The Secretary of HUD's Regulation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)

SUMMARY: This final rule implements the Secretary's regulatory

authorities respecting the Federal National Mortgage Association

(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation

(``Freddie Mac'') (collectively the ``Government-Sponsored

Enterprises'' or ``GSEs'') under the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992 (``FHEFSSA''). FHEFSSA's

purpose is to establish a new regulatory framework for the GSEs that

reflects their unique status as shareholder-owned corporations that

receive substantial public benefits. FHEFSSA substantially overhauled

the regulatory authorities and structure for GSE regulation and

required the issuance of this rule.

FHEFSSA directs the Secretary to establish three separate housing

goals for the GSEs' mortgage purchases financing: housing for low- and

moderate-income families; housing located in central cities, rural

areas, and other underserved areas; and special affordable housing to

meet the unaddressed needs of low-income families in low-income areas

and very-low-income families. Under this rule, the Secretary sets the

level of each goal and specifies the requirements for counting mortgage

purchases toward meeting the goals. The rule also includes procedures

for monitoring and enforcing performance under the goals.

In addition, FHEFSSA requires the Secretary to prohibit

discrimination by the GSEs in their mortgage purchases and establishes

new responsibilities for the Secretary and the GSEs with respect to the

Fair Housing Act and the Equal Credit Opportunity Act. This rule

implements these authorities. The rule also sets forth requirements for

the Secretary's review and approval of new programs of the GSEs, GSE

submission of mortgage purchase data and reports to the Secretary, the

Secretary's dissemination of data and protection of proprietary

information, and enforcement and other proceedings under this rule.

EFFECTIVE DATE: January 2, 1996, except that Sec. 81.62(c) shall not be

effective until April 1, 1996, so that the first mortgage report

required to be submitted by the GSEs under that section will cover

mortgage purchases through the second quarter of 1996 and will not be

due until September 1, 1996.

FOR FURTHER INFORMATION CONTACT: Janet Tasker, Director, Office of

Government-Sponsored Enterprises, Room 6154, telephone (202) 708-2224;

or, for questions on data or methodology, Harold Bunce, Director,

Financial Institutions Regulation, Office of Policy Development and

Research, Room 8204, telephone (202) 708-2770; or, for legal questions,

Kenneth A. Markison, Assistant General Counsel for Government Sponsored

Enterprises/RESPA, Office of the General Counsel, Room 9262, telephone

(202) 708-3137. The address for all of these persons is: Department of

Housing and Urban Development, 451 Seventh Street, S.W., Washington,

D.C. 20410. A telecommunications device for deaf persons (TDD) is

available at (202) 708-9300. (The telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

The information collection requirements contained in this rule have

been submitted to the Office of Management and Budget (OMB) for review

under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), as

implemented by OMB in regulations at 5 CFR part 1320. No person may be

required to respond to, or may be subjected to a penalty for failure to

comply with, these information collection requirements until they have

been approved and HUD has announced the assigned OMB control number.

The OMB control number, when assigned, will be announced by separate

notice in the Federal Register. In accordance with Sec. 1320.11(h) of

the implementing regulations, OMB has 60 days from today's publication

date in which to approve, disapprove, or instruct HUD to make a change

to the information collection requirements in this rule.

The final rule addresses comments submitted to OMB and HUD on the

collection of information requirements in the proposed rule. In

addition, HUD has consulted with members of the public and affected

agencies regarding these collections of information. In revising the

requirements from those that appeared in the proposed rule, HUD has

evaluated the necessity and usefulness of the collection of

information; reevaluated HUD's estimate of the information collection

burden, including the validity of the underlying methodology and

assumptions; and minimized the burden on respondents for the

information collection requirements, to the extent compatible with the

Secretary's responsibilities under the authorizing statute. This final

rule provides for the use of electronic collection techniques.

General

Purpose

This final rule establishes new regulations implementing the

Secretary of Housing and Urban Development's (``the Secretary's'')

authority to regulate the GSEs. The authority exercised by the

Secretary is established under:

(1) The Federal National Mortgage Association Charter Act (``Fannie

Mae Charter Act''), which is Title III of the National Housing Act,

section 301 et seq. (12 U.S.C. 1716 et seq.);

(2) The Federal Home Loan Mortgage Corporation Act (``Freddie Mac

Act''), which is Title III of the Emergency Home Finance Act of 1970,

section 301 et seq. (12 U.S.C. 1451 et seq.); \1\ and

\1\ This rule refers to the Fannie Mae Charter Act and the

Freddie Mac Act collectively as the ``Charter Acts.''

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(3) FHEFSSA, enacted as Title XIII of the Housing and Community

Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992,

and codified, generally, at 12 U.S.C. 4501-4641). FHEFSSA substantially

changed the Secretary's authorities respecting the GSEs, requiring the

Secretary to promulgate new regulations.

This rule implements these authorities and authorities under the

Charter Acts, replaces the Secretary's current regulations governing

Fannie Mae and, for the first time, establishes regulations governing

Freddie Mac.

Background

Fannie Mae and Freddie Mac are congressionally chartered,

shareholder-owned corporations that have been regulated by HUD since

1968 and 1989, respectively. The GSEs were chartered by Congress to:

(1) Provide stability in the secondary market for residential

mortgages;

(2) Respond appropriately to the private capital market;

(3) Provide ongoing assistance to the secondary market for

residential mortgages (including activities relating to mortgages on

housing for low- and moderate-income families involving a

[[Page 61847]]

reasonable economic return that may be less than the return earned on

other activities) by increasing the liquidity of mortgage investments

and improving the distribution of investment capital available for

residential mortgage financing; and

(4) Promote access to mortgage credit throughout the Nation

(including central cities, rural areas, and other underserved areas) by

increasing the liquidity of mortgage investments and improving the

distribution of investment capital available for residential mortgage

financing.\2\

\2\ Sections 301(b) of the Freddie Mac Act and 301 of the Fannie

Mae Charter Act.

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In exchange for carrying out their public purposes, the GSEs enjoy

substantial public benefits not provided to other private corporations

in the secondary mortgage market, which include: (1) Conditional access

to a $2.25 billion line of credit from the U.S. Treasury; \3\ (2)

exemption from securities registration requirements of the Securities

and Exchange Commission and the States; \4\ and (3) exemption from all

State and local taxes, except property taxes.\5\ In addition to these

benefits, the GSEs enjoy the implicit benefit of the financial market's

assumption that, even though no Federal guarantee exists,\6\ should a

GSE fail to meet its obligations, the Federal Government and,

ultimately, the American taxpayer would stand behind the obligations of

the GSEs. As a result of their Government-sponsored status, the GSEs

borrow at approximately the same rates as the Department of

Treasury,\7\ and their cost of doing business is less than that of

other competitors in the mortgage market. In return for the substantial

benefits that the GSEs receive, they are expected to serve certain

public purposes, and are subject to congressionally imposed limitations

on their undertakings and to HUD's regulation.

\3\ Sections 306(c)(2) of the Freddie Mac Act and 304(c) of the

Fannie Mae Charter Act.

\4\ Sections 306(g) of the Freddie Mac Act and 304(d) of the

Fannie Mae Charter Act.

\5\ Sections 303(e) of the Freddie Mac Act and 309(c)(2) of the

Fannie Mae Charter Act.

\6\ The GSEs' obligations are not guaranteed by the United

States. See, e.g., sections 1302(4), 1381(f), and 1382(n) of FHEFSSA

(requiring each GSE to state in its obligations and securities that

such obligations and securities ``are not guaranteed by the United

States'').

