pending merger applicants are not provided in

the Bank Act.

Section 933.15 of the proposed rule largely codifies the special

eligibility requirements that recent and pending merger applicants must

satisfy under the current Guidelines, in addition to or in place of the

previously described eligibility requirements. To be considered a

``pending merger applicant'' or a ``recent merger applicant,'' an

applicant must meet two tests, a timing test and a materiality test

defined in Sec. 933.15(a) of the proposed rule. For ``pending merger

applicants,'' the timing test is whether the applicant is a party to a

merger or acquisition agreement that is expected to be consummated

within two calendar quarters of submission of the membership

application. The materiality test is whether the applicant accounts for

75 percent or less of the combined assets of the resulting entity at

the time of application.

For ``recent merger applicants,'' the timing test is whether the

applicant has merged with or acquired another institution within the

six calendar quarters prior to submission of the membership

application. The materiality test is whether the applicant accounts for

75 percent or less of the combined assets of the resulting entity at

the time of application.

Section 933.15(b) of the proposed rule establishes an additional

review requirement that a Bank shall include in its digest for each

recent or pending merger applicant. The general information required

includes: (1) The name of each entity involved and its charter type;

(2) a general statement of the financial condition of each entity; (3)

a brief statement of the business reasons for the merger or

acquisition; and (4) the names and positions of management of the

resulting entity.

Section 933.15(c) of the proposed rule establishes the special

membership eligibility standards for recent and pending merger

applicants. A recent or pending merger applicant shall be deemed to be

in compliance with section 4(a) of the Bank Act and Sec. 933.6(a) of

the proposed rule, subject to rebuttal, only if the recent or pending

merger applicant satisfies the requirements of part 933 as modified and

supplemented by Sec. 933.15(c). Section 933.15(c)(1) establishes the

financial condition standard for a recent merger applicant. For recent

merger applicants that do not yet have a composite regulatory

examination rating subsequent to the merger or acquisition, each party

(other than existing Bank members) to the merger or acquisition must

satisfy the recent examination requirement, the capital requirements

and the minimum performance standards in Sec. 933.11(b). Section

933.15(c)(1)(A) of the proposed rule provides that, to the extent a

recent merger applicant does not yet have regulatory financial reports

for the six most recent calendar quarters needed to calculate

performance trends, the applicant must prepare pro forma combined

financial statements for those calendar quarters in which actual

combined regulatory financial reports are unavailable.

Section 935.15(c)(2) establishes the financial condition standard

for a pending merger applicant. Since a pending merger has by

definition not been consummated, the applicant cannot provide a

composite regulatory examination rating for the combined entity as

required by Sec. 933.11(b)(1). In lieu of that, each party to the

merger or acquisition, except an incumbent Bank member, is required by

Sec. 933.15(c)(2)(A) of the proposed rule to satisfy all of the

requirements of Sec. 933.11(b).

Section 933.15(c)(2)(B) of the proposed rule requires that in

addition to each party to a pending merger individually satisfying all

of the financial condition standards in Sec. 933.11(b), the pending

merger applicant must satisfy the capital requirements and the

performance trend requirements in Sec. 933.11(b)(2) and (3) as a

combined entity based on pro forma combined financial statements to be

prepared by the applicant for the six most recent calendar quarters.

Section 933.15(c)(3) provides that the determination of the

character of management of a recent or pending merger applicant for

purposes of Sec. 933.12 of the proposed rule shall be based on an

evaluation of the directors and senior officers of the resulting

entity. Section 933.15(c)(4) provides that for a pending merger

applicant or for a recent merger applicant that does not yet have a CRA

performance evaluation on a combined basis for the

[[Page 54967]]

merged entity, the determination of whether the merger applicant's home

financing policy satisfies the requirements of Sec. 933.13 shall be

based on a review of the most recent CRA performance evaluation

available for each party to the merger or acquisition.

12. Insurance Company Applicants

To become a Bank member, the Bank Act requires that an insurance

company applicant meet the membership eligibility requirements set

forth in section 4(a)(1) of the Bank Act. See 12 U.S.C. 1424(a)(1)(A)-

(C); Sec. 933.6(a)(1), (2) and (3) of the proposed rule, discussed in

part II(B) above. For the reasons discussed in part II(B)(6) above, the

Finance Board proposes to apply the section 4(a)(2) criteria to all

applicants for Bank membership, including insurance company applicants,

even though the Bank Act specifically applies the section 4(a)(2)

criteria only to insured depository institution applicants. See 12

U.S.C. 1424(a)(2).

a. Inspection and regulation.

Insurance companies are subject to state, not federal, regulation

and, therefore, the standards applicable to insurance companies are not

uniform. Every United States insurance company is subject to

examination and regulation by the state insurance department in its

domiciliary state, as well as to some level of regulation by the state

insurance department in each state where the insurance company

applicant is licensed to do business. State insurance laws are similar

to federal banking laws in that they require the appropriate regulator

to monitor whether the insurance company has complied with minimum

capital and reserve, financial condition, asset valuation and various

consumer related requirements.

The standards used to examine and regulate insurance companies vary

from state to state. Some states adhere to the uniform standards

established by the National Association of Insurance Commissioners

(NAIC), while other states either do not conduct examinations of

insurance companies pursuant to the NAIC standards or do not conduct

on-site examinations. Thus, there is no single objective measurement

applicable to all insurance companies. The Finance Board specifically

requests comment on whether the degree of inspection and regulation

imposed by a particular state should be a factor in determining whether

an insurance company applicant satisfies the ``inspection and

regulation'' requirement. For example, the Finance Board seeks comment

on whether it should require that an insurance company applicant be

regulated and examined by an NAIC accredited state insurance

commissioner in order to satisfy the ``inspection and regulation''

requirement.

b. Financial condition.

The differences between the regulatory scheme for insurance

companies and the regulatory scheme for insured depository institutions

has led the Finance Board to propose a separate set of financial

condition standards for insurance company applicants. Section 933.16 of

the proposed rule establishes financial condition standards for

insurance company applicants that differ from the financial condition

standards applicable to other applicants under Sec. 933.11.

Section 933.16(a) of the proposed rule defines certain terms that

are used only in this section.

Section 933.16(b) of the proposed rule establishes performance

standards for insurance company applicants.

(1) Examination rating and independent rating.

Section 933.16(b)(1) requires the Bank to review the most recent

examination report of an insurance company applicant by its primary

regulator. Most insurance company examination reports do not include a

rating; however, several private firms rate insurance company

performance. Therefore, the Finance Board also requires that an

insurance company applicant have a rating from one of the five

principal private companies that rate insurance companies, A.M. Best

Company, Duff & Phelps, Inc., Moody's Investor Service, Inc., Standard

& Poor's Corp., or Weiss Research, Inc. Relying in part on the

independent rater's evaluation of an insurance company applicant

reduces documentation requirements and makes the application process

more efficient.

Section 933.16(b)(2) of the proposed rule requires that an

insurance company applicant's most recent examination indicate no major

adverse findings pertaining to the applicant's financial condition.

(2) Capital requirement.

Section 933.16(b)(3) of the proposed rule requires that an

insurance company applicant meets all of its minimum statutory and

regulatory capital requirements and the NAIC capital standards as

reported in its most recent quarter-end or year-end regulatory

financial report filed with its primary regulator.

(3) Minimum performance standard.

Section 933.16(b)(4) of the proposed rule establishes the minimum

performance standard for an insurance company applicant. Under

Sec. 933.16(b)(4)(i), the applicant's most recent composite insurance

company rating must have been ``strong,'' defined in the proposed rule

as: ``A-'' or above from A.M. Best Company; ``AA-'' or above from Duff

& Phelps, Inc.; ``Aa'' or above from Moody's Investor Service, Inc.;

``AA'' or above from Standard & Poor's Corp.; or ``A'' from Weiss

Research, Inc.

Alternatively, under Sec. 933.16(b)(4)(ii), an insurance company

applicant can establish an acceptable financial condition if it has an

``adequate'' rating and earnings. An ``adequate'' rating is defined in

the proposed rule as: ``C+'' to ``B++'' from A.M. Best Company; ``BB-''

to ``A+'' from Duff & Phelps, Inc.; ``Ba'' to ``A'' from Moody's

Investor Service, Inc.; ``BB'' to ``A'' from Standard & Poor's Corp.;

or ``B'' or ``C'' from Weiss Research, Inc. To establish that it has

adequate earnings, an insurance company applicant must have positive

annualized earnings in two of the three most recent calendar years.

(4) Minimum performance ratios.

(i) Overall ratios.

All insurance company applicants also must meet certain minimum

performance ratios established by Sec. 933.16(b)(5) of the proposed

rule during the most recent year-end or quarter-end period. Section

933.16(b)(5)(i) defines certain terms that are used only in this

paragraph. Section 933.16(b)(5)(ii) establishes the overall minimum

performance ratios for insurance company applicants.

Section 933.16(b)(5)(ii)(A) establishes a premium to surplus ratio

standard that is designed to measure the adequacy of an insurance

company's reserves for absorbing above-average losses. To calculate

this ratio, divide net premiums written by total capital and surplus.

To meet the standard, an applicant's net premiums may not exceed three

times the level of capital and surplus. Section 933.16(a)(7) defines

the term ``net premiums written'' as the total consideration paid for

an insurance contract during a specified period of time, net of

reinsurance assumed and ceded.

Section 933.16(a)(8) defines the term ``reinsurance'' as

transactions in which an assuming enterprise, known as a reinsurer,

assumes, for a premium, all or part of a risk undertaken originally by

another insurer.

Section 933.16(a)(9) defines the term ``reinsurance assumed'' as

all premiums generated by policies issued to assume a liability, in

whole or in part, of another insurer that is already covering the risk

with a policy.

