Amendment of Affordable Housing Program Regulation; Affordable Housing Program Application Requirements

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

amend its regulation governing the Affordable Housing Program (AHP) to

provide the Federal Home Loan Banks (Banks) with the authority to limit

the maximum amount of AHP subsidy that may be requested for a given AHP

funding period in the following ways: a uniform limit per member; a

limit per project application; a limit per project unit; or a limit per

amount of AHP direct subsidy per project application. A Bank would have

the authority to establish any other subsidy limit or substantive AHP

application requirement not specifically provided for in the AHP

regulation, only if such subsidy limit or substantive AHP application

requirement has received the prior approval of the Board. A Bank would

have to consult with its Advisory Council in establishing its subsidy

limits or substantive AHP application requirements. Any subsidy limit

or AHP application requirement established by a Bank would have to

apply equally to all members.

The Board requests comments on this proposal. In addition, the

Board requests comments on whether the AHP regulation also should be

amended to authorize the Banks in their discretion to: Establish AHP

subsidy limits based on the level of a member's mortgage-related assets

or its use of Bank credit products; establish other specified types of

AHP subsidy limits that would promote AHP goals; limit or prohibit AHP

applications from out-of-district projects; or require involvement by

members in an AHP project as a threshold criterion in order to be

considered for scoring and approval of AHP funding.

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

before December 18, 1995.

ADDRESSES: Send comments to: Elaine L. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, DC

20006. Comments will be available for public inspection at this

address.

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

Community Investment Program & Policy Division, Office of Housing

Finance, (202) 408-2576; Sharon B. Like, Attorney-Adviser, Office of

General Counsel, (202) 408-2930, Federal Housing Finance Board, 1777 F

Street, N.W., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. AHP Statutory and Regulatory Requirements

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

requires each Bank to establish a program to subsidize the interest

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

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

subsidized interest rates. See 12 U.S.C. 1430(j)(1). While requiring

the Banks to make subsidized advances to their members, section 10(j)

of the Bank Act is silent as to whether a Bank may impose limits on the

amount of AHP subsidy a member may obtain. The Board is required to

promulgate regulations governing the AHP. See id. sec. 1430(j)(9); 12

CFR part 960.

Under the Bank Act and the Board's AHP regulation, each Bank must

make a specified annual contribution to fund its AHP. See 12 U.S.C.

1430(j)(5); 12 CFR 960.10. While the Bank Act does not specifically

address the method by which the Banks' required annual contribution to

the AHP is to be allocated among potential recipients, the AHP

regulation establishes threshold criteria that applications must

satisfy and a competitive application scoring process to be used to

determine the distribution of AHP funds. See 12 CFR 960.5.

Under the AHP regulation, during each calendar year, each Bank

accepts applications for funds from its members by specific application

due dates during two of four quarterly funding periods. See id.

Sec. 960.4(a). Each Bank must notify its members of the approximate

amount of annual AHP funds available and the approximate amount to be

offered in each funding period. See id. Sec. 960.4(b). Applications

must contain detailed information described in the AHP regulation. See

id. Sec. 960.4(c). AHP funds are awarded to the applicants whose

applications score the highest, pursuant to the scoring criteria set

forth in the AHP regulation, among all the applications received by the

Bank in that funding period. See id. Sec. 960.5(f). It was anticipated

that, in this way, the best, most competitive projects would be funded

with AHP subsidies.

B. Current Bank Policies on AHP Subsidy Limits, Member Involvement, and

Out-of-District AHP Projects

1. Current Bank Policies

Pursuant to prior legal advice that, absent guidance from or

definitive action by the Board on specific policies and statutory

interpretations, the Banks had to determine for themselves whether

their actions were consistent with a reasonable interpretation of the

AHP provisions of the Bank Act and AHP regulation, a number of Banks

adopted AHP policies that impose requirements in addition to, or

different from, the comprehensive AHP application requirements

contained in the Board's AHP regulation.