\7\ Congressional Budget Office, Controlling the Risks of

Government-Sponsored Enterprises, at 10 (April 1991).

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Provisions of FHEFSSA

Because Congress perceived a need to increase protection to the

taxpayers from any potential financial losses or risks posed by the

GSEs, FHEFSSA established an independent financial regulator within

HUD--the Office of Federal Housing Enterprise Oversight (OFHEO)--which

is responsible for the financial safety and soundness of the GSEs.

At the same time, to assure that the GSEs accomplish their public

purposes, Congress clarified and expanded the Secretary's specific

powers and authorities respecting the GSEs. FHEFSSA provides that,

except for the authority of the Director of OFHEO over all matters

related to financial safety and soundness, the Secretary has general

regulatory power over the GSEs and is required to make all rules and

regulations necessary to ensure that the purposes of FHEFSSA and the

Charter Acts are carried out.\8\

\8\ Section 1321 of FHEFSSA.

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FHEFSSA specifically requires the Secretary to establish, monitor,

and enforce three separate goals for the GSEs' mortgage purchases on:

(1) Housing for low- and moderate-income families (Low- and

Moderate-Income Housing Goal);

(2) Housing located in central cities, rural areas, and other

underserved areas (Geographically Targeted Goal); and

(3) Special affordable housing meeting the ``unaddressed housing

needs of low-income families in low-income areas and very low-income

families'' (Special Affordable Housing Goal).

Under FHEFSSA, the Secretary is to establish each of the housing

goals after consideration of certain statutorily prescribed factors

relevant to the particular goal. The Secretary's findings concerning

each of these factors are set forth in the appendices to this rule,

which are published in today's Federal Register after the text of the

rule. These appendices will not be codified in the Code of Federal

Regulations.

FHEFSSA also establishes new fair lending requirements for the

GSEs. Under FHEFSSA, the Secretary must, by regulation, prohibit the

GSEs from discriminating in their mortgage purchases because of ``race,

color, religion, sex, handicap, familial status, age, or national

origin, including any consideration of age or location of the dwelling

or the age of the neighborhood or census tract where the dwelling is

located in a manner that has a discriminatory effect.'' \9\ The

Secretary must also:

\9\ Section 1325(1).

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(1) By regulation, require the GSEs to submit data to assist the

Secretary in investigating whether a mortgage lender has failed to

comply with the Fair Housing Act and the Equal Credit Opportunity Act

(``ECOA'');

(2) Obtain and make available to the GSEs information from other

regulatory and enforcement agencies on violations by lenders of the

Fair Housing Act and ECOA;

(3) Direct the GSEs to take various remedial actions against

lenders found to have engaged in discriminatory lending practices in

violation of the Fair Housing Act or ECOA; and

(4) Periodically review and comment on the GSEs' underwriting and

appraisal guidelines, to ensure that the guidelines are consistent with

the Fair Housing Act and FHEFSSA.

FHEFSSA also details the Secretary's authority to review and

approve new programs of the GSEs and establishes procedures under which

the GSEs may contest determinations on new program requests. FHEFSSA

maintains the Secretary's authority to require reports from the GSEs on

their activities and requires the GSEs to submit detailed, specific

data on their mortgage purchases. FHEFSSA assigns the Secretary other

responsibilities, including establishing a public-use database

containing data gathered from the GSEs on mortgage purchases, and

protecting proprietary information provided by the GSEs. FHEFSSA

terminates the former regulations governing Fannie Mae and requires

that the Secretary issue new regulations governing both GSEs.

Transition Period

FHEFSSA established a transition period of calendar years 1993 and

1994, to provide time for the Secretary to collect data and implement

FHEFSSA's provisions. For the transition period, FHEFSSA established

targets for mortgage purchases by the GSEs on housing for low- and

moderate-income families and housing located in central cities, rural

areas, and other underserved areas. For the transition years, the

targets for both of these goals were set at 30 percent of the GSEs'

mortgage purchases. The target amounts were the same as the percentage

goals established under HUD's Fannie Mae regulations, which were

originally promulgated in 1979 and codified under the former Fannie Mae

regulations in 24 CFR part 81. During the transition, only mortgages

located in central cities, as designated by the Office of Management

and Budget (OMB), counted toward the Geographically Targeted Goal.

FHEFSSA required that the Secretary establish interim goals to improve

the GSEs' performance relative to these targets, so that the GSEs would

meet the targets by the end of the transition

[[Page 61848]]

period. FHEFSSA also established specific dollar amounts for purchases

by the GSEs of mortgages under the Special Affordable Housing Goal. For

the transition years, the legislative history of FHEFSSA indicates that

the goal should be higher than the GSEs' 1992 performance.

Interim Notices

As required by FHEFSSA, on October 13, 1993, the Secretary

published notices of interim housing goals establishing requirements

necessary to implement the transition housing goals; 10 the GSEs

reviewed and commented on the notices prior to publication.

\10\ 58 FR 53048 and 53072.

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The Interim Notice for Fannie Mae established that, of the dwelling

units financed by Fannie Mae's mortgage purchases: (1) In 1993 and

1994, 30 percent should be affordable to low- and moderate-income

families; (2) in 1993, 28 percent and, in 1994, 30 percent should be

located in central cities; and (3) during the 1993-94 period, at least

$16.4 billion in mortgages should meet the Special Affordable Housing

Goal.

The Interim Notice for Freddie Mac established that, of the

dwelling units financed by Freddie Mac's mortgage purchases: (1) In

1993, 28 percent and, in 1994, 30 percent should be affordable to low-

and moderate-income families; (2) in 1993, 26 percent and, in 1994, 30

percent should be located in central cities; and (3) during the 1993-94

period, at least $11.9 billion in mortgages should meet the Special

Affordable Housing Goal.

In late 1994, when it became apparent that this rulemaking would

not be completed in time to establish new housing goals for 1995, the

Secretary issued a final regulation extending the 1994 goals for both

GSEs into 1995.11

\11\ 59 FR 61504 (November 30, 1994).

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The Proposed Rule

On February 16, 1995 (60 FR 9154), HUD published a proposed rule to

implement the Secretary's authorities under FHEFSSA and the Charter

Acts. The proposed rule raised the level of the goals. It also provided

that, in accordance with FHEFSSA, the Geographically Targeted Goal

would be expanded to include rural and other underserved areas, and

that the goal would be directed to the underserved portions of these

areas. The proposal reformulated the categories of the Special

Affordable Housing Goal and proposed new counting requirements based on

experience gained in the transition period. The proposed rule also

would have established procedures for review of new programs, detailed

prohibitions against discrimination, scaled back reporting requirements

from the former Fannie Mae regulations and the Interim Notices, and

included detailed requirements for book entry of GSE securities and

procedures under FHEFSSA.