Section 933.16(a)(10) defines the term ``reinsurance ceded'' as all

premiums generated by policies or coverage purchased from another

insurer that

[[Page 54968]]

transfer liability, in whole or in part, from direct or reinsurance

policies.

Section 933.16(a)(14) defines the term ``surplus'' as the total of

common and preferred capital stock, aggregate write-ins for other than

special surplus funds, gross paid-in and contributed surplus, surplus

notes and unassigned funds, less treasury stock.

Section 933.16(b)(5)(ii)(B) establishes a change in net premiums

written ratio standard that is designed to measure the stability of an

insurance company's operation. Major increases or decreases in net

premiums written may indicate a lack of stability in company operations

or an abrupt entry into new product lines or sales territory. To

calculate this ratio, divide the change in net premiums written between

the two most recent consecutive calendar years by the total net

premiums written in the first year. To meet the standard, an

applicant's ratio must be between -10 percent and +50 percent.

Section 933.16(b)(5)(ii)(C) establishes a surplus relief ratio

standard that is designed to measure the insurance company's level of

dependence on net income generated by reinsurance activities to fund

capital and surplus. Dependence on income from reinsurance ceded

premiums may indicate that company management believes current capital

and surplus to be inadequate. To calculate the surplus relief ratio,

divide the net of commissions and expenses generated by reinsurance

ceded and assumed by total capital and surplus. To meet the standard,

an applicant's surplus relief ratio must be less than 30 percent.

Section 933.16(b)(5)(ii)(D) establishes an adequacy of investment

income ratio standard that is designed to measure whether the insurance

company's investment income is adequate to cover contractual interest

obligations on policies and funds held on deposit. To calculate this

ratio, divide net investment income by the sum of total tabular

interest required on life insurance, accident and health reserves, and

total interest credited on funds held on deposit. Section 933.16(a)(15)

defines the term ``tabular interest'' as interest, required by the

primary regulator, to be set aside to cover all contractual

obligations.

Section 933.16(a)(11) defines the term ``reserves'' as funds set

aside for possible losses on insurance policies, annuities, claims

unpaid, funds held for policyholders, and deposit funds.

To meet the adequacy of investment income ratio standard, an

applicant's net investment income must provide no less than 1.25 times

the coverage on total funds held in reserves to pay interest on

contractual obligations and funds held on deposit.

Section 933.16(b)(5)(ii)(E) establishes a change in capital and

surplus ratio standard that is designed to provide an overall

measurement of improvement or deterioration in an insurance company's

financial condition. To calculate this ratio, divide the net change in

capital and surplus between the two most recent consecutive calendar

years, by total capital and surplus in the first year. To meet this

standard, an applicant's ratio must be between -10 percent and +50

percent.

(ii) Solvency ratios.

Section 933.16(b)(5)(iii) establishes the solvency ratios for

insurance company applicants. --

Section 933.16(b)(5)(iii)(A) establishes a highly liquid ratio

standard that is designed to measure the relationship between highly

liquid assets and those liabilities that can be withdrawn or must be

paid by the company in less than 30 days.

Section 933.16(a)(4) defines the term ``highly liquid assets'' as

cash or cash equivalent assets readily convertible to cash, including

marketable Class 1 (highest investment grade) publicly traded bonds,

marketable preferred and common stock, short-term investments, and

investment income due. To calculate this ratio, divide highly liquid

assets by annuity and deposit fund reserves less reserves with no

withdrawal privileges, separate accounts and reinsurance.

To meet the standard, an applicant's highly liquid ratio must be no

less than: (1) 75 percent on traditional life insurance products; (2)

85 percent on interest sensitive life insurance products; (3) 85

percent on individual annuity insurance products; (4) 100 percent on

group annuity insurance products; (5) 79 percent on property and

liability insurance products; (6) 75 percent on accident and health

insurance products; and (7) 50 percent on disability income insurance

products.

Section 933.16(b)(5)(i)(A) defines ``traditional life insurance

products'' as insurance business that consists of individual term life

insurance contracts, individual permanent fixed value life insurance

contracts, or policies that consist of fixed premiums, fixed dollar

amounts of contract, or fixed reserves (cash value) established by each

state.

Section 933.16(b)(5)(i)(B) defines ``interest sensitive life

insurance products'' as insurance business that consists of individual

life insurance policies characterized by flexible premiums, dollar

amounts of contract that can vary, and reserves which represent a pool

of assets such as mutual funds that are held for the benefit of, and

support the investment return to, policy holders.

Section 933.16(b)(5)(i)(D) defines ``individual and group annuity

insurance products'' as insurance business that consists of contracts

that accumulate and disburse retirement benefits to individual

policyholders or to companies for their employees, hold pension deposit

funds, or distribute and hold funds under guaranteed interest

contracts.

Section 933.16(b)(5)(i)(F) defines ``property insurance products''

as insurance business that consists of policies where the majority of

premiums go to cover losses to real property, automobiles or similar

tangible assets.

Section 933.16(b)(5)(i)(G) defines ``liability insurance products''

as insurance business that consists of policies that cover losses

arising from actions taken by individuals or companies, including

losses from litigation or mutual agreements as to the amount of a

claim, such as product liability, medical malpractice and worker's

compensation.

Section 933.16(b)(5)(i)(C) defines ``accident and health insurance

products'' as insurance business that consists of coverage for care

such as basic hospital expense, basic surgical expense, dental care,

specific hospital reimbursement, long-term nursing home or home care

expenses for the aged or disabled, major medical expense, and Medicare

supplemental insurance.

Section 933.16(b)(5)(i)(E) defines ``disability income insurance

products'' as insurance business that consists of contracts that pay

income periodically to insureds who are unable to work as a result of

sickness or injury.

Section 933.16(b)(5)(iii)(B) establishes a current ratio standard

that is designed to measure the relationship between liquid assets and

liabilities that are available to meet a company's obligations if the

obligations are paid in an orderly fashion in the normal course of

business. Section 933.16(a)(6) defines the term ``liquid assets'' as

installment premiums booked but deferred and not yet due, cash, accrued

investment income, marketable Class 1 (highest investment grade

quality) publicly traded bonds and marketable Class 2 (high investment

grade quality) publicly traded bonds, marketable preferred and common

stock, cash, short-term investments, and investment income due, less

investments in affiliated companies and excess of real estate over five

percent of liabilities.

To calculate the current ratio, divide liquid assets by annuity,

ordinary life,

[[Page 54969]]

and deposit fund reserves, less reserves with no withdrawal privileges,

separate accounts, reinsurance, and policy loans. -

Section 933.16(a)(12) defines the term ``separate accounts'' as

assets and liabilities maintained by an insurance company predominately

to fund fixed-benefit or variable annuity contracts and pension plans.

The contract holder assumes the investment risk while the insurance

company receives a fee for managing or maintaining the investments.

To meet the standard, an applicant's current ratio must be no less

than: (1) 60 percent on traditional life insurance products; (2) 75

percent on interest sensitive life insurance products; (3) 75 percent

on individual and group annuity insurance products; (4) 87 percent on

property and liability insurance products; (5) 75 percent on accident

and health insurance products; and (6) 50 percent on disability income

insurance products.

Section 933.16(b)(5)(iii)(C) establishes an adjusted liabilities to

adjusted surplus ratio standard that is designed to measure whether an

insurance company's surplus account is adequate in relation to its

level of current contractual obligations outstanding.

Section 933.16(a)(1) defines the term ``adjusted liabilities'' as

total statutory liabilities less separate account liabilities, asset

valuation reserves, and interest maintenance reserves. Section

933.16(a)(13) defines the term ``statutory liabilities'' as the total

of funds set aside to pay future claims and operating expenses,

including separate account liabilities and funds held for the benefit

of others, as established under the accounting rules and techniques

permitted by the NAIC. Examples of statutory liabilities are policy

reserves, premiums collected in advance, commissions and expenses

payable, and provisions for policyholder dividends.

Section 933.16(a)(3) defines the term ``asset valuation reserves''

as reserves on the liability side of the balance sheet that are

established by the primary regulator to guard against fluctuations in

the value of securities and to absorb all unrealized capital gains and

losses and certain realized gains and losses on investment activity.

Section 933.16(a)(5) defines the term ``interest maintenance

reserves'' as reserves on the liability side of the balance sheet that

are established to hold the amount of realized capital gains and losses

on fixed income securities that result from overall interest rate

changes.

Section 933.16(a)(2) defines the term ``adjusted surplus'' as

surplus plus asset valuation reserves and interest maintenance

reserves.

To calculate the adjusted liabilities to adjusted surplus ratio,

divide adjusted liabilities by adjusted surplus. To meet the standard,

an applicant's adjusted liabilities to adjusted surplus ratio must not

exceed: (1) 10 to 1 on traditional life insurance products; (2) 10 to 1

on interest sensitive life insurance products; (3) 10 to 1 on

individual and group annuity insurance products; (4) 3 to 1 on property

and liability insurance products; (5) 3 to 1 on accident and health

insurance products; and (6) 5 to 1 on disability income insurance

products.

13. Rebuttable Presumptions

For each membership eligibility criteria required by the Bank Act

and this part, the Finance Board, based on its general supervisory

authority over the Banks, 12 U.S.C. 1422a, 1422b(a)(1), and its

authority to interpret the Bank Act's membership requirements, id.

Sec. 1424, is proposing to establish flexible standards. In the

proposed rule, an applicant that meets those standards is presumed to

be in compliance with the statutory membership eligibility criteria.

So, too, applicants not meeting the standards are presumed not to be in

compliance with the Bank Act criteria. The proposed rule provides that

these presumptions may be rebutted if the applicant provides compelling

or substantial evidence, depending on the standard at issue, or if the

Bank otherwise obtains compelling evidence to the contrary. Section

933.17 of the proposed rule establishes the method by which a

presumption may be rebutted.