More specifically, several Banks unilaterally have imposed maximum

limits on the amount of AHP subsidy that may be requested in a given

AHP funding period, including limits applicable: per member; per

project application; per project unit; and per amount of AHP direct

subsidy per project application. One Bank has adopted member subsidy

limits that are based on the level of a member's use of Bank credit

products in the preceding year. Another Bank has established a policy

prohibiting members from submitting AHP applications for projects

located outside of the Bank's district.

Yet another Bank has adopted a threshold criterion that a project

must include member involvement in order to be scored and approved for

AHP funding, through: financing other than through an AHP direct

subsidy;

[[Page 55488]]

servicing project loans at no cost to the project sponsor; making cash

contributions of $500 per project unit; providing a minimum 100 hours

of volunteer labor per unit provided by employees of the member; or

contributing land or real estate owned by the member to be used in the

project.

2. Reasons Provided for Policies

None of the Bank policies discussed above has been acted upon by

the Board prior to issuance of this proposed rule. All of the policies

presumably have been adopted pursuant to determinations by the Banks

that these policies were consistent with a reasonable interpretation of

the Bank Act and AHP regulation.

One reason that has been expressed for permitting various AHP

subsidy limits is that they encourage greater participation by members

in the AHP. Section 10(j) does not explicitly require or encourage

widespread member participation as a goal of the AHP. On the other

hand, the legislative history of the AHP statutory provisions does

indicate that Congress was aware of ``uneven use of similar special

advance programs maintained by the [Banks] in the past and the

reluctance of some of the [Banks] to actively encourage their member

institutions to address critical community investment and affordable

housing needs.'' See Conference Report accompanying Financial

Institutions Reform, Recovery and Enforcement Act of 1989, H.R. Conf.

Rep. No. 101-222, 101st Cong., 1st Sess. (Aug. 4, 1989) at 429. The

principle of encouraging even administration of special advances

programs among the Banks arguably also could be applied within each

Bank, i.e., to encouraging the use of AHP programs by all members

within the Bank, on a broad basis, in order to meet community

investment and affordable housing needs.

3. Reasons for Change

In light of the level of detail set forth in the AHP regulation,

which includes particularized filing requirements (down to specifying

the dates by which applications must be filed), details of the required

contents of applications, and explicit procedures for applications

review, see 12 CFR 960.4, 960.5, the Board is concerned that some forms

of additional substantive AHP application requirements may tend to

undermine the regulatory scheme. The Board would prefer that the

regulation provide flexibility through the establishment of clear

standards under which the Banks must operate. The Board also is mindful

of the importance of ensuring that the AHP remain responsive to the

unique circumstances within each Bank District, and that program

standards not hamper responsive local administration of the AHP.

The proposed rule would allow the Banks to establish the listed AHP

application requirements, as well as any other subsidy limit or

substantive AHP application requirement not specifically provided for

in the AHP regulation, only if such other subsidy limit or substantive

application requirement has received the prior approval of the Board.

The Board requests comment on whether this or some other approach would

best maintain the appropriate balance between clear regulatory

standards and responsiveness and flexibility for the program.

The Board wishes to emphasize that the proposed rule is meant to

clarify the regulatory scheme and should not be construed as

representing a retreat by the Board from its consideration of the

decentralization of the AHP by giving the Banks greater flexibility and

control in implementing their AHP programs.

None of the Bank policies discussed above was addressed or noticed

for comment in the Board's proposed AHP regulation issued in January

1994. See 59 Fed. Reg. 1323 (Jan. 10, 1994). In order to ensure that

full consideration is given to the consequences of the proposed rule,

the Board is requesting comments on any provisions that should be added

to the regulation for any currently existing Bank AHP application

policies or any other substantive AHP application requirements a Bank

may wish to impose that are not specifically provided for in the AHP

regulation.

II. Analysis of the Proposed Rule

A. Notice to Members of Subsidy Limits

Section 960.4(b)(1) of the proposed rule requires each Bank to

notify members of the applicability of any subsidy limits or other

application requirements established pursuant to section 960.4(b) of

the proposed rule.

B. Per Member Limits

Section 960.4(b)(2) of the proposed rule provides that a Bank may

establish a uniform maximum dollar limit on the amount of AHP subsidy,

or a uniform maximum limit on the percentage of total available AHP

subsidy, that may be requested by a member in a given AHP funding

period.