Final Rule

In response to the proposed rule, HUD received 163 comments. The

comments came from the GSEs; individuals; representatives of lending

institutions, community, and consumer groups; Members of Congress;

local and State governments; and others. Following full consideration

of the comments and discussions with the GSEs and outside entities, HUD

developed this final rule. The final rule is consistent with the

approach announced in the proposed rule, but includes significant

revisions in light of the comments. The final rule:

(1) Establishes housing goals that are greater than those

established under the regulations for the transition and will ensure

that the GSEs continue and strengthen their efforts to carry out

Congress's intent that the GSEs provide the benefits of a secondary

market to families throughout the Nation;

(2) Requires the GSEs to take appropriate steps to facilitate fair

housing for all citizens, recognizing the GSEs' leadership role in the

lending industry without forcing the GSEs to act in an enforcement

capacity better left to the Government;

(3) Establishes conditions and procedures by which the Secretary

will exercise his or her statutory authority to review new programs of

the GSEs, but in a manner that will not create a disincentive for the

GSEs to be innovative in developing new mortgage finance initiatives;

(4) Implements reporting requirements for the GSEs that are not

unduly burdensome and will allow the Secretary and Congress to monitor

the GSEs' activities appropriately;

(5) Requires dissemination of information on the GSEs' activities

to the public, while protecting the GSEs' legitimate commercial

interests in proprietary data; and

(6) Establishes fair procedures for enforcement actions and other

regulatory procedures under FHEFSSA.

Discussion Of Public Comments

Overview of the Public Comments

Of the 163 comments received, by far the most detailed were the

submissions of the two directly affected GSEs--Fannie Mae and Freddie

Mac. Each GSE submitted comments of more than 200 pages, supported by

numerous appendices, exhibits, and footnotes. Although occasionally

voicing approval of provisions of the proposed rule, the GSEs'

comments, in the main, registered substantial opposition to key

features.

In addition, comments were received from 26 national or regional

industry-related groups or associations; 26 nonprofit organizations; 10

Members of Congress; 22 governors and mayors, 10 State and local

agencies; 24 banks, lenders, or other real estate professionals; 40

individuals; 12 and 3 legal organizations. HUD reviewed and

considered all of these comments in writing the final rule.

\12\ The 40 comments from individuals were form letters, signed

by persons from several different States but containing identical

information except for, in a few instances, written-in additional

observations. These comments were limited to housing goals issues

and generally favored, and recommended strengthening of, the rule.

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The portion of the rule most frequently discussed by the commenters

was Subpart B--Housing Goals, some aspect of which attracted comments

from 146 of the 163 commenters. Eighty-three of these comments

reflected general approval of the proposed rule's approach to the

goals. Fifty-three others were in opposition, in whole or in part,

while 10 contained mixed statements of support and opposition.

Other major subject areas of the proposed rule (subpart C--Fair

Housing, subpart D--New Program Approval,and Subpart E--Access to

Information) attracted the attention of only a minority of the

commenters. Fifty-five of the 62 commenters who addressed the new

program approval provisions opposed them in whole or in part, with only

3 commenters setting out unqualified approval, and 4 others expressing

a mixture of favorable and unfavorable comments.

Thirty commenters opposed one or more major elements of the rule's

treatment of fair housing concerns, while 11 favored the rule. Two

comments featured well-mixed supporting and opposing views. The

majority of the institutional commenters and lenders who did address

the issues of fair housing stated their opposition to the rule's

treatment. Only among the nonprofit organizations did a majority of the

commenters addressing the issue express support for the proposed rule's

handling of the subject. Commenters often addressed Subpart E,

Reporting Requirements, in the context of other statements pertaining

to housing goals, fair housing, or both. Accordingly, the commenters'

views on reporting are

[[Page 61849]]

largely included in the discussion of subparts B and C.

Only 10 commenters addressed the access to information issue. Of

these, six (including the GSEs) were substantially opposed to the

rule's provisions, while four supported the rule or urged stronger

provisions in favor of broader public disclosure of GSE information.

In all subject areas, the GSEs' expressions of opposition to

important features of the rule were backed by a majority of the

national or regional industry associations submitting comments, as well

as by commenters representing banks and other lenders. On the other

hand, several associations expressed notable support for some of the

same features.

A higher proportion of the commenting nonprofit organizations

supported important aspects of the rule as proposed, although many of

these commenters also opposed individual features of the proposal and

offered suggestions for modifications or compromises that would

accomplish similar aims. A number of nonprofit organizations also

recommended further strengthening of the rule, especially as it relates

to housing goals.

Comments from Governors and Mayors tended to concentrate on the

goals. In general, these comments opposed the definitions in the

proposed rule of ``central city,'' ``rural area,'' and other key terms

that determine the transactions that count toward achievement of the

housing goals. Twelve of the 22 State and local political leaders who

commented expressed opposition to the program approval portions of the

rule. The 10 comments from State and local governmental agencies

focused largely on housing goals issues, but were more diverse in their

views, with 5 agencies generally supporting the rule, 4 opposing

significant portions of it, and 1 expressing a mixture of favorable and

unfavorable comments.

Members of Congress submitting comments mainly addressed housing

goals issues, with 6 of the 10 criticizing the rule. Six Members also

opposed aspects of the new program approval subpart. Three Members

voiced support for the proposed rule's approach to housing goals, and

one expressed support for the rule's fair housing provisions.

A discussion of general and specific comments on the rule follows.

HUD has read and considered all of the comments received from the

public in developing this final rule. Although not all of the comments

are addressed explicitly in this preamble, often because HUD's response

is implicit in the general discussion of the rule or other comments or

because the comments were minor, HUD acknowledges the value of all of

the comments submitted in response to the proposed rule.

Other Public Input

In addition to the comments received, HUD sought information from

the GSEs and other market participants to verify or revise assumptions

and data HUD used in developing the rule. During this rulemaking, HUD

held numerous meetings with the GSEs, lenders, developers, nonprofit

groups, public-interest representatives, and other Federal agencies to

discuss issues related to the rule, including the methodology used to

establish market shares, current conditions in rural lending, and

current conditions in the multifamily market. Additional information on

these meetings is contained in the public docket file of this rule in

Room 10276 at HUD Headquarters. HUD also conducted a series of detailed

analyses of various technical issues raised in the comment letters. To

assist in analyzing these issues, HUD contracted with researchers and

academicians in universities and the private sector to carry out

independent evaluations of HUD's methodology. HUD also consulted

broadly with researchers and economists at other Government agencies,

the GSEs, and housing trade groups to critique and refine the

underlying analytical work used in establishing the housing goals.

Subpart A--General

Overview

The GSEs commented that various parts of the proposed rule were not

legally sustainable because the Secretary's actions were, for example,

``unreasonable,'' ``arbitrary,'' ``capricious,'' ``not supported by a

cogent rationale,'' ``in direct conflict with the plain meaning of the

Act,'' or ``an improper exercise of the Secretary's discretion.'' HUD

has carefully reviewed these concerns and applicable case law,13

and has concluded that its exercise of regulatory authority in

promulgating this final rule is, in all respects, well within the

discretion accorded to HUD by Congress under FHEFSSA and is well-

supported by ample evidence and considered reasoning.

\13\ See, e.g., Chevron, U.S.A., Inc. v. Natural Resources

Defense Council, 467 U.S. 837 (1984).

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Section 81.2--Definitions

Many of the definitions remain the same as in the proposed rule or

have been modified for purposes of clarity only. This final rule,

however, does change some definitions substantially in response to

comments. This section of the preamble mainly discusses changes in

definitions relating to housing goals. The preamble text concerning

subpart D discusses the definition of ``new program'', and the text

concerning subpart F discusses the definitions of ``proprietary

information'' and ``public data''.

Contract Rent. Freddie Mac asked that the definition of ``contract

rent'' be revised to allow the GSEs to decrease contract rent by the

amount of any ``rent concessions.'' Supporting, generally, the rule's

contract rent definition, Freddie Mac commented that: underwriting

determinations are based on post-concession rents; Freddie Mac adheres

to that general practice; and allowing rent concessions to be taken

into account would materially increase affordability of some units.