This approach is similar to the current Guidelines, in that it

allows an applicant that fails to meet a standard to establish an

alternative basis for complying with the statutory membership

eligibility criteria.

Under Sec. 933.17(a) of the proposed rule, even if an applicant

meets all of the standards, it may not be admitted to membership if the

Bank obtains compelling evidence to overcome the presumption that the

applicant is in compliance with the Bank Act and the general

eligibility requirements of Sec. 933.6(a).

Section 933.17(b) provides that an applicant that does not meet all

of the standards or that is unable to provide information sufficient

for the Bank to evaluate whether it meets the standards, may

nevertheless have the opportunity to rebut the presumption that it is

therefore not in compliance with the Bank Act and the general

eligibility requirements in Sec. 933.6(a).

The remaining provisions of section 933.17 describe specific

rebuttal procedures. Section 933.17(c) of the proposed rule sets out

the requirements for rebutting the presumption of noncompliance with

the financial condition standards. Under Sec. 933.17(c)(1), for each

variance from the required minimum regulatory examination rating, an

applicant must prepare a written justification that provides compelling

evidence that the applicant is in the financial condition required by

Sec. 933.6(a)(4) of the proposed rule, notwithstanding the variance.

The Finance Board is proposing a compelling evidence standard to rebut

a low regulatory examination rating, a rating of ``4'' or ``5,''

because of the importance of the regulatory examination rating in

determining an applicant's financial condition.

Under section 933.17(c)(2) of the proposed rule, for each variance

from a performance trend criterion required by Sec. 933.11(b)(3), the

applicant must prepare a written justification that provides

substantial evidence that the applicant is in an adequate financial

condition, notwithstanding the variance. The Finance Board is proposing

a substantial evidence standard to rebut the failure to meet a

performance trend standard because, while the performance trend

criteria are important, they are less important than the regulatory

examination ratings in evaluating financial condition.

Section 933.17(d) of the proposed rule sets out the requirements

for rebutting the presumption of noncompliance with the character of

management standards. Under Sec. 933.17(d)(1) of the proposed rule, if

an applicant or any of its directors or senior officers is subject to

or operating under an enforcement action, the applicant must provide

written confirmation from its appropriate regulator that the applicant,

its directors or senior officers are in substantial compliance with all

aspects of the enforcement action. Alternatively, an applicant may

prepare a written analysis stating each action the applicant, director

or senior officer is required to take by the enforcement action, the

actions actually taken by the applicant, director or senior officer,

and whether the applicant regards this as substantial compliance. If

the Bank is not certain that the applicant has substantially complied

with all aspects of the enforcement action, the Bank must consult the

applicant's appropriate regulator.

Under Sec. 933.17(d)(2) of the proposed rule, if an applicant or

any of its directors or senior officers is subject to criminal, civil

or administrative

[[Page 54970]]

proceedings that reflect on creditworthiness, business judgment or

moral turpitude since the last examination, the applicant must provide

written confirmation from the applicant's primary regulator that the

proceedings will not likely result in enforcement action.

Alternatively, the applicant may prepare a written analysis of the

severity of the pending charges and any mitigating actions taken by the

applicant, director or senior officer. If the Bank is uncertain whether

the proceedings will result in enforcement action, the Bank must

consult the applicant's primary regulator.

Under Sec. 933.17(d)(3) of the proposed rule, if there are any

material known or potential civil, criminal or administrative monetary

liabilities, pending lawsuits, or unsatisfied judgments against the

applicant or any of its directors or senior officers as of the most

recent quarter-end, the applicant must provide written confirmation

from its primary regulator that the matter will not likely cause the

applicant to fall below its minimum capital requirements.

Alternatively, the applicant may provide a written analysis of each

matter, the likelihood of the applicant or its directors or senior

officers prevailing and the financial consequences if the applicant or

its directors or senior officers do not prevail. If the Bank is

uncertain whether the matter will cause the applicant to fall below its

minimum capital requirements, the Bank must consult the applicant's

primary regulator.

Section 933.17(e) of the proposed rule sets out the requirements

for rebutting the presumption of noncompliance with the home financing

policy standards. If an applicant received a ``substantial non-

compliance'' rating on its most recent CRA performance evaluation, or

two consecutive ``needs to improve'' CRA ratings, or has not received a

CRA performance evaluation within four years from the date of the

membership application, the applicant must provide written confirmation

from its primary regulator of the applicant's recent satisfactory CRA

performance, including any corrective action that substantially

improved upon the deficiencies cited in any recent CRA performance

evaluation. Alternatively, the applicant may provide a written analysis

demonstrating that the applicant's low CRA rating is unrelated to

housing finance, or providing substantial evidence that the applicant's

home financing credit policies and lending practices (if applicable)

are consistent with the Bank System's housing finance mission. The

Finance Board is proposing a compelling evidence standard to overcome

the presumption of an inadequate home financing policy because of the

likelihood that a ``substantial non-compliance'' rating or two

consecutive ``needs to improve'' ratings indicate a poor home financing

policy.

The Finance Board has made no change to Sec. 933.18, Determination

of appropriate Bank district for membership, other than conforming

citations to the proposed rule. For the sake of brevity, conforming

change to the citations in subparts D through I of part 933 are set out

in a table. Part 933 as revised will be set out in its entirety when

the final rule is published.

III. Regulatory Flexibility Act

The proposed rule implements statutory requirements binding on all

applicants for Bank membership, regardless of their size. The Finance

Board is not at liberty to make adjustments in those requirements to

accommodate small entities. The Finance Board has not imposed any

additional regulatory requirements that will have a disproportionate

impact on small entities. The proposed rule would, to some extent,

reduce the tests and criteria for determining compliance with statutory

eligibility requirements that currently are used by the Finance Board

in approving membership applications. Therefore, it is certified,

pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C.

605(b), that this proposed rule, if promulgated as a final rule, would

not have a significant economic impact on a substantial number of small

entities.

Paperwork Reduction Act

The Finance Board has submitted to the Office of Management and

Budget (OMB) an analysis of membership approval collections of

information contained in Secs. 933.2, 933.3, 933.5, and 933.7 through

933.17 of the proposed rule, described more fully in part II of the

Supplementary Information, as well as an analysis of other information

collection requirements in redesignated Secs. 933.18, 933.22, 933.25,

933.26 and 933.31 of the current membership regulation, which are not

otherwise affected by this proposed rule. These information collections

are necessary to enable the Finance Board and/or the Banks to determine

whether applicants qualify for Bank membership and to satisfy various

statutory requirements that apply to FHLBank members. Responses are

required to obtain or retain a benefit. See 12 U.S.C. 1424, 44 U.S.C.

3512.

The information collections will be used by Finance Board and/or

Bank staff as part of the membership process to determine the

eligibility of applicants for Bank membership under the Bank Act and

Finance Board regulation, the amount of stock that each member is

required to hold pursuant to statutory requirements, information the

Finance Board must collect to comply with statutory requirements in the

event of a member's withdrawal from membership, and information the

Finance Board is required by statute to collect to determine a member's

actual principal place of business. Confidentiality of information

obtained from respondents pursuant to the collections of information

will be maintained by the Finance Board as required by applicable

statute, regulation and agency policy. Books or records relating to

these collections of information must be retained as provided in the

regulation or proposed rule. -

Likely respondents and/or recordkeepers will be the types of

financial institutions eligible to become Bank members under the Bank

Act, 12 U.S.C. 1424(a)(1), including any building and loan association,

savings and loan association, cooperative bank, homestead association,

insurance company, savings bank, or insured depository institution; the

Banks; and the Finance Board. Potential respondents are not required to

respond to the collections of information unless the regulation

collecting the information displays a currently valid control number

assigned by the OMB. See 44 U.S.C. 3512(a).

The estimated annual reporting and recordkeeping hour burden is:

a. Number of respondents--6,412.

b. Total annual responses--6,412.

Percentage of these responses collected electronically 0%.

c. Total annual hours requested--59,152.1.

d. Current OMB inventory--38,889.6.

e. Difference--20,262.5.

The estimated annual reporting and recordkeeping cost burden is:

a. Total annualized capital/startup costs--0.

b. Total annual costs (O&M)--$1,683,923.95.

c. Total annualized cost requested--1,683,923.95.

d. Current OMB inventory--1,754,181.95.

e. Difference--($70,258.00).

Comments concerning the accuracy of the burden estimates and

suggestions for reducing the burden may be submitted to the Finance

Board in writing at the address listed above.

[[Page 54971]]

The collections of information have been submitted to OMB for

review in accordance with section 3507(d) of the Paperwork Reduction

Act of 1995, 44 U.S.C. 3507(d). Comments regarding the proposed

collections of information may be submitted in writing to the Office of

Information and Regulatory Affairs of OMB, Attention: Desk Officer for

Federal Housing Finance Board, Washington, DC 20503, by December 26,

1995.

List of Subjects in 12 CFR Part 933

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

Accordingly, the Board hereby amends title 12, chapter IX, part

933, of the Code of Federal Regulations as follows:

PART 933--MEMBERS OF THE BANKS

1. The heading for part 933 is revised as set forth above.

1a. The authority citation for part 933 continues to read as

follows:

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

2. The table of contents to part 933 is revised to read as follows:

Subpart A--Definitions

Sec.

933.1 Definitions.

Subpart B--Membership Application Process

933.2 Membership application requirements.

933.3 Decision on application.

933.4 Automatic membership.

933.5 Appeals.

Subpart C--Eligibility Requirements

933.6 General eligibility requirements.

933.7 Duly organized requirement.

933.8 Subject to inspection and regulation requirement.

933.9 Makes long-term home mortgage loans requirement.

933.10 Ten percent requirement

933.11 Financial condition requirement.

933.12 Character of management requirement.

933.13 Home financing policy requirement.

933.14 De novo insured depository institution applicants.

933.15 Recent and pending merger applicants.

933.16 Financial condition standards for insurance company

applicants.