Limiting the amount of subsidy that may be requested by a member

may prevent a small number of members from receiving all of the

subsidy, thereby encouraging participation by a greater number of

members in the AHP. While there may be an effect on the AHP regulatory

program goal of promoting competition if highly competitive projects

have difficulty finding available members that have not exceeded their

limits to submit applications for them, sufficient numbers of members

should be available to handle applications for AHP funds. Accordingly,

any noncompetitive effect of per member subsidy limits likely would be

minimal in comparison to the benefit of greater member participation in

the AHP.

The proposed rule does not authorize a Bank to establish AHP

subsidy limits that are based on the level of a member's mortgage-

related assets or its use of Bank credit products. See further

discussion in III.D. below.

C. Per Project Application Direct Subsidy Limits

Section 960.4(b)(2) of the proposed rule provides that a Bank may

limit the maximum amount of AHP direct subsidy that may be requested

per project application, in a given AHP funding period.

Such a limit may promote greater member involvement in the AHP by

encouraging more members to borrow AHP subsidized advances and, in

turn, lend their own funds to borrowers, thereby building greater

member affordable housing lending capacity and expertise. If members'

own funds were at risk as a result of such a limit, members would have

greater incentive to underwrite and monitor projects for AHP compliance

and financial feasibility. Direct subsidies, which, in some cases, are

passed on by members to borrowers without members putting any of their

own funds at risk, do not promote these goals.

A direct subsidy limit would not prevent competitive projects

seeking direct subsidies from being funded; it merely would cause those

projects to be funded at lower levels, with the gaps in funding made up

from other funding sources. There may be an effect on the AHP

regulatory program goal of promoting competition if otherwise highly

competitive projects that need a large amount of direct subsidy have

difficulty finding other available sources for such funding, and

therefore remain financially unfeasible. However, any noncompetitive

effect of direct subsidy limits may be outweighed by the benefit of

greater member involvement in the AHP.

D. Per Project Application or Per Project Unit Limits

Section 960.4(b)(2) of the proposed rule provides that a Bank may

limit the

[[Page 55489]]

maximum amount of AHP subsidy that may be requested per project

application or per project unit, in a given AHP funding period.

Per project application or per project unit limits may prevent a

small number of projects from receiving all or most of the available

AHP funds in a given funding period, thereby encouraging funding of a

greater number of AHP projects, which also may benefit housing needs in

more areas of the district. Such limits would not prevent competitive

projects from being funded; they would merely cause those projects to

be funded at lower levels, with the gaps in funding made up from other

funding sources, thereby enabling the funding of additional AHP

projects. Again, there may be an effect on the AHP regulatory program

goal of promoting competition if otherwise highly competitive projects

that need a large amount of subsidy have difficulty finding other

available sources for funding, and therefore remain financially

unfeasible. However, any noncompetitive effect of such limits may be

outweighed by the benefit of funding a greater number of AHP projects

in the district.

Per project unit limits also conform with the goal of the

effectiveness scoring criterion in the AHP regulation to encourage

lower levels of AHP subsidy per unit by giving additional scoring

points for projects with lower ratios. See 12 CFR 960.5(d)(3).

Per project unit limits could have an impact on the AHP statutory

and regulatory program goal of promoting funding of units for very low-

income households which often need larger subsidies to make the

projects financially feasible. See 12 U.S.C. 1430(j)(2)(B); 12 CFR

960.3(b), 960.5(b)(1), (2), (d)(1). However, the ability to receive

additional scoring points under the AHP regulatory scoring criterion

for targeting units for occupancy by very low-income households, see 12

CFR 960.5(d)(1), the importance of encouraging efforts to find other

available sources of funding and the goal of promoting the funding of a

greater number of projects together may outweigh any effect on funding

of units for very low-income households.

E. Board Waiver Authority

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

establish any other subsidy limit or substantive AHP application

requirement not specifically provided for in sections 960.4(b) or

960.5(a)(2) of the AHP regulation, only if such subsidy limit or

substantive AHP application requirement has received the prior approval

of the Board. The Board requests comments on whether such additional

subsidy limits or substantive AHP application requirements should

depend on whether application of the limit or requirement would

adversely affect achievement of the purposes of the AHP provisions of

the Bank Act, or upon a showing of good cause.