Under FHEFSSA, the affordability of housing units and their

eligibility for counting towards a goal is based on their rents. Rent

concessions are relatively short-term in nature. Their consideration in

calculating rents would result in unrealistically low levels of rent,

considering that after the rent concession period ends, the rents are

increased. Accordingly, it is not appropriate to consider rent

concessions in defining or determining rent.

Dwelling unit. Freddie Mac objected to the inclusion of a

definition for ``dwelling unit'' in the rule. Freddie Mac asserted that

under section 302(h) of the Freddie Mac Act, which defines

``residential mortgage,'' Freddie Mac is authorized to define

``dwelling unit.''

Although Freddie Mac is authorized to define the term ``dwelling

unit'' under the Freddie Mac Act, it is appropriate that this final

rule define the term under FHEFSSA. The Secretary is charged with

measuring the extent of compliance with the housing goals under section

1336 of FHEFSSA. Because FHEFSSA specifically authorizes the Secretary

to consider units in formulating the goal, a definition of the term

``unit'' or ``dwelling unit'' is integral to counting GSEs' purchases

toward achievement of the goals.

The GSEs also commented that, if ``dwelling unit'' is defined under

the rule, the definition of ``dwelling unit'' should include the

following types of housing: (1) A single-family dwelling with a home

office; (2) dwelling units in an apartment complex with retail space or

a day care center; and (3) single-room-occupancy buildings and group

homes that may lack separate kitchens

[[Page 61850]]

or bathrooms for each unit of residence. In response to this point, the

definition of ``dwelling unit'' is changed in the final rule to include

single room properties, dwellings that include offices, and dwellings

located in mixed-use properties.

Median Income. Freddie Mac, addressing the Low- and Moderate-Income

Goal, commented that the definition of ``median income'' should be

revised to permit household income in nonmetropolitan areas to be

measured against the greater of the county median income or the

statewide nonmetropolitan median. Freddie Mac noted that ``the proposed

rule would classify a borrower with an income of $12,000 living in a

county with median income of $11,000 as 'upper income.''' The final

rule (in Sec. 81.15) clarifies that ``median income'' for families

outside of metropolitan statistical areas (MSAs) means the greater of

the county median income or the statewide nonmetropolitan median income

for the area where the property is located.

Mortgages and Interests in Mortgages. The GSEs commented that, in

tracking the Freddie Mac Act, the definition of ``mortgage'' appears to

have dropped a line relating to interests in mortgages. Freddie Mac

suggested adding to the rule's definition ``* * * and includes

interests in mortgages. Such term shall also include a mortgage, lien,

or other security interest on the stock or membership certificate.''

(Emphasis in original.)

FHEFSSA requires the Secretary to establish goals for the

``purchases of mortgages.'' The proposed and final rules specifically

allow certain interests in mortgages, such as participations and credit

enhancements, to count toward achievement of the goals, because these

transactions are essentially the same as mortgage purchases. The final

rule provides that ``interests in mortgages'' are mortgages and count

toward achievement of the housing goals. Because defining mortgages to

include all ``interests in mortgages'' is potentially over-inclusive

and may encompass transactions or activities that are not equivalent

and should not appropriately count toward achievement of the goals, the

counting provisions in Sec. 81.16(b) list specific types of

transactions that do not count toward achievement of the goals,

including certain ``interests in mortgages.''

Refinancing. Freddie Mac commented that, by excluding from the

definition of ``refinancing'' the renegotiation of a multifamily

mortgage when a balloon payment is due within one year, it is not clear

whether the excluded activity is intended to be treated as a ``mortgage

purchase.'' The final rule includes as new mortgages multifamily

mortgages that have balloon payments due within 1 year after the date

of closing of the renegotiated mortgages.

Very-low-Income. Freddie Mac commented that the term ``very-low-

income'' should be defined consistently with certain other HUD

regulations and programs. Freddie Mac noted that these programs'

formulas for determining eligibility sets the ``very-low-income'' limit

above 60 percent of the local area median income in 48 metropolitan

areas and 1,502 nonmetropolitan counties with either unusually low

income or unusually high housing costs. Freddie Mac urged HUD to create

exceptions to the definition of ``very-low-income'' for multifamily

projects benefiting from a Federal assistance program, where such

projects are located in areas with either unusually low income or

unusually high housing costs.

As part of the Special Affordable Housing Goal, Congress

specifically required the Secretary to establish a housing subgoal that

targets very-low-income families. Section 1303(19) of FHEFSSA defines

``very low-income'' as:

(1) In the case of owner-occupied units, income not in excess of 60

percent of area median income; and

(2) In the case of rental units, income not in excess of 60 percent

of area median income, with adjustments for smaller and larger

families, as determined by the Secretary.

In certain HUD programs the Secretary has statutory authority to

make the type of adjustments that Freddie Mac has requested HUD to make

under FHEFSSA. However, FHEFSSA does not provide similar authority. The

only adjustments to the definition of ``very-low-income'' that are

permissible under FHEFSSA are adjustments for smaller and larger

families in the case of rental units.

Subpart B--Housing Goals

Overview

The greatest amount of controversy in the public comments centered

on the housing goals. Fannie Mae and a number of commenters focused on

the levels of the goals, the concept of ``leading the industry,'' and

the methodology used to estimate the size of the conventional market

for each of the goals. In its critique of the housing goals portion of

the proposed rule, Freddie Mac advanced six major concerns: (1) The

market estimates are flawed and will result in infeasible goals over

time; (2) the proposed rule does not establish a link between

identified housing needs and the housing goals; (3) HUD has not

adequately taken market volatility into account in establishing the

goals; (4) the GSEs' previous performance is incorrectly assessed; (5)

the proposed rule presents too narrow a concept of leading the

industry; and (6) the proposed rule does not adequately address the

risks posed by increased levels of multifamily purchases. Freddie Mac

also expressed concern that in establishing the goals as proposed, HUD

would micromanage the type and location of the GSEs' mortgage

purchases, severely limiting the GSEs' ability to respond to the market

in a timely manner.

General comments on the housing goals are discussed in this

section. More detailed analyses of some of these issues are presented

in four technical appendices immediately following the text of the

rule, as well as in an economic analysis of the rule prepared by HUD.

Levels of the Goals

Fannie Mae requested that the levels of the goals be set lower than

in the proposed rule, commenting that the housing goals should be set

at a ``reasonable and appropriate share'' of Fannie Mae's business.

Fannie Mae also urged HUD to refrain from frequent adjustments in the

goals and to avoid increasing the goals if Fannie Mae exceeded them.

Similarly, Freddie Mac stressed the necessity of setting

``conservative'' goals that are capable of being met under a variety of

economic conditions.

Both GSEs agreed that HUD had not adequately considered the impact

that changes in national economic conditions could have on the size of

the conventional, conforming market. The GSEs commented that HUD was

assuming, in its market estimates, that the unusually favorable

economic and housing market conditions of 1993-1994 would continue in

the future.

A number of commenters, mainly representing public-interest

organizations, asked for more aggressive goal-setting, urging that the

levels of the goals were too low, given the benefits provided to the

GSEs by virtue of their Federal charters, their current levels of

performance, and the scope of the nation's housing problems.

Some commenters, primarily industry representatives, expressed

concern with the proposed rule's stated intention to set future goals

at higher levels. A number of commenters joined with the GSEs in

recommending that goals remain stable over the long term and be imposed

at reasonable levels that not

[[Page 61851]]

only assure the GSEs will increase their support of low- and moderate-

income housing, but also reflect that economic conditions may influence

the capacity of the GSEs to support such housing in any given year.