933.17 Rebuttable presumptions.

933.18 Determination of appropriate Bank district for membership.

Subpart D--Stock Requirements

933.19 Par value and price of stock.

933.20 Stock purchase.

933.21 Issuance and form of stock.

933.22 Adjustments in stock holdings.

933.23 Purchase of excess stock.

Subpart E--Consolidations Involving Members

933.24 Consolidation of members.

933.25 Consolidations involving nonmembers.

Subpart F--Withdrawal and Removal From Membership

933.26 Procedure for withdrawal.

933.27 Procedure for removal.

933.28 Automatic termination of membership for institutions placed

in receivership.

Subpart G--Orderly Liquidation of Advances and Redemption of Stock

933.29 Orderly liquidation of advances and redemption of stock.

Subpart H--Reacquisition of Membership

933.30 Reacquisition of membership.

Subpart I--Bank Access to Information

933.31 Reports and examinations.

Subpart J--Membership Insignia

933. 32 Official membership insignia.

Subparts C Through I of Part 933 [Redesignated as Subparts D Through

J]

3. Subparts C through I of Part 933 are redesignated as Subparts D

through J, respectively.

Secs. 933.6 Through 933.19 [Redesignated as Secs. 933.19 Through

933.32]

4. Sections 933.6 through 933.19 are redesignated as Secs. 933.19

through 933.32, respectively.

5. Subpart A of part 933 is revised to read as follows:

Subpart A--Definitions

Sec. 933.1 Definitions.

For purposes of this part:

(a) Act means the Federal Home Loan Bank Act, as amended (12 U.S.C.

1421 through 1449).

(b) Aggregate unpaid load principal means the aggregate unpaid

principal of a subscriber's or member's home mortgage loans, home

purchase contracts, and similar obligations.

(c) Annualized adjusted earnings means net earnings, excluding

extraordinary items such as income received from or expense incurred in

sales of securities or fixed assets.

(d) Appropriate Federal banking agency has the same meaning as used

in 12 U.S.C. 1813(q) and, for federally insured credit unions, shall

mean the National Credit Union Administration.

(e) Appropriate regulator means any officer, agency, supervisor or

other entity that has regulatory authority over, or is empowered to

institute enforcement action against, an applicant.

(f) Bank means a Federal Home Loan Bank established under the

authority of the Act.

(g) Board means the Federal Housing Finance Board.

(h) Combination business or farm property means real property for

which the total appraised value is attributable to residential, and

business or farm uses.

(i) Domestic loan means a loan on property located in a state or

the United States.

(j) Dwelling unit means a single room or a unified combination of

rooms designed for residential use.

(k) Enforcement action means any written notice, directive, order

or agreement initiated by an applicant or its appropriate regulator to

address any operational, financial, managerial or other deficiencies of

the applicant identified by the appropriate regulator.

(l) Funded residential construction loan means the portion of a

loan secured by real property made to finance the on-site construction

of dwelling units on one-to-four family property or multifamily

property disbursed to the borrower.

(m) Home mortgage loan means:

(1) A domestic loan, whether or not fully amortizing, or an

interest in such a loan, which is secured by a mortgage, deed of trust,

or other security agreement that creates a first lien on one of the

following interests in property:

(i) One-to-four family property or multifamily property, in fee

simple;

(ii) A leasehold on one-to-four family property or multifamily

property under a lease of not less than 99 years that is renewable, or

under a lease having a period of not less than 50 years to run from the

date the mortgage was executed; or

(iii) Combination business or farm property where at least 50

percent of the total appraised value of the combined property is

attributable to the residential portion of the property; or

(2) A mortgage pass-through security that represents an undivided

ownership interest in:

(i) Long-term loans, provided that, at the time of issuance of the

security, all of the loans meet the requirements of paragraph (m)(1) of

this section; or

(ii) A security that represents an undivided ownership interest in

long-term loans, provided that, at the time of issuance of the

security, all of the loans meet the requirements of paragraph (m)(1) of

this section.

(n) Institutions which are eligible to make application to become

members means for purposes of 12 U.S.C. 1431(e)(2)(A), any building and

loan association, savings association, cooperative bank, homestead

association, insurance company, savings bank or any insured depository

[[Page 54972]]

institution, regardless of whether the institution applies for or would

be approved for membership.

(o) Insured depository institution means an insured depository

institution as defined in 12 U.S.C. 1422(12).

(p) Loan loss reserves means a specified balance-sheet account held

to fund potential losses on loans or leases.

(q) Long-term means a term to maturity of five years or greater.

(r) Manufactured housing means a manufactured home as defined in

section 603(6) of the Manufactured Home Construction and Safety

Standards Act of 1974, as amended (42 U.S.C. 5402(6)).

(s) Member means an institution that has been approved for

membership in a Bank and has purchased capital stock in the Bank in

accordance with Secs. 933.20 or 933.24 of this part.

(t) Multifamily property means:

(1) Real property that is solely residential and includes five or

more dwelling units; or

(2) Real property that includes five or more dwelling units

combined with commercial units, provided that the property is primarily

residential; and

(3) Property that includes, but is not limited to, nursing homes,

dormitories and homes for the elderly.

(u) Nonperforming assets means the sum of loans and leases reported

on a regulatory financial report that have been past due for 90 days or

longer; loans and leases on a nonaccrual basis; restructured loans and

leases (not already reported as nonperforming); and foreclosed real

estate, except that nonperforming assets shall be as defined by the

National Credit Union Administration for credit union applicants.

(v) Nonresidential real property means real property that is not

used for residential purposes, including business or industrial

property, hotels, motels, churches, hospitals, educational and

charitable institution buildings or facilities, clubs, lodges,

association buildings, golf courses, recreational facilities, farm

property not containing a dwelling unit, or similar types of property,

except as otherwise determined by the Board, in its discretion.

(w) One-to-four family property means:

(1) Real property that is solely residential, including one-to-four

family dwelling units or more than four family dwelling units if each

dwelling unit is separated from the other dwelling units by dividing

walls that extend from ground to roof, such as row houses, townhouses

or similar types of property;

(2) Manufactured housing if applicable state law defines the

purchase or holding of manufactured housing as the purchase or holding

of real property;

(3) Individual condominium dwelling units or interests in

individual cooperative housing dwelling units that are part of a

condominium or cooperative building without regard to the number of

total dwelling units therein; or

(4) Real property which includes one-to-four family dwelling units

combined with commercial units, provided the property is primarily

residential.

(x) Primary regulator means the chartering authority for federally-

chartered applicants, the insuring authority for federally-insured

applicants that are not federally-chartered; or the appropriate state

agency for all other applicants.

(y) Regulatory examination rating means a rating of capital,

assets, management, earnings and liquidity following the guidelines of

the Uniform Financial Institutions Rating System contained in a written

report of examination conducted by the applicant's appropriate

regulator, including a CAMEL rating, a MACRO rating, or other similar

ratings.

(z) Regulatory financial report means a financial report that an

applicant is required to file with its primary regulator on a specific

periodic basis, including the quarterly call report for commercial

banks, thrift financial report for thrifts, quarterly or semi-annual

call report for credit unions, the National Association of Insurance

Commissioners' annual or quarterly report for insurance companies and

other similar reports.

(aa) Residential mortgage loan means any one of the following types

of domestic loans, whether or not fully amortizing:

(1) Home mortgage loans;

(2) Funded residential construction loans;

(3) Loans secured by manufactured housing whether or not defined by

state law as secured by an interest in real property;

(4) Loans secured by junior liens on one-to-four family property or

multifamily property;

(5) Qualified private activity exempt facility bonds where 95

percent or more of the net proceeds are used for the construction of

qualified residential rental projects as defined in 20 U.S.C.

142(a)(7);

(6) Mortgage pass-through securities representing an undivided

ownership interest in:

(i) Loans that meet the requirements of paragraphs (aa)(1) through

(4) of this section at the time of issuance of the security;

(ii) Securities representing an undivided ownership interest in

loans, provided that, at the time of issuance of the security, all of

the loans meet the requirements of paragraphs (r)(1) through (4) of

this section; or

(iii) Mortgage debt securities as defined in paragraph (aa)(7) of

this section;

(7) Mortgage debt securities secured by:

(i) Loans, provided that, at the time of issuance of the security,

all of the loans meet the requirements of paragraphs (aa)(1) through

(4) of this section;

(ii) Securities that meet the requirements of paragraph (aa)(6) of

this section; or

(iii) Securities secured by assets, provided that, at the time of

issuance of the security, all of the assets meet the requirements of

paragraphs (aa)(1) through (5) of this section; or

(8) Home mortgage loans secured by a leasehold interest, as defined

in paragraph (m)(1)(ii) of this section, except that the period of the

lease term may be for any duration.

(bb) State means a State of the United States, the District of

Columbia, Guam, Puerto Rico or the U.S. Virgin Islands.

(cc) Total assets means cash and balances due from depository

institutions, held to maturity securities, available-for-sale

securities, federal funds sold and securities purchased under

agreements to resell (in domestic subsidiaries), loans and lease

financing receivables, assets held in trading accounts (in domestic

offices of the company and its domestic subsidiaries), premiums and

fixed assets, other real estate owned, investments in unconsolidated

subsidiaries and associated companies, customers' liability to the

reporting bank on acceptances outstanding, intangible assets, and other

assets.

6. Subpart B of part 933 is revised to read as follows:

Subpart B--Membership Application Process

Sec. 933.2 Membership application requirements.