F. Subsidy Limits Applied Equally to All Members

Section 960.4(b)(4) of the proposed rule provides that any subsidy

limits or AHP application requirements established by a Bank pursuant

to section 960.4(b) must be applied equally to all members. See further

discussion in III.D. below.

G. Bank Consultation With Advisory Council

Sections 960.4(b)(2) and (3) of the proposed rule require that a

Bank have consulted with its Advisory Council in establishing any

subsidy limits or other substantive AHP application requirements

pursuant to section 960.4(b). Advisory Council members typically have

affordable housing expertise that may be very useful to the Banks in

determining the affordable housing needs of the Bank district and how

any subsidy limit or other substantive AHP application requirement

would promote those needs.

III. Related Request for Comments

A. Other Types of Subsidy Limits

The Board requests comments on any other types of subsidy limits

that would promote AHP goals that should be considered appropriate for

establishment by a Bank. For example, a maximum limit on the amount of

AHP subsidy that may be requested per sponsor arguably might be

appropriate to encourage greater participation by sponsors in the AHP,

increase the affordable housing development capacity of more sponsors,

and encourage the creation of more sponsors, especially where one large

or particularly active sponsor in a district is winning a large portion

of the Bank's AHP funds.

B. Limiting or Prohibiting AHP Applications From Out-of-District

Projects

The Board requests comments on whether the Banks should have

authority to limit or prohibit members from submitting AHP applications

from projects located outside of the Bank's district, and the reasons

for or against such authority.

One reason expressed for imposing such a restriction is that the

Bank's Advisory Council, whose members are drawn from the Bank's

district and who are required to advise on the low- and moderate-income

housing programs and needs of the district, do not have the familiarity

and expertise to provide guidance on projects located outside the

district. See 12 U.S.C. 1430(j)(11). However, it also is noted that

Advisory Council members, while most familiar with the housing needs of

their local communities, often are very familiar with the network of

affordable housing providers that are active across the country and

could advise the Banks on affordable housing issues of general

applicability.

Another reason given for imposing an out-of-district restriction is

that such a restriction is warranted when there is an overwhelming

demand for AHP funds within the district.

In addition, it is argued that the administrative costs incurred by

the Bank to monitor out-of-district projects for compliance with the

AHP statutory and regulatory requirements would be significantly

greater than those for in-district projects. However, particularly in

Bank districts that cover large geographical areas, it is possible that

the cost of monitoring and conducting on-site visits of out-of-district

projects would be no greater than the cost of conducting such

activities in-district.

Another argument made in support of an out-of-district restriction

is that sponsors of out-of-district projects would not be precluded

from participating in the AHP, as they could apply for AHP funds

through a member of another Bank.

It also is argued that an out-of-district restriction will have

only a limited effect on the desirability of Bank membership, since

there are other benefits to membership besides access to the AHP.

Another argument made is that out-of-district projects located in

lower-cost districts may be able to compete more successfully for AHP

funds against higher-cost projects located in the district.

It also is noted that one or a few large multistate members have

the ability to win a substantial portion of AHP funds for out-of-

district projects, thereby resulting in significantly less AHP funds

for use by other members and sponsors within the district.

The Bank Act and Board regulations provide that an eligible

institution may only be a member of and obtain advances from one Bank,

even though members may do business through branch offices outside that

Bank district.

[[Page 55490]]

See id. sec. 1424(b); 12 CFR 933.5(a). The Bank Act does not

specifically prohibit advances for AHP or other purposes from being

used out of district. See 12 U.S.C. 1424(b); 1430(a), (j). A Bank's

required annual contribution to the AHP is based on a percentage of the

Bank's net earnings in the previous year. See id. sec. 1430(j)(5).

Those net earnings are derived, in part, from advances made to members

that have branches outside the Bank district in which they are a

member. Preventing access to AHP funds by a member's out-of-district

branches would deny that member the opportunity to take advantage of a

source of funds it was, in part, responsible for generating.