The GSEs held differing views on how far into the future the goals

should be fixed. Fannie Mae commented that the goals should be fixed

for a substantial period of time, to allow the GSEs to incorporate the

goals into their long-range business plans and corporate strategies.

Freddie Mac expressed serious doubt that meaningful goals could be

established for a period more than two years into the future.

Under the rule, the following goals are established: the annual

goal for each GSEs' purchases of mortgages on housing for low- and

moderate-income families is--for 1996, 40 percent of the total number

of dwelling units financed by that GSE's mortgage purchases in 1996

and, for each of the years 1997-99, 42 percent of the total number of

dwelling units financed by that GSE's mortgage purchases in each of

those years; the annual goal for each GSEs' purchases of mortgages on

housing located in central cities, rural areas, and other underserved

areas is--for 1996, 21 percent of the total number of dwelling units

financed by that GSE's mortgage purchases in 1996 and, for each of the

years 1997-99, 24 percent of the total number of dwelling units

financed by that GSE's mortgage purchases in each of those years; and

the annual goal for each GSEs' purchases of mortgages on special

affordable housing is--for 1996, 12 percent of the total number of

dwelling units financed by that GSE's mortgage purchases in 1996 and,

for each of the years 1997-99, 24 percent of the total number of

dwelling units financed by that GSE's mortgage purchases in each of

those years; additionally, the special affordable housing goal for each

of these years shall include mortgage purchases financing dwelling

units in multifamily housing totalling not less than 0.8 percent of the

dollar volume of mortgages purchased by the respective GSE in 1994. For

2000 and thereafter the Secretary shall establish new annual goals;

pending establishment of goals for 2000 and thereafter, the annual goal

for each of those years for each of the three goals shall be the same

as the 1999 goals.

The levels of the housing goals established in this final rule meet

the following objectives: they are reasonable and appropriate, they

reflect consideration of the statutory factors for establishing housing

goals, and they are set far enough into the future to allow the GSEs to

engage in long-term planning.

First, the levels of the three housing goals are reasonable and

appropriate, as summarized below in the discussion of each of the

housing goals and detailed further in the appendices. The goals have

been set judiciously in relation to reasonable estimates of the market

share of the mortgages originated that would qualify under the goals.

The levels of the goals also reflect the cyclical nature of the

mortgage markets and the need to provide a margin for unforeseen

macroeconomic impacts.

Second, the levels of the goals reflect a full consideration of all

factors for consideration under FHEFSSA. The GSEs expressed concern

that the process used by the Secretary for establishing the levels of

the goals was too rigid, driven primarily by the market-share estimates

for each of the goals. This concern is unfounded. In establishing the

goals, the Secretary carefully considered the factors mandated by

FHEFSSA. These factors, which encompass more than just the estimate of

the market for each goal, include housing needs, the financial

conditions of the GSEs, economic and demographic conditions, previous

performance, and the GSEs' leadership role within the industry. The

appendices that accompany this rule explain in detail the evaluation of

these factors.

The levels of the goals represent a benchmark against which the

GSEs' performance can be measured. The levels are designed to be

standards, not ceilings. They are not so high that the GSEs are likely

to fail to meet the goals. Instead, the levels of the goals represent a

reasonable and appropriate share of the GSEs' business that--at a

minimum--should be devoted to meeting the needs of lower-income renters

and home buyers and of residents of areas underserved by the mortgage

markets. The final rule has been revised to allow the GSEs maximum

flexibility in choosing how they achieve the goals. The levels of the

goals also reflect careful consideration of the concerns expressed by

the GSEs and other commenters that economic and demographic conditions

be taken into account. The levels of the goals have been set so that

they should be attainable in economic conditions more adverse than

those experienced in the past few years.

Third, HUD considered carefully the comments expressing concern

about the future levels of the goals. To provide the GSEs with the

predictability needed to manage their operations, the levels of the

goals have been established for the next four years. The Secretary can,

by regulation, change the level of the goals for the years 2000 and

beyond based on the experience of the previous years. If the Secretary

elects not to change them, they will be left at the 1999 levels for

future years.

Leading the Industry

The proposed rule asserted that the GSEs have a responsibility

because of their Federal charters to lead the industry in expanding

housing opportunities for low-income home buyers and renters and for

residents of underserved areas. The proposed rule requested comment on

how the Secretary should consider ``leading the industry'' in

establishing the levels of the housing goals.

Freddie Mac commented that the proposed rule's presentation of

``leading the industry'' was too narrow. Freddie Mac argued that HUD,

in suggesting that leading the industry only be judged on percentage

terms, ignored the GSEs' non-goal-related activities that provide

stability and liquidity to the mortgage markets. Freddie Mac suggested

that HUD should view industry leadership to include GSE activities that

broaden the entire market, including ``pioneering innovation, the

establishment of new business practices and programs, and the

generation of market efficiencies.'' Further, HUD should evaluate the

GSEs' charge to lead the industry in qualitative, and not just

quantitative, terms.

Several industry commenters echoed Freddie Mac's concerns about

considering ``leading the industry'' in merely percentage terms. They

commented that Congress had included the ability of the GSEs to lead

the industry as one of several factors to be considered. Further, they

noted that leading the industry can be demonstrated in many ways beyond

just the level of mortgage purchases. Reaching reasonable goals would

be a component of leadership, the Mortgage Bankers Association

(``MBA'') commented, but ``the attainment of steadily increasing

benchmarks should not be regarded as a prerequisite for leadership.''

Other commenters differed with this approach. The National Training

and Information Center (``NTIC'') commented that the proposed goals

were ``too low'' and ``do not ensure that the GSEs will 'lead the

market' in the production of affordable housing and housing in

underserved areas.'' NTIC stated that, although the GSEs achieved the

1993 goals, the goals and the GSEs ``ha[d] not made a significant

presence in these neighborhoods.'' The Los Angeles Housing Department

argued

[[Page 61852]]

that the GSEs ought to purchase ``a higher percentage of mortgages than

are originated by the market under each housing goal.''

The GSEs' efforts to create liquidity and stability in the mortgage

markets, as well as the introduction of innovative products,

technology, and processes, clearly demonstrate their leadership role

within the industry. These activities have strengthened the mortgage

industry and increased its ability to serve homeowners and renters of

all incomes throughout the country. Congress chartered the GSEs to

carry out four public purposes: (1) To provide stability; (2) to

respond appropriately to the mortgage markets; (3) to assist the

residential mortgage market, including serving low- and moderate-income

families; and (4) to promote access to mortgage credit throughout the

nation. In FHEFSSA, Congress acknowledged, as does HUD, the substantial

contributions the GSEs have made and continue to make in creating

liquidity and stability in the overall mortgage market. However, in

FHEFSSA, Congress developed a mechanism to ensure that the GSEs served

lower-income families and underserved areas. HUD, through its focus on

the housing goals and performance-based measurements, is carrying out

that congressional intent.

Purpose of the Goals

Freddie Mac commented that HUD had premised the proposed rule on

the mistaken belief that the GSEs are not fulfilling their statutory

purposes. Freddie Mac asserted that its 1993 and 1994 performance under

the housing goals ``demonstrate[s] that Freddie Mac is strongly

committed to fulfilling its obligation to serve [lower-income

households and residents of specific areas].''

Both GSEs commented that a clear connection had not been

established between the general housing needs of low- and moderate-

income households and those needs that can be addressed by the GSEs.