(a) Application. An applicant for membership in a Bank shall submit

to that Bank an application that satisfies the requirements of this

part. The application shall include a written certification by a

majority of the applicant's directors or by an individual with

authority to act on behalf of the applicant of the following:

[[Page 54973]]

(1) Applicant review. Applicant has reviewed the requirements of

this part and, as required by this part, has provided to the best of

applicant's knowledge the most recent, accurate and complete

information available; and

(2) Duty to supplement. Applicant will promptly supplement the

application with any relevant information that comes to applicant's

attention prior to the Bank's decision on whether to approve the

application, and if the Bank's decision is appealed pursuant to

Sec. 933.5 of this part, prior to resolution of any appeal by the

Board.

(b) Digest. The Bank shall prepare a written digest for each

applicant stating whether or not the applicant meets each of the

requirements in Secs. 933.6 to 933.18 of this part, the Bank's findings

and the reasons therefor.

(c) File. The Bank shall maintain a membership file for each

applicant for at least three years after the Bank decides whether to

approve membership and the resolution of any appeal to the Board. The

membership file shall contain at a minimum:

(1) Digest. The digest required by paragraph (b) of this section.

(2) Required documents. All documents required by Secs. 933.6 to

933.18 of this part, including those documents required to establish or

rebut a presumption under this part, shall be described in and attached

to the digest. If an applicant's primary regulator requires return of a

regulatory examination report, the date that the report is returned

shall be noted in the digest.

(3) Additional documents. Any document submitted by the applicant,

or otherwise obtained or generated by the Bank, concerning the

applicant.

(4) Decision resolution. Decision resolution described in

Sec. 933.3(b) of this part.

(d) Independent evaluation. The Bank shall use regulatory financial

reports and other sources independent of the applicant to evaluate and

analyze all conclusions offered by the applicant regarding the

applicant's eligibility for membership. No applicant shall be admitted

to membership until the Bank is satisfied that the applicant meets the

requirements of the Act and this part independent of any

representations by the applicant.

Sec. 933.3 Decision on application.

(a) Authority. The Board authorizes the Banks to approve or deny

all applications for membership, subject to Sec. 933.5 of this part.

The Bank may delegate the authority to approve membership applications

only to a committee of the Bank's board of directors, the Bank

president or a senior officer who reports directly to the Bank

president other than an officer with responsibility for business

development.

(b) Decision resolution. For each applicant, the Bank shall prepare

a resolution of its board of directors signed by a majority of the

directors or by an officer with delegated authority to approve

membership applications. The decision resolution shall state:

(1) That the information in the digest is accurate and is based on

a diligent and comprehensive review of all available information; and

(2) The Bank's decision and the reasons therefor. Decisions to

approve an application should specifically state that the applicant is

authorized under the laws of the United States and the laws of the

appropriate state to become a member of, purchase stock in, do business

with and maintain deposits in the Bank to which the applicant has

applied; and, that the applicant meets all of the membership

eligibility criteria of the Act and this part.

(c) Action on applications. The Bank shall act on an application

within 60 calendar days of the date the Bank deems the application to

be complete. Within three business days of a Bank's decision on an

application, the Bank shall provide the applicant and the Board's

Executive Secretary with a copy of the Bank's decision resolution.

Sec. 933.4 Automatic membership.

(a) Automatic membership for mandatory members. Any institution

required by law to become a member of a Bank automatically shall become

a member of the Bank of the district in which its principal place of

business is located upon the purchase of stock in that Bank pursuant to

Sec. 933.20(b)(1) of this part.

(b) Automatic membership for certain charter conversions. An

insured depository institution member that converts from one charter

type to another automatically shall become a member of the Bank of

which the converting institution was a member on the effective date of

such conversion, provided that the converting institution continues to

be an insured depository institution and the assets of the institution

immediately before and immediately after the conversion are identical.

In such case, all relationships existing between the member and the

Bank at the time of such conversion may continue.

(c) Automatic membership for transfers. Any member whose membership

is transferred pursuant to Sec. 933.18(d) of this part automatically

shall become a member of the Bank to which it transfers.

Sec. 933.5 Appeals.

(a) Appeals by applicants--(1) Filing procedure. Within 90 calendar

days of the date of a Bank's decision to deny an application for

membership, the applicant may file a written appeal of the decision

with the Board.

(2) Documents. The applicant's appeal shall be addressed to the

Executive Secretary, Federal Housing Finance Board, 1777 F Street,

N.W., Washington, D.C. 20006, with a copy to the Bank, and shall

include the following documents:

(i) Bank's decision. A copy of the Bank's decision resolution; and

(ii) Basis for appeal. A statement of the basis for the appeal by

the applicant with sufficient facts, information, analysis and

explanation to support the applicant's contentions.

(b) Appeals by Banks. Within 60 days of the date that a Bank grants

an application for membership, another Bank (appellant Bank) may file a

written appeal with the Board of the determination of the appropriate

district for membership pursuant to Sec. 933.18 of this part, by

writing to the Board's Executive Secretary with a copy to the Bank that

granted membership. The appeal shall include a statement of the basis

for appeal by the appellant Bank with sufficient facts, information,

analysis and explanation to support the appellant Bank's contentions.

(c) Record for appeal.--(1) Copy of membership file. Within five

business days of receiving an appeal, the Bank whose action has been

appealed (appellee Bank) shall provide the Board with a complete copy

of the applicant's membership file. Until the Board resolves the

appeal, the appellee Bank shall supplement the materials provided to

the Board as new materials are received.

(2) Additional information. The Board may request additional

information or further supporting arguments from the appellant, the

appellee Bank or any other party that the Board deems appropriate.

(d) Deciding appeals. The Board shall consider the record for

appeal described in paragraph (c) of this section and shall resolve the

appeal based on the requirements of the Act and this part within 90

calendar days of the date the appeal is filed with the Board. In

deciding the appeal, the Board shall follow the presumptions in this

part, unless the appellant or appellee Bank presents compelling

evidence to rebut a presumption.

[[Page 54974]]

7. Subpart C of part 933 is added to read as follows:

Subpart C--Eligibility Requirements

Sec. 933.6 General eligibility requirements.

(a) Requirements. Any building and loan association, savings and

loan association, cooperative bank, homestead association, insurance

company, savings bank, or insured depository institution, upon

application satisfying all of the requirements of the Act and this

part, shall be eligible to become a member of a Bank if:

(1) It is duly organized under the laws of any State of the United

States;

(2) It is subject to inspection and regulation under the banking

laws, or under similar laws, of any State or the United States;

(3) It makes long-term home mortgage loans;

(4) It has at least ten percent of its total assets in residential

mortgage loans;

(5) Its financial condition is such that advances may be safely

made to it;

(6) The character of its management is consistent with sound and

economical home financing; and

(7) Its home-financing policy is consistent with sound and

economical home financing.

(b) Ineligibility. Except as otherwise provided in this part, if an

applicant does not satisfy the requirements of this part, the applicant

is ineligible for membership.

Sec. 933.7 Duly organized requirement.

An applicant shall be deemed to be duly organized as required by

section 4(a)(1)(A) of the Act and Sec. 933.6(a)(1) of this part,

subject to rebuttal, if it is chartered by a state or federal agency as

a building and loan association, savings association, cooperative bank,

homestead association, insurance company, savings bank or insured

depository institution.

Sec. 933.8 Subject to inspection and regulation requirement.

An applicant shall be deemed to meet the inspection and regulation

requirement of section 4(a)(1)(B) of the Act and Sec. 933.6(a)(2) of

this part, subject to rebuttal, if it is inspected and regulated by the

Federal Deposit Insurance Corporation, the Federal Reserve Board, the

National Credit Union Administration, the Office of the Comptroller of

the Currency, the Office of Thrift Supervision, a state insurance

commissioner or other state regulatory agency authorized to regulate

depository institutions or insurance companies.

Sec. 933.9 Makes long-term home mortgage loans requirement.

(a) Requirement. An applicant shall be deemed to meet the makes

long-term mortgage loans requirement of section 4(a)(1)(C) of the Act

and Sec. 933.6(a)(3) of this part, subject to rebuttal, if the

applicant originates or purchases long-term home mortgage loans.

(b) Ineligible. If an applicant does not satisfy the requirement in

paragraph (a) of this section, the applicant is ineligible for

membership, unless the Board, in its sole discretion, determines on

appeal, on the basis of additional information supplied by the

applicant or otherwise, that the applicant satisfies the requirements

of section 4(a)(1)(C) of the Act.

Sec. 933.10 Ten percent requirement.

(a) Insured depository institution applicants. Except as provided

in Sec. 933.14(b) of this part, an insured depository institution

applicant shall be deemed to be in compliance with the ten percent

requirement of section 4(a)(2)(A) of the Act and Sec. 933.6(a)(4) of

this part, subject to rebuttal, if, as of the date of the application,

the applicant had at least ten percent of its total assets, as reported

to its primary regulator, in residential mortgage loans, except that

any assets used to secure mortgage debt securities as described in

Sec. 933.1(aa)(7) of this part shall not be used to meet this

requirement.

(b) Noninsured depository institution applicants. A noninsured

depository institution applicant shall be deemed to be in compliance

with the 10 percent requirement of section 4(a)(2)(A) of the Act and

Sec. 933.6(a)(4) of this part, subject to rebuttal, if the applicant

has mortgage-related assets that reflect a commitment to housing

finance, as determined by the Board.

(c) Ineligible. If an applicant does not satisfy the requirements

of this section, the applicant is ineligible for membership, unless the

Board, in its sole discretion, determines on appeal, on the basis of

additional information supplied by the applicant or otherwise, that the

applicant otherwise satisfies the requirements of section 4(a)(2)(A) of

the Act.

Sec. 933.11 Financial condition requirement.