In addition, it would preclude a member that does business outside

the Bank district where it is a member from applying for AHP funds on

behalf of its out-of-district customers or using AHP funds to meet its

Community Reinvestment Act obligations in those out-of-district areas.

It is noted that, due to recent legislative and regulatory changes,

interstate banking is increasing throughout the country and it is

likely that more and more Bank members will be operating across state

lines. To access the AHP, out-of-district customers would have to seek

out a member of the Bank in whose district their state is located.

It also is argued that out-of-district restrictions, even if

desirable, are not warranted at this time because the number of current

members with out-of-district branches and the number of applications

for out-of-district projects are minimal.

Further, to address the situation where one large multistate member

is winning a substantial portion of AHP funds for out-of-district

projects, uniform limits on the amount of AHP subsidy for which each

member may apply, such as those currently imposed by a number of Banks

(see discussion in I.B.1. above), may have a greater likelihood of

broadening member participation in the AHP.

It also is noted that out-of-district restrictions may result in

the selection of less competitive in-district projects, i.e., projects

that would have scored lower than projects that could not be submitted

because they are located outside the district. This could undermine the

Board's AHP regulatory program goal of promoting competition in the AHP

selection process such that only the best, most competitive projects

are selected for funding. See 12 CFR 960.4, 960.5.

C. Member Involvement as Threshold Criterion

The Board requests comments on whether the Banks should have

authority to require certain types of member involvement in a project

as a threshold criterion the project must satisfy in order to be

considered for scoring and approval for AHP funding. Member involvement

could include, for example: providing financing other than a direct

subsidy to the project; servicing project loans at no cost to the

sponsor of the project; contributing a minimum cash amount per unit to

the project; providing a minimum number of hours of volunteer labor per

project unit from its employees; or contributing land or real estate

owned by the member to be used in the project.

Where members' own funds and contributions are at risk, members

would be more likely to be involved in individual AHP projects, thereby

building member affordable housing lending capacity and expertise, and

creating greater incentives for members to underwrite and monitor

projects for AHP compliance and financial feasibility. In the Board's

proposed AHP regulation issued for comment in January, 1994, the Board

proposed including the extent of member involvement in a project as a

separate scoring criterion, rather than as a threshold requirement that

members must meet in order for projects even to be considered for

scoring and approval of AHP funding. See 59 Fed. Reg. 1323, 1335, 1354

(Jan. 10, 1994). The Board requests comments on whether the extent of

member involvement in a project should be included as a threshold

criterion, scoring criterion or not at all in the final AHP regulation

and, if it should be included, how it should be implemented.

D. Limits Based on the Level of a Member's Mortgage-Related Assets or

Its Use of Bank Credit Products

The proposed rule does not authorize a Bank to establish AHP

subsidy limits based on the level of a member's mortgage-related assets

or its use of Bank credit products. The Board requests comments on

whether the Banks should have authority to impose AHP subsidy limits

based on the level of a member's mortgage-related assets or its use of

Bank credit products. Commenters should address how such subsidy limits

would advance the overall goals of the AHP, the reasons for or against

such linkage, whether any such limits are compatible with the

requirement in proposed section 960.4(b)(4) that subsidy limits be

applied equally to all members, and whether any such limits are

permissible under section 7(j) of the Bank Act, which requires the

Banks to administer their affairs fairly and impartially and without

discrimination in favor of or against any member borrower. See 12

U.S.C. 1427(j).

One reason that has been expressed for imposing such limits is that

they would encourage broader participation by members in the AHP.

Involving more members in the AHP could give project sponsors more

options for financing AHP projects, and provide experience and

education to more members that could help them develop additional

capacity to engage in affordable housing lending.

However, imposing limits based on levels of member mortgage-related

assets or borrowings may not achieve this goal if members with high

levels of mortgage-related assets or borrowings who already participate

in the AHP would be allowed to apply for and win the additional AHP

subsidies no longer available to those members subject to the limits.