Freddie Mac stated that it is not a problem of availability of mortgage

credit that dominates the unaddressed needs of low-income families, but

a lack of sufficient incomes or subsidies to support homeownership or

rental payments.

Freddie Mac expressed concern that the proposed rule was based upon

a ``fundamental misinterpretation'' of what Congress had intended to

achieve through FHEFSSA. Freddie Mac denied that FHEFSSA's passage

reflected a congressional presumption that the GSEs had failed to serve

lower-income households or certain geographic areas adequately.

Both GSEs suggested that the goals amounted to using the GSEs to

allocate credit. Fannie Mae also suggested that the goals were being

used to assign to the GSEs the responsibility for alleviating specific

housing needs. Both GSEs argued that Congress had no such intent.

The GSEs' comments that the housing goals result in credit

allocation by the Secretary are difficult to understand. Congress

created the GSEs and provided them federally derived benefits to

achieve national housing purposes. Congress also required the

establishment of explicit goals for the GSEs' purchases of mortgages

financing housing for lower-income households and in communities

underserved by the mortgage markets. Congress created the GSEs to

develop liquidity and stability in the mortgage markets, and Congress

specifically charged the GSEs to provide credit to low- and moderate-

income households and to all areas. Congress clearly believed that

doing so was not inconsistent with the GSEs' operation as profitmaking,

shareholder-owned entities.

Criticism that HUD failed to establish a clear connection between

identified housing needs and the proposed housing goals reflects a

misunderstanding of the requirements placed on the Secretary by

FHEFSSA. FHEFSSA directs the Secretary to establish the housing goals

after analyzing a number of factors, including national housing needs.

HUD's analysis, set forth in the appendices, describes the decline in

homeownership rates and the loss of affordable rental stock, and

provides background information on the current state of the nation's

housing needs. These analyses are not designed as a blueprint for the

GSEs' achievement of the housing goals. Nor do they suggest that all

those needs identified can or should be met through GSE activities.

These analyses do, however, set forth the bases for establishing these

goals.

Credit Risk of Multifamily Purchases

Freddie Mac commented that the proposed rule had not adequately

addressed the higher credit risk it might face in meeting higher

housing goals. Freddie Mac claimed that it would have to purchase

``significantly higher levels'' of multifamily mortgages, a business

with a different and higher level of risk than single-family lending.

Further, Freddie Mac argued that any additional losses it might

experience in order to achieve higher goals would be a direct subsidy

on the part of Freddie Mac--something not required by FHEFSSA.

HUD agrees that multifamily financing is a different business than

single-family financing, posing a different level of risk. In

considering the issue of credit quality in the multifamily market, HUD

finds it instructive to compare the levels of activity between the two

GSEs. In 1994, Fannie Mae purchased five times as many multifamily

mortgages as Freddie Mac. Even after factoring in the relative sizes of

the businesses of each GSE--Fannie Mae's overall dollar volume of

business is about 25 percent larger than Freddie Mac's--a substantial

disparity still exists. Fannie Mae's significantly greater volume of

multifamily purchases has not impaired the company's financial health.

Further, the economic analysis prepared for this rule does not support

the argument that the goals will expose the GSEs to unacceptably high

levels of credit risk. Sufficient investment-quality opportunities

exist in the marketplace to allow Freddie Mac to achieve all of the

housing goals without resorting to the purchase of riskier mortgages.

HUD recognizes that Freddie Mac experienced losses on its

multifamily business in the late 1980s, in part because of flawed

corporate oversight mechanisms, resulting in Freddie Mac's withdrawal

from the multifamily market. However, half a decade has passed since

that experience, providing Freddie Mac with sufficient time to develop

a multifamily business. Indeed, Freddie Mac has publicly committed

itself to this market. Leland Brendsel, Chairman and Chief Executive

Officer of Freddie Mac, articulated the GSE's attitude toward this

market segment, noting that ``our re-entry into the multifamily market

[is] * * * our most important next step in meeting our nation's housing

needs. We are committed to having the right people, programs, and

systems in place so that our multifamily mortgage purchases will be

sustainable over the long term.'' 14 HUD accepts as sincere

Freddie Mac's repeated public statements and representations that it is

committed to a long-term, meaningful role in the multifamily market;

the housing goals take that commitment into account.

\14\ Prepared statement of Leland C. Brendsel before the

Subcommittee on General Oversight, Investigations, and the

Resolution of Failed Financial Institutions of the Committee on

Banking, Finance and Urban Affairs, U.S. House of Representatives,

April 20, 1994, pp. 4-5.

[[Page 61853]]

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Market Estimates in Establishing the Goals

In establishing the goals, the Secretary is required to assess,

among a number of factors, the size of the conventional market for each

goal. HUD developed a straightforward technique for estimating the size

of the conventional conforming market for each of the goals. This

technique draws on the existing major sources of data on mortgage

market activity.

Both GSEs expressed strong criticism of HUD's use of specific data

elements in constructing its estimates of market size; for example,

estimates of the proportion of 1- to 4-unit rental properties or the

levels of multifamily originations. Although both GSEs criticized how

data had been interpreted in HUD's market-share models, neither GSE,

nor any other commenter, objected to HUD's basic model for calculating

the size of the markets relevant to each of the housing goals. However,

Freddie Mac provided a detailed set of objections to the use of certain

data sources or assumptions, concluding that HUD's market estimates

were ``fatally flawed.'' Fannie Mae argued that market estimates

employed by HUD ``created an artificial market description based on

interpretations of the data available to [HUD], which are not

consistent.'' Fannie Mae commented that the Secretary deliberately

selected existing data interpretations to yield higher goals. Several

other commenters, all industry trade groups, also criticized aspects of

HUD's market-share estimates.

Freddie Mac maintained that the flaws in HUD's estimation process

would result in goals that were too high, because HUD had overestimated

the size of the rental market. Freddie Mac presented a comparison of

available market-share estimates, explained deficiencies it believed

were present in the data employed by HUD, and claimed that HUD had

chosen the least-favorable of the databases that could have been

employed in reckoning appropriate goals for the GSEs.

Both GSEs argued that the role of multifamily financing in the

mortgage market was consistently overstated in the proposed rule.

Freddie Mac provided data to support its assertion that the rule's

estimates of multifamily originations overstated both the total amount

of originations to be expected and the degree to which multifamily

originations are available to the secondary market.

Both GSEs commented that HUD's analysis ignored the impact that

changes in national economic conditions can have on the size of the

mortgage market. The GSEs noted that their recent efforts to expand the

reach of the secondary market in support of lower-income households

were assisted by highly favorable interest rates and economic

conditions that will likely not persist. Several commenters suggested

that HUD consider more fully the impact of changing economic

conditions.

In considering the levels of the goals, HUD examined carefully the

comments on the methodology used to establish the market share for each

of the goals. HUD contracted with the Urban Institute to conduct an

independent review that drew upon its resources of well-respected

academicians and others in evaluating HUD's methodology. Based on that

thorough evaluation, as well as HUD's additional analysis, the basic

methodology employed by HUD is a reasonable and valid approach to

estimating market share, and Freddie Mac's claim that the methodology

is ``fatally flawed'' is without merit.

HUD agrees that a comprehensive source of information on mortgage

markets is not available. HUD considered and analyzed a number of data

sources for the purpose of estimating market size, because no single

source could provide all the data elements needed. In the appendices,

HUD has carefully defined the range of uncertainty associated with each

of these data sources and has conducted sensitivity analyses to show

the effects of various assumptions. Technical papers prepared by the

Urban Institute and other academicians support HUD's analysis.