(a) Review requirement. Except as provided in Sec. 933.14 of this

part, in determining whether an applicant has complied with the

financial condition requirement of section 4(a)(2)(B) of the Act and

Sec. 933.6(a)(5) of this part, the Bank shall obtain as a part of the

membership application, and consider each of the following documents:

(1) Financial report. The regulatory financial reports for the last

six calendar quarters and three year-ends;

(2) Financial statement. The most recent annual audited financial

statement, or if unavailable, any other such independent external

annual financial report as the applicant's primary regulator may

require, or if unavailable, such financial statements as the applicant

may otherwise have available;

(3) Examination report. The most recent available regulatory

examination report, a summary of the applicant's strengths and

weaknesses as cited in the examination report, and a summary of actions

taken by the applicant to respond to examination weaknesses;

(4) Enforcement actions. A description of any outstanding

enforcement actions, responses by the applicant and reports as required

by the enforcement action; and

(5) Additional information. Any other relevant information that

comes to the Bank's attention or reasonably should come to the Bank's

attention in reviewing the applicant's financial condition.

(b) Standards. Except as provided in Secs. 933.14(a) and 933.16 of

this part, an applicant shall be deemed to be in compliance with the

financial condition requirement of section 4(a)(2)(B) of the Act and

Sec. 933.6(a)(5) of this part, subject to rebuttal, if:

(1) Recent examination. The applicant has received a composite

regulatory examination rating by its primary regulator within two years

from the date of application;

(2) Meets capital requirement. The applicant meets all of its

minimum statutory and regulatory capital requirements as reported in

its most recent quarter-end regulatory financial report filed with its

primary regulator; and

(3) Minimum performance standard. (i) The applicant's most recent

composite regulatory examination rating was ``1;'' or, was ``2'' or

``3'' and, based on the applicant's most recent regulatory financial

report, the applicant satisfied all of the following performance trend

criteria:

(A) Earnings. Applicant had positive annualized adjusted earnings

in four of the six most recent calendar quarters;

(B) Nonperforming assets. Applicant's nonperforming assets did not

exceed ten percent of its total assets in the most recent calendar

quarter; and

(C) Loan loss reserves. Applicant had a ratio of loan loss reserves

to nonperforming assets of 60 percent or greater during 4 of the 6 most

recent calendar quarters.

[[Page 54975]]

(ii) For applicants that are not required to report financial data

to their primary regulator on a quarterly basis, the information

required in paragraphs (b)(3)(i) of this section may be reported on a

semiannual basis.

(c) Eligible collateral not considered. The availability of

sufficient eligible collateral to secure advances to the applicant is

presumed and shall not be considered in determining whether an

applicant is in the financial condition required by Sec. 933.6(a)(5) of

this part.

Sec. 933.12 Character of management requirement.

(a) Review requirement. For each applicant, the Bank shall review:

(1) The names of directors and senior officers;

(2) The most recent regulatory financial report;

(3) The most recent audited financial statement, or if unavailable,

other such independent external financial report that the applicant's

primary regulator may require, or if unavailable, such financial

statements that the applicant may otherwise have available;

(4) Enforcement actions as described in paragraph (b)(1) of this

section;

(5) Certain pending criminal, civil or administrative matters as

described in paragraph (b)(2) of this section;

(6) Information concerning potential monetary liabilities, material

pending law suits or unsatisfied judgments as described in paragraph

(b)(3) of this section; and

(7) Any other document that comes to the Bank's attention or

reasonably should come to the Bank's attention in reviewing the

applicant's character of management.

(b) Standards. An applicant shall be deemed to be in compliance

with the character of management required by section 4(a)(2)(C) of the

Act and Sec. 933.6(a)(6) of this part, subject to rebuttal, if:

(1) No enforcement actions. Neither the applicant nor any of its

directors or senior officers is subject to, or operating under, any

enforcement action instituted by an appropriate regulator;

(2) No objectionable proceedings. Neither the applicant nor any of

its directors or senior officers has been the subject of any criminal,

civil or administrative proceedings reflecting upon creditworthiness,

business judgment, or moral turpitude since the most recent

examination; and

(3) No objectionable liabilities. There are no known or potential

civil, criminal or administrative monetary liabilities, material

pending law suits, or unsatisfied judgments against the applicant, its

directors or senior officers since the most recent examination; and

(4) Applicant certification. The applicant makes the unqualified

certification described in paragraph (c)(1) of this section.

(c) Applicant certification. Either a majority of the members of

the board of directors of the applicant, or an individual with

authority to act on behalf of the board of directors of the applicant

shall provide to the Bank:

(1) Unqualified certification. An unqualified written certification

that the statements submitted in response to the requirements of

paragraphs (b) (1) through (3) of this section are true and correct

without exception; or

(2) Qualified certification. A qualified written certification that

the statements submitted in response to the requirements of paragraphs

(b) (1) through (3) of this section are true and correct and detailed

explanations of any exceptions noted.

Sec. 933.13 Home financing policy requirement.

(a) Standards. An applicant shall be deemed to be in compliance

with the home financing policy requirement of section 4(a)(2)(C) of the

Act and Sec. 933.6(a)(7) of this part, subject to rebuttal, if the

applicant has received:

(1) Recent evaluation. A Community Reinvestment Act (CRA)

performance evaluation within four years from the date of application;

and

(2) Minimum rating. A CRA rating of ``Satisfactory'' or better in

the most recent compliance examination.

(b) Written justification required. An applicant that is not

subject to CRA or an applicant that received a ``needs to improve''

rating in its most recent CRA performance evaluation but has received a

``satisfactory'' or better rating on its prior CRA performance

evaluation, shall file as a part of its application, a written

justification that demonstrates how and why the applicant's home

financing credit policies and lending practices (if applicable) are

consistent with the Bank System's housing finance mission.

Sec. 933.14 De novo insured depository institution applicants.

An insured depository institution applicant that provides a Bank

with written confirmation from its primary regulator that it has been

chartered for less than three years or is otherwise considered to be a

de novo insured depository institution (de novo applicant) by the

applicant's primary regulator shall receive special consideration for

eligibility as follows:

(a) Financial condition--(1) Financial report. For purposes of

Sec. 933.11(a)(1) of this part, a de novo applicant that has not filed

regulatory financial reports for the last six calendar quarters and

three year-ends shall provide any regulatory financial reports the

applicant has filed.

(2) Financial statement. For purposes of Sec. 933.11(a)(2) of this

part, a de novo applicant shall provide the most recent annual audited

financial statement, or if unavailable other such independent external

annual financial report as the applicant's primary regulator may

require, or if unavailable, a de novo applicant shall, at a minimum,

provide financial reports for six calendar quarters of operation.

(3) Regulatory examination rating. For purposes of

Sec. 933.11(b)(1) of this part, if a de novo applicant has not yet

received a composite regulatory examination rating from its primary

regulator, the applicant shall provide a preliminary or informal

written regulatory examination rating from the applicant's primary

regulator, if a preliminary or informal rating is acceptable to the

Bank.

(4) Performance trends. A de novo applicant need not meet the

performance trend criteria in Sec. 933.11(b)(3)(i) of this part; if:

(i) Reports for six quarters. Applicant has completed regulatory

financial reports for at least six calendar quarters of operation; and

(ii) Business plan compliance. Applicant has provided written

confirmation from its primary regulator that applicant is in compliance

with the terms of its regulatory business plan; or applicant has

prepared a written analysis demonstrating that it is in substantial

compliance with its regulatory business plan as determined by the Bank.

(b) Home financing policy. For purposes of Sec. 933.13(b) of this

part, a de novo applicant that has not yet received a CRA performance

evaluation shall be deemed to have a home financing policy as required

by Sec. 933.6(a)(7) of this part if it has received a preliminary or

informal written CRA performance evaluation of ``Satisfactory'' or

better; or it has submitted a written justification acceptable to the

Bank of how the applicant intends to support the Bank System's housing

finance mission.

Sec. 933.15 Recent and pending merger applicants.

(a) Definitions--(1) Pending merger applicant means an institution

that meets both of the following tests:

(i) Timing test. The institution is a party to a merger or

acquisition agreement expected to be consummated within two calendar

quarters of submission of the membership application; and

(ii) Materiality test. The institution will account for 75 percent

or less of the

[[Page 54976]]

combined assets of the resulting entity at the time of the merger or

acquisition.

(2) Recent merger applicant means an institution that meets both of

the following tests:

(i) Timing test. The institution merged with or acquired another

institution within the six calendar quarters prior to submission of the

membership application; and

(ii) Materiality test. The institution accounts for 75 percent or

less of the combined assets of the resulting entity at the time of the

merger or acquisition.

(b) Review requirement. For each recent or pending merger

applicant, the digest shall include the following additional

information:

(1) The name of each entity involved and its charter type;

(2) A general statement of the financial condition of each entity;

(3) A brief statement of the business reasons for the merger or

acquisition; and

(4) The names and positions of management of the resulting entity.

(c) Standards. A recent or pending merger applicant shall be deemed

to be in compliance with section 4(a) of the Act and Sec. 933.6(a) of

this part, subject to rebuttal, only if the recent or pending merger

applicant satisfies the requirements of this part as modified and

supplemented by this section.

(1) Recent merger applicant financial condition--(i) Recent

examination and minimum performance standards. A recent merger

applicant that does not have a composite regulatory examination rating

subsequent to the merger or acquisition, shall satisfy the requirements

of Sec. 933.11(b) of this part on a combined basis and for each party

to the merger or acquisition, except an incumbent Bank member.

(ii) Performance trends. To the extent that a recent merger

applicant does not yet have regulatory financial reports for the six

most recent calendar quarters, the applicant shall prepare pro forma

combined financial statements for those calendar quarters in which an

actual combined regulatory financial report is unavailable to determine

whether the applicant meets the performance trend requirements of

Sec. 933.11(b)(3) of this part.

(2) Pending merger applicant financial condition--(i) Recent

examination and minimum performance standards. In lieu of a composite

regulatory examination rating for the combined entity, as required by

Sec. 933.11(b)(1) of this part, each party to the merger or

acquisition, except an incumbent Bank member, must satisfy all of the

requirements of Sec. 933.11(b) of this part.