Uniform limits on the amount of AHP subsidy for which each member may

apply, such as those currently imposed by a number of Banks (see

discussion in I.B.1. above), may have a greater likelihood of

increasing member participation in the AHP.

Another objective expressed for imposing subsidy limits based on

member use of Bank credit products is that they would increase the pool

of available AHP funds by encouraging greater borrowing from the Bank

and therefore increasing Bank earnings, from which AHP funds are

derived. Increased AHP funds could be used by the Bank to finance more

AHP projects, thereby benefiting more low- and moderate-income

households and furthering the housing finance mission of the Bank

System. See id. sec. 1422a(a)(3)(ii). The argument also is made that

members that contribute to Bank earnings by borrowing should have

greater access than non-borrowing members to AHP funds derived from

such earnings.

The Bank Act does not restrict availability of AHP subsidies to

``borrowing'' members. Nor does it specify any correlation between the

member's contribution to Bank earnings and its access to AHP funds.

Bank earnings are affected by economic factors other than the amount of

outstanding advances of members participating in the AHP. Thus, even

non-borrowing members contribute to Bank earnings and, therefore, to

the AHP fund. The limits also may not enlarge the AHP fund by

increasing member borrowing because small

[[Page 55491]]

member institutions, by virtue of their limited asset size, would be

incapable of increasing or unwilling to increase their borrowings (due

to the increased cost of borrowing resulting from investing in

additional Bank stock) just to receive ``preferred treatment'' under an

AHP subsidy limits policy.

Another possible reason for limiting access to AHP subsidies based

on a member's level of mortgage-related assets may be to encourage

members to do more home financing, consistent with the provisions of

the Bank Act that impose less burdensome advances and stock

requirements on institutions that devote a greater percentage of their

assets to housing finance (qualified thrift lenders). See id. sec.

1430(e)(1), (2); 12 CFR 935.13. However, such a limit may defeat this

goal since members with lower levels of mortgage-related assets would

have limited access to AHP subsidies which they could use for such

housing finance purposes.

IV. Regulatory Flexibility Act

The proposed rule applies only to the Banks, which do not come

within the meaning of ``small entities,'' as defined in the Regulatory

Flexibility Act. See 5 U.S.C. 601(6). Therefore, in accordance with 5

U.S.C. 605(b), the Board hereby certifies that this proposed rule, if

promulgated as a final rule, will not have a significant economic

impact on a substantial number of small entities.

List of Subjects for 12 CFR Part 960

Banks, banking, Credit, Federal home loan banks, Housing.

Accordingly, part 960 of title 12 of its Code of Federal

Regulations is hereby proposed to be amended as follows:

SUBCHAPTER E--AFFORDABLE HOUSING

PART 960--AFFORDABLE HOUSING PROGRAM

1. The authority citation for part 960 continues to read as

follows:

Authority: 12 U.S.C. 1422a, 1422b, 1430(j).

2. Paragraph (b) of Sec. 960.4 is revised to read as follows:

960.4 Applications for funding.

* * * * *

(b)(1) Each Bank shall notify its members of the approximate amount

of annual program funds available for the District, the approximate

amount to be offered in each funding period, and the applicability of

any subsidy limits or other application requirements established

pursuant to this paragraph (b). The amount of funds made available in

each offering should be comparable.

(2) A Bank, after consultation with its Advisory Council, may limit

the maximum dollar amount of subsidy, or the maximum percentage of

total available subsidy, that may be requested in a given funding

period in the following ways:

(i) A uniform limit per member;

(ii) A limit per project application, including limits varying

according to project size;

(iii) A limit per project unit; or

(iv) A limit on the amount of direct subsidy per project

application.

(3) A Bank, after consultation with its Advisory Council, may

establish any other subsidy limit or substantive application

requirement not specifically provided for in this paragraph (b) or

Sec. 960.5(a)(2), only if such subsidy limit or substantive application

requirement has received the prior approval of the Board.

(4) Any subsidy limit or application requirement established by a

Bank pursuant to this paragraph (b) must apply equally to all members.

* * * * *

Dated: October 25, 1995.

By the Federal Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 95-27023 Filed 10-31-95; 8:45 am]

BILLING CODE 6725-01-U