A number of technical changes have been made in response to the

comments and the evaluation by outside experts, but the approach for

determining market size has not been modified substantially. The

detailed evaluations show that the methodology, as modified, produces

reasonable estimates of the market share for each goal.

In response to concerns expressed about the volatility of the

mortgage markets over time, HUD has taken three steps with regard to

the methodology. First, HUD conducted detailed sensitivity analyses for

each of the housing goals to reflect economic conditions that are less

conducive to homeownership than those that existed during 1993 and

1994. Second, HUD elaborated further on the impact of increased

interest rates on long-term affordability and the ability of lower-

income households to become homeowners. Third, with regard to

volatility in the multifamily market, the Urban Institute, at HUD's

request, designed a ``steady-state'' multifamily originations model

that produces an alternative means of estimating multifamily

originations. This alternative model is designed to generate

conservative forecasts of future multifamily loan originations because

it omits refinancing activity and balloon loans due to mature in the

next several years. This model is less sensitive to year-to-year

fluctuations in the historical volume of mortgage originations.

Criticism of the methodology focused, in part, on the estimated

size of the multifamily market. The GSEs proposed that HUD use the

volume of originations as reported in the Home Mortgage Disclosure Act

(``HMDA'') database--$15 billion in 1994--as the accurate number of

multifamily originations, as opposed to HUD's $30 billion estimate

derived from other data sources. Four of the studies HUD commissioned

from the Urban Institute considered various aspects of the multifamily

market. HUD also consulted with experts at the Federal Reserve Board,

at the Bureau of the Census, and in industry trade groups to assist HUD

in carefully evaluating the GSEs' claim that HMDA data provide an

accurate number of total multifamily originations.

HUD found a consensus that HMDA data underreports multifamily

originations. HMDA, alone, is not an accurate survey of the total

market; it was not designed to be one. It includes only information

reported by a subset of institutions that originate multifamily loans:

large commercial banks, thrifts, and mortgage bankers in metropolitan

areas. In addition, HMDA underestimates multifamily lending by both

mortgage bankers and commercial banks. The additional analyses

conducted in response to the comments support the $30 billion

multifamily estimate used by HUD.

Three-Year Rolling Average

Fannie Mae and an industry commenter suggested that HUD measure

performance against each goal using a 3-year rolling average. Fannie

Mae contended that a 3-year average ``will ameliorate the difficulty

that can arise in managing to a specific goal when major factors in the

marketplace that are outside of our control can heavily influence our

ability to manage to a specific goal level.''

FHEFSSA and the legislative history do not support use of a 3-year

rolling average. Instead, they provide a scheme whereby the Secretary

is to set goals for each year and performance is to be evaluated during

and at the end of each year by the Secretary. FHEFSSA provides that the

housing goals are

[[Page 61854]]

``annual'' goals. Moreover, if the Secretary determines that there is a

substantial probability that the GSE will fail to meet a goal ``in the

current year'' and a housing plan is required, the housing plan is to

describe the actions the GSE will take ``to make such improvements as

are reasonable in the remainder of such year.'' 15 Similarly, if

the Secretary determines that a GSE has failed to meet a housing goal,

the requisite housing plan is to describe the actions the GSE will take

``to achieve the goal for the next calendar year.'' 16 The

legislative history also refers to the goals as annual goals.17

\15\ Section 1336(c)(2)(B).

\16\ Section 1336(c)(2)(A).

\17\ See, e.g., S. Rep. No. 282, 102d Cong., 2d Sess, at 5

(1992) (S. Rep.); H.R. Rep. No. 206, 102 Cong., 1st Sess., at 34 and

36 (1991) (H. Rep.); 138 Cong. Rec. S8607 (daily ed. June 23, 1992)

(statement of Sen. Riegle); 138 Cong. Rec. S17908 (daily ed. Oct. 8,

1992) (statement of Sen. Cranston).

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

Interpreting the statute to allow the use of a 3-year rolling

average, instead of an annual goal with performance assessed by whether

the GSE meets each year's individual goal, would render the statutory

provisions insignificant or inoperative. Such a structure would ignore

an ``elementary rule of [statutory] construction that effect must be

given, if possible, to every word clause and sentence of a statute.''

18 Accordingly, the Secretary has determined that using a 3-year

rolling average was not intended by or permitted under FHEFSSA and,

therefore, the final rule contains annual goals. Fannie Mae's root

concern--that macroeconomic and other conditions outside its control

may render a goal infeasible--is addressed in those provisions of the

rule concerning evaluation of GSE performance; these conditions are

considered in determining whether a goal was or is feasible. The

Secretary can modify a goal, or determine that it was infeasible, if

economic conditions change.

\18\ 2A Norman J. Singer, Sutherland on Statutory Construction

Sec. 46.06 (5th ed. 1993).

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Low- and Moderate-Income Goal, Section 81.12

The proposed rule provided that 38 percent of the total number of

dwelling units financed by each GSE's 1995 mortgage purchases and 40

percent of their 1996 purchases finance housing for low- and moderate-

income families. In 1994, Fannie Mae reported that its performance was

45.83 percent under the Low- and Moderate-Income Goal in the Interim

Notice of Housing Goals; Freddie Mac reported its performance as 37.46

percent. As detailed in the appendices, the Secretary determined that

the conventional conforming market for this goal is 48-52 percent. This

final rule requires that 40 percent of the total number of dwelling

units financed by each GSE's mortgage purchases in 1996 and 42 percent

in 1997-1999 be affordable to low- and moderate-income families.

Fannie Mae objected to the goal set forth in the proposed rule,

recommending a permanent goal of 38 percent, unless and until the

economic environment changes significantly. Other commenters stated

that the goal was not high enough to challenge the GSEs to increase

their mortgage purchases for low- and moderate-income housing. These

commenters emphasized the leadership capacity of the GSEs and indicated

that an increase in secondary market activity by Fannie Mae and Freddie

Mac would help the industry as a whole, because the GSEs' business

decisions influence the rest of the market.

The Low- and Moderate-Income Housing Goal established in the final

rule is reasonable and appropriate considering the factors set forth in

FHEFSSA. HUD addressed the comments on the potential for fluctuations

in the market by setting the level of the goal conservatively, relative

to market estimates, with the understanding that dramatic changes in

the market may require reevaluation of the level of the goal. However,

current examination of the size of the market available to the GSEs

demonstrates that the number of mortgages secured by housing for low-

and moderate-income families is more than sufficient for the GSEs to

achieve the goal. Appendices A and D provide extensive detail on the

statutory factors considered in establishing the level of the goal.

A number of commenters also requested that the goal include

subgoals, targeting a portion of the GSEs' business to multifamily

housing and a portion to single-family housing. One commenter also

requested the establishment of subgoals to focus a percentage of the

GSEs' business on low-income households and another percentage on

moderate-income households. Such subgoals would ensure that the GSEs

undertake more complex and more time-consuming, and less standard,

business to achieve the goal. Subgoals are not established at this time

because: (1) The statute provides that subgoals under the Low- and

Moderate-Income Goal are unenforceable; (2) subgoals suggest

micromanagement of the GSEs' business decisions and unnecessary

regulatory interference by HUD; and (3) the Low- and Moderate-Income

Goal was designed to focus a portion of the GSEs' business on housing

for both low- and moderate-income families, whether that housing is

single-family or multifamily, rental or owner-occupied: a unitary goal

should achieve this purpose.