(ii) Capital requirements and performance trends. In addition to

each party to a pending merger individually satisfying all of the

requirements of Sec. 933.11(b) of this part, the pending merger

applicant shall satisfy the requirements in Sec. 933.11(b) (2) and (3)

of this part as a combined entity based on pro forma combined financial

statements to be prepared by the applicant for the six most recent

calendar quarters.

(iii) Character of management. For purposes of Sec. 933.12 of this

part, the determination of the character of management of a recent or

pending merger applicant shall be based on an evaluation of the

directors and senior officers of the resulting entity.

(iv) Home financing policy. For a pending merger applicant or for a

recent merger applicant that does not yet have a CRA performance

evaluation on a combined basis for the merged entity, the determination

of whether the merger applicant's home financing policy satisfies the

requirements of Sec. 933.13 of this part, shall be based on a review of

the most recent CRA performance evaluation for each party to the merger

or acquisition.

Sec. 933.16 Financial condition standards for insurance company

applicants.

(a) Definitions. For purposes of this section:

(1) Adjusted liabilities means total statutory liabilities less

separate account liabilities, asset valuation reserves, and interest

maintenance reserves.

(2) Adjusted surplus means surplus plus asset valuation reserves

and interest maintenance reserves.

(3) Asset valuation reserves means reserves on the liability side

of the balance sheet that are established by the primary regulatory to

guard against fluctuations in the value of securities and to absorb all

unrealized capital gains and losses and certain realized gains and

losses on investment activity.

(4) Highly liquid assets means cash or cash equivalents readily

convertible to cash, including marketable Class 1 (highest investment

grade) publicly traded bonds, marketable preferred and common stock,

short-term investments, and investment income due.

(5) Interest maintenance reserves means reserves on the liability

side of the balance sheet that are established to hold the amount of

realized capital gains and losses on fixed income securities that

result from overall interest rates changes.

(6) Liquid assets means installment premiums booked but deferred

and not yet due, cash, accrued investment income, marketable Class 1

(highest investment grade quality) publicly traded bonds and marketable

Class 2 (high investment grade quality) publicly traded bonds,

marketable preferred and common stock, cash, short-term investments,

and investment income due, less investments in affiliated companies and

excess of real estate over five percent of liabilities.

(7) Net premiums written means the total consideration paid for an

insurance contract during a specified period of time, net of

reinsurance assumed and ceded.

(8) Reinsurance means transactions in which an assuming enterprise,

known as a reinsurer, assumes, for a premium, all or part of a risk

undertaken originally by another insurer.

(9) Reinsurance assumed means all premiums generated by policies

issued to assume a liability, in whole or part, of another insurer that

is already covering the risk with a policy.

(10) Reinsurance ceded means all premiums generated by policies or

coverage purchased from another insurer that transfer liability, in

whole or part, from direct or reinsurance policies.

(11) Reserves means funds set aside for possible losses on

insurance policies, annuities, claims unpaid, funds held for

policyholders, and deposit funds.

(12) Separate accounts means assets and liabilities maintained by

an insurance company predominately to fund fixed-benefit or variable

annuity contracts and pension plans. The contract holder assumes the

investment risk while the insurance company receives a fee for managing

or maintaining the investments.

(13) Statutory liabilities means the total of funds set aside to

pay future claims and operating expenses, including separate account

liabilities and funds held for the benefit of others, as established

under the accounting rules and techniques permitted by the National

Association of Insurance Commissioners. Examples of statutory

liabilities are policy reserves, premiums collected in advance,

commission and expenses payable, and provisions for policyholder

dividends.

(14) Surplus means the total of common and preferred capital stock,

aggregate write-ins for other than special surplus funds, gross paid-in

and contributed surplus, surplus notes and unassigned funds less

treasury stock.

(15) Tabular interest means interest, required by the primary

regulator, to be set aside to cover all contractual obligations.

(b) Performance standards. An insurance company applicant shall be

[[Page 54977]]

deemed to meet the financial condition requirement of section

4(a)(2)(B) of the Act and Sec. 933.6(a)(5) of this part, subject to

rebuttal, if:

(1) Recent examination and rating. The applicant has received a

regulatory examination by its primary regulator and a composite

independent insurance company rating from A.M. Best Company, Duff &

Phelps, Inc., Moody's Investor Service, Inc., Standard & Poor's Corp.

or Weiss Research Inc. within three years of the date of application;

(2) Satisfactory examination. The applicant's most recent

regulatory examination by its primary regulator indicates no major

adverse findings pertaining to the company's financial condition;

(3) Meets capital requirements. The applicant meets all of its

minimum statutory and regulatory capital requirements and the capital

standards established by the National Association of Insurance

Commissioners as reported in the applicant's most recent regulatory

financial report filed with its primary regulator;

(4) Minimum performance standard--(i) Strong rating. The

applicant's most recent composite independent insurance company rating

was:

(A) A.M. Best Company: ``A-'' or above;

(B) Duff & Phelps, Inc.: ``AA-'' or above;

(C) Moody's Investor Service, Inc.: ``Aa'' or above;

(D) Standard & Poor's Corp.: ``AA'' or above; or

(E) Weiss Research, Inc.: ``A''; or

(ii) Adequate rating and earnings--(A) Adequate rating. The

applicant's most recent composite independent insurance company rating

was:

(1) A.M. Best Company: ``C+'' to ``B++'';

(2) Duff & Phelps, Inc.: ``BB-'' to ``A+'';

(3) Moody's Investor Service, Inc.: ``Ba'' to ``A'';

(4) Standard & Poor's Corp.: ``BB'' to ``A''; or

(5) Weiss Research, Inc.: ``B'' or ``C''; and

(B) Earnings. The applicant had positive annualized adjusted

earnings in two of the three most recent calendar years; and

(5) Minimum performance ratios. The applicant meets the minimum

performance ratios in paragraph (b)(5)(ii) of this section during the

most recent year-end or quarter-end period.

(i) Definitions. For purposes of this paragraph (b)(5):

(A) Traditional life insurance products means insurance business

that consists of individual term life insurance contracts, individual

permanent fixed value life insurance contracts, or policies that

consist of fixed premiums, fixed dollar amounts of contract, or fixed

reserves (cash value) established by each state.

(B) Interest sensitive life insurance products (universal or whole

life) means insurance business that consists of individual life

insurance policies characterized by flexible premiums, dollar amounts

of contract that can vary, and reserves which represent a pool of

assets such as mutual funds that are held for the benefit of, and

support the investment return to, policy holders.

(C) Accident and health insurance products (indemnity) means

insurance business that consists of coverage for care such as basic

hospital expense, basic surgical expense, dental care, specific

hospital reimbursement, long-term nursing home or home care expenses

for the aged or disabled, major medical expense, and Medicare

supplemental insurance.

(D) Individual and group annuity insurance products means insurance

business that consists of contracts that accumulate and disburse

retirement benefits to individual policyholders or to companies for

their employees, hold pension deposit funds or distribute and hold

funds under guaranteed interest contracts.

(E) Disability income insurance products means insurance business

that consists of contracts that pay income periodically to insureds who

are unable to work as a result of sickness or injury.

(F) Property insurance products means insurance business that

consists of policies where the majority of premiums go to cover losses

to real property, automobiles or similar tangible assets.

(G) Liability insurance products means insurance business that

consists of policies that cover losses arising from actions taken by

individuals or companies, including losses from litigation or mutual

agreements as to the amount of a claim such as product liability,

medical malpractice and worker's compensation.

(ii) Overall minimum performance ratios.--(A) Premium to surplus

ratio. (1) Calculation. Divide net premiums written by total capital

and surplus.

(2) Standard. The applicant's net premiums may not exceed three

times the level of capital and surplus.

(B) Change in net premiums written ratio.--(1) Calculation. Divide

the change in net premiums written between the two most recent

consecutive calendar years by the total net premiums written in the

first year.

(2) Standard. The applicant's ratio must be between -10 percent and

+50 percent.

(C) Surplus relief ratio.--(1) Calculation. Divide the net of

commissions and expenses generated by reinsurance ceded and assumed by

total capital and surplus.

(2) Standard. The applicant's ratio must be less than 30 percent.

(D) Adequacy of investment income ratio.--(1) Calculation. Divide

net investment income by the sum of total tabular interest required on

life insurance, accident and health reserves, and total interest

credited on funds held on deposit.

(2) Standard. The applicant's net investment income must provide no

less than 1.25 times the coverage on total funds held in reserves to

pay interest on contractual obligations and funds held on deposit.

(E) Change in capital and surplus ratio.--(1) Calculation. Divide

the net change in capital and surplus between the two most recent

consecutive calendar years, by total capital and surplus in the first

year.

(2) Standard. The applicant's ratio must be between -10 percent and

+50 percent.

(iii) Solvency ratios.--(A) Highly liquid ratio.--(1) Calculation.

Divide highly liquid assets by annuity and deposit fund reserves less

reserves with no withdrawal privileges, separate accounts and

reinsurance.

(2) Standard. The applicant's ratio must be no less than:

(i) 75 percent on traditional life insurance products;

(ii) 85 percent on interest sensitive life insurance products;

(iii) 85 percent on individual annuity insurance products;

(iv) 100 percent on group annuity insurance products;

(v) 79 percent on property and liability insurance products;

(vi) 75 percent on accident and health insurance products; and

(vii) 50 percent on disability income insurance products.

(B) Current ratio.--(1) Calculation. Divide liquid assets by

annuity, ordinary life, and deposit fund reserves, less reserves with

no withdrawal privileges, separate accounts, reinsurance, and policy

loans.

(2) Standard. The applicant's ratio must be no less than:

(i) 60 percent on traditional life insurance products;

(ii) 75 percent on interest sensitive life insurance products;

(iii) 75 percent on individual and group annuity insurance

products;

(iv) 87 percent on property and liability insurance products;

[[Page 54978]]

(v) 75 percent on accident and health insurance products; and

(vi) 50 percent on disability income insurance products.

(C) Adjusted liabilities to adjusted surplus ratio.--(1)

Calculation. Divide adjusted liabilities by adjusted surplus.

(2) Standard. The applicant's ratio must not exceed:

(i) 10 to 1 on traditional life insurance products;

(ii) 10 to 1 on interest sensitive life insurance products;

(iii) 10 to 1 on individual and group annuity insurance products;

(iv) 3 to 1 on property and liability insurance products;

(v) 3 to 1 on accident and health insurance products; and

(vi) 5 to 1 on disability income insurance products.

Sec. 933.17 Rebuttable presumptions.

(a) Overcoming presumptive compliance. The presumption that an

applicant meeting the standards described in Secs. 933.7 to 933.16 of

this part is in compliance with the Act and Sec. 933.6(a) of this part,

may be overcome if the Bank obtains compelling evidence to the

contrary.

(b) Overcoming presumptive noncompliance. An applicant that does

not meet all of the standards in Secs. 933.7 to 933.16 of this part, or

that is unable to provide the information required to evaluate whether

or not it meets those standards, shall be deemed not to be in

compliance with the Act and Sec. 933.6(a) of this part unless the

applicant rebuts the presumption, as described in this section, and the

Bank determines that the applicant has complied with the Act and

Sec. 933.6(a) of this part.

(c) Noncompliance with financial condition standards.--(1)

Compelling written justification. For each variance from the minimum

regulatory examination rating required by Sec. 933.11(b)(3) of this

part, an applicant shall prepare a written justification that provides

compelling evidence that the applicant is in the financial condition

required by Sec. 933.6(a)(4) of this part, notwithstanding the

variance.

(2) Substantial written justification. For each variance from a

performance criterion required by Sec. 933.11(b)(3), of this part, the

applicant shall prepare a written justification pertaining to that

performance criterion that provides substantial evidence that the

applicant is in the financial condition required by Sec. 933.6(a)(4) of

this part, notwithstanding the variance.

(d) Noncompliance with character of management standards.--(1)

Enforcement actions. If an applicant or any of its directors or senior

officers is subject to or operating under an enforcement action, the

applicant shall provide:

(i) Regulator confirmation. Written confirmation from the

applicant's appropriate regulator that the applicant or its directors

or senior officers are in substantial compliance with all aspects of

the enforcement action; or

(ii) Written analysis. A written analysis stating each action the

applicant or its directors or senior officers is required to take by

the enforcement action, the actions actually taken by the applicant or

its directors or senior officers, and whether the applicant regards

this as substantial compliance. If the Bank is uncertain whether the

applicant has substantially complied with all aspects of the

enforcement action, the Bank shall consult the applicant's appropriate

regulator.

(2) Certain criminal, civil or administrative proceedings. If an

applicant or any of its directors or senior officers is subject to

criminal, civil or administrative proceedings that reflect on

creditworthiness, business judgment or moral turpitude since the last

examination, the applicant shall provide:

(i) Regulator confirmation. Written confirmation from the

applicant's primary regulator that the proceedings will not likely

result in enforcement action; or

(ii) Written analysis. A written analysis of the severity of the

pending charges and any mitigating action taken by the applicant or its

directors or senior officers. If the Bank is uncertain whether the

proceedings will result in enforcement action, the Bank shall consult

the applicant's primary regulator.

(3) Material monetary liabilities. If there are any material known

or potential civil, criminal or administrative monetary liabilities,

pending law suits, or unsatisfied judgments against the applicant or

its directors or senior officers as of the most recent quarter-end, the

applicant shall provide:

(i) Regulator confirmation. Written confirmation from the

applicant's primary regulator that the matter will not likely cause the

applicant to fall below its minimum capital requirements; or

(ii) Written analysis. A written analysis of each matter, the

likelihood of the applicant or its directors or senior officers

prevailing and the financial consequences if the applicant or its

directors or senior officers do not prevail. If the Bank is uncertain

whether the matter will cause the applicant to fall below its minimum

capital requirements, the Bank shall consult the applicant's primary

regulator.

(e) Noncompliance with home financing policy standards. If an

applicant received a ``substantial non-compliance'' rating on its most

recent CRA performance evaluation, two consecutive ``needs to improve''

CRA ratings, or has not received a CRA performance evaluation within

four years from the date of the membership application, the applicant

shall provide:

(1) Regulator confirmation. Written confirmation from the

applicant's primary regulator of the applicant's recent satisfactory

CRA performance, including any corrective action that substantially

improved upon the deficiencies cited in any recent CRA performance

evaluation; or

(2) Written analysis. A written analysis demonstrating that the CRA

rating is unrelated to housing finance, or providing substantial

evidence that the applicant's home financing credit policies and

lending practices (if applicable) are consistent with the Bank System's

housing finance mission.

Sec. 933.18 Determination of appropriate Bank district for membership.

(a) Eligibility. (1) An institution eligible to become a member of

a Bank under the Act and this part may become a member only of the Bank

of the district in which the institution's principal place of business

is located, except as provided in paragraph (a)(2) of this section.

(2) An institution eligible to become a member of a Bank under the

Act and this part may become a member of the Bank of a district

adjoining the district in which the institution's principal place of

business is located, if demanded by convenience and then only with the

approval of the Board.

(b) Principal place of business. Except as otherwise designated in

accordance with this section, the principal place of business of an

institution is the state in which the institution maintains its home

office established as such in conformity with the laws under which the

institution is organized.

(c) Designation of principal place of business. (1) A member or an

applicant for membership may request in writing to the Bank in the

district where the institution maintains its home office that a state

other than the state in which it maintains its home office that a state

other than the state in which it maintains its home office be

designated as its principal place of business. Within 90 days of

receipt of such written request, the board of directors of the Bank in

the district where the

[[Page 54979]]

institution maintains its home office shall designate a state other

than the state where the institution maintains its home office as the

institution's principal place of business, provided all of the

following criteria are satisfied:

(i) At least 80 percent of the institution's accounting books,

records and ledgers are maintained, located or held in such designated

state;

(ii) A majority of meetings of the institution's board of directors

and constituent committees are conducted in such designated state; and

(iii) A majority of the institution's five highest paid officers

have their place of employment located in such designated state.

(2) Written notice of a designation made pursuant to paragraph

(c)(1) of this section shall be sent to the Bank in the district

containing the designated state, the Board and the institution.

(3) The notice of designation made pursuant to paragraph (c)(1) of

this section shall include the state designated as the principal place

of business and the resulting Bank to which membership will be

transferred.

(4) If the board of directors of the Bank in the district where the

institution maintains its home office fails to make the designation

requested by the member or applicant pursuant to paragraph (c)(1) of

this section, then the member or applicant may request in writing that

the board make the designation.

(d) Transfer of membership. (1) No transfer of membership from one

Bank to another Bank shall take effect until the Banks involved reach

agreement on a method of orderly transfer.

(2) In the event that the Banks involved fail to agree on a method

of orderly transfer, the Board shall determine the conditions under

which the transfer shall take place.

(e) Effect of transfer. A transfer of membership pursuant to this

section shall be effective for all purposes including directorial

representation under section 7(c) of the Act, 12 U.S.C. 1427(c), and

Sec. 932.11 of this chapter, but shall not be subject to the provisions

on termination of membership set forth in section 6 of the Act, 12

U.S.C. 1426, or Secs. 933.26, 933.27 and 933.29 of this part, including

the restriction on reacquiring Bank membership set forth in Sec. 933.30

of this part.

8. In the list below, for each section indicated in the left

column, remove the reference indicated in the middle column from where

it appears and add the reference indicated in the right column:

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

Section Remove - Add

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933.20(b)(1).......................... Secs. 933.2(c) or 933.3..................................... Sec. 933.3 -

Sec. 933.2(d)............................................... Sec. 933.4(a)

933.20(b)(2).......................... Sec. 933.2(d)............................................... Sec. 933.4(a)

933.22(b)(1).......................... Sec. 933.7(a)............................................... Sec. 933.20(a)

Sec. 933.18(d).............................................. Sec. 933.31(d)

933.23................................ Sec. 933.7(a)............................................... Sec. 933.20(a)

933.24(a)(2).......................... Sec. 933.7(a)............................................... Sec. 933.20(a)

933.24(b)(2).......................... Sec. 933.16................................................. Sec. 933.29

933.25(c)............................. Sec. 933.2.................................................. Subpart B

933.25(d)(2)(ii) (A) and (B).......... Sec. 933.7(a)............................................... Sec. 933.20(a)

933.25(d)(3).......................... Sec. 933.16................................................. Sec. 933.29

933.26(c)............................. Sec. 933.16................................................. Sec. 933.29

933.27(e)............................. Sec. 933.16................................................. Sec. 933.29

933.28(b)............................. Sec. 933.16................................................. Sec. 933.29

933.29(a)(1).......................... Secs. 933.13, 933.14 or 933.15.............................. Secs. 933.26, 933.27 or 933.28

Secs. 933.11(b) or 933.12(d)(3)............................. Secs. 933.24(b) or 933.25(d)(3)

933.30 introductory text.............. Sec. 933.13................................................. Sec. 933.26

933.30(a)............................. Sec. 933.5.................................................. Sec. 933.18

933.30(b)............................. Sec. 933.2(d)............................................... Sec. 933.4(a)

933.31(d)............................. Sec. 933.9(b)(1)............................................ Sec. 933.22(b)(1)

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Dated: October 5, 1995.

By the Federal Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 95-25823 Filed 10-26-95; 8:45 am]

BILLING CODE 6725-01-U