Central Cities, Rural Areas, and Other Underserved Areas Goal, Section

81.13

This section of the preamble discusses the public comments on the

Central Cities, Rural Areas, and Other Underserved Areas Goal

(``Geographically Targeted Goal''), first for urban and then for rural

mortgage purchases financing housing in these areas. It also addresses

a cross-cutting issue of the legal basis for defining the

Geographically Targeted Goal in the manner implemented by this rule.

Level of Geographically Targeted Goal

The Central Cities, Rural Areas, and Other Underserved Areas Goal

(``Geographically Targeted Goal'') is established in this rule at 21

percent of GSE business in 1996, and 24 percent in 1997-1999. Under the

proposed rule, the Geographically Target Goal would have been

established: for 1995, at 18 percent; for 1996, at 21 percent; for 1997

and 1998, a percentage ranging from 21 percent to the proportion or

percentage or mortgages qualifying under the goal that are originated

in that year's market (``the amount of the market'') or the amount of

the market plus an additional percentage; and for each year after 1998,

a percentage ranging from 21 percent to the amount of the market or the

amount of the market plus an additional percentage or, if HUD does not

set an annual goal for those years, the goal for such years shall be

the same as the most recent goal established by HUD pending further

adjustment by HUD through rulemaking. In Appendix D, HUD estimates that

the mortgage market in the areas covered by this goal will account for

25-28 percent of the total number of newly mortgaged dwelling units. In

1994, 29 percent of Fannie Mae's purchases financed dwelling units

located in all underserved areas, as defined in the final rule,

compared with 24.2 percent of Freddie Mac's purchases.

Mortgage Purchases in Metropolitan Areas, Including Central Cities and

Other Underserved Areas

The rule provides that for properties in metropolitan areas,

mortgage purchases will count toward the goal when such purchases

finance properties that are located in census tracts where either the

median income of families in the tract does not exceed 90 percent of

the area median income, or minorities comprise 30 percent or more of

the

[[Page 61855]]

residents and the median income of families in the tract does not

exceed 120 percent of the area median income. This definition has been

revised from that in the proposed rule which encompassed areas at 80

percent (rather than 90 percent) of median income.

As detailed in Appendix B, this goal emerges from HUD's

consideration of the six statutorily mandated factors for establishing

the goal, supported by HUD's and other researchers' analyses of

mortgage lending data. The final rule's use of a census-tract-based

approach to identify underserved metropolitan areas is supported by the

legislative history of FHEFSSA.

The final rule's definitions of central cities and other

underserved areas, as the underserved census tracts of these areas,

encompass 47 percent of metropolitan census tracts and 44 percent of

metropolitan residents. The average mortgage denial rate in these

tracts is 21 percent--almost twice the denial rate in the non-included

tracts. The definition in the final rule adds 3,657 tracts to the

definition in the proposed rule. These added tracts also have

significant problems with access to mortgage credit, as evidenced by

relatively high mortgage denial rates.

The commenters' recommendations for the underserved area definition

as it applies to central cities and other underserved areas can be

organized into three categories: (1) count all mortgages in OMB-defined

central cities; (2) count mortgages in certain census tracts, as in the

proposed rule or defined more broadly than under the proposed rule; and

(3) modify the list of OMB-defined central cities to include or exclude

various cities.

Tract-Based Versus Whole-City Approaches

Fannie Mae strongly objected to HUD's census-tract-based

formulation of this goal, insisting that the goal should include

``central cities,'' as defined as such on lists issued periodically by

OMB, in addition to high-minority or low-income census tracts in the

remaining portions of metropolitan areas as well as rural areas. Fannie

Mae's objections were based on both policy and legal arguments; the

discussion of the policy issues follows immediately and the legal

arguments are considered at the end of this section of the preamble.

Fannie Mae commented that its experience in developing partnerships

with central cities demonstrates that including only underserved

segments of central cities and rural areas, thereby focusing Fannie

Mae's attention especially on low-income or minority communities, would

be a mistake. Fannie Mae stated that ``community leaders, Congress, and

many national policy makers argue that the health of low-income and

minority communities within central cities is tied directly to the

overall health of the community.''

A number of commenters also disagreed with the proposed rule's use

of a census-tract-based approach, arguing that it did not reflect the

manner in which political leaders, real estate professionals, and

lenders work in cities. According to the Mortgage Insurance Companies

of America, ``rewriting the geographic goals to narrow them

substantially is inconsistent with the objective of improving cities.''

The MBA expressed concern that the criteria for the Geographically

Targeted Goal would exclude areas that are experiencing or are about to

experience ``transitioning minority and low-income demographic

patterns''; MBA recommended that HUD broaden the areas covered. The

National Association of Realtors (NAR) noted that, conceptually,

excluding certain parts of central cities from the definition should

not result in less mortgage activity for those cities, because ``such

an approach could actually improve overall credit flows by focusing GSE

attention on those specific areas most in need.'' However, NAR went on,

``actual marketplace dynamics are more complex than the theory,'' and

called for a ``more holistic approach to addressing the mortgage credit

needs of the central cities.''

Other commenters supported the idea of targeting by means of census

tracts, as proposed. Although Freddie Mac commented that the scope of

the goal should be broadened, Freddie Mac ``applaud[ed] the Secretary's

general methodological approach in defining what areas should be

included'' in the Geographically Targeted Goal. Representative Joseph

P. Kennedy ``strongly support[ed] the idea of not using the OMB

definition of central cities for this goal, since it is clear that the

OMB definition does not identify areas underserved by the mortgage

markets.'' The American Bankers Association (ABA) commented that using

the OMB list of central cities ``has not done enough to focus the GSEs

on the truly underserved portions of urban markets;'' it favored

targeting the GSEs' activities on underserved areas, rather than entire

cities. The Local Initiatives Support Corporation (LISC) agreed that

jurisdictional boundary lines were not particularly useful in

identifying places that need better access to mortgage credit and noted

with approval that the proposed rule ``dovetails with new regulations

implementing the Community Reinvestment Act which also focus on low-

income geographies.''

HUD's Analysis of Metropolitan Underserved Areas

Under FHEFSSA, HUD may define the terms ``central cities'', ``rural

areas'', and ``other underserved areas''. The research conducted by the

GSEs, other mortgage-market economists, and HUD supports the premise

that the location of a census tract--whether it is within a central

city or not--has minimal impact on whether the tract is underserved.

Instead, these studies have found that mortgage availability in a

census tract is strongly correlated with the minority concentration or

median income of that tract. The most thorough studies available

demonstrate that areas with lower incomes and higher shares of minority

residents consistently have poorer access to mortgage credit, with

higher denial rates and lower origination rates for mortgages. With

income, minority composition, and other relevant census tract variables

controlled for, differences in credit availability between central

cities and suburbs are minimal.

Under its contract with HUD, the Urban Institute evaluated the

proposed definition of central cities and underserved areas, as well as

the use of various alternatives advanced by commenters. The Urban

Institute researchers criticized the use of the OMB definition of

central cities--encompassing all areas of designated cities--because

that definition treats all areas in central cities as if they have

equal mortgage-access problems, when, in fact, areas within central

cities are not homogeneous in this regard.19 Use of the OMB

definition of central cities, as advanced by Fannie Mae, would add

8,833 central city tracts to the 13,554 central city tracts included

under this final rule's definition. Credit access is not a problem in

these added tracts--their mortgage denial rate is 11 percent, or half

of the average denial rate in the tracts covered by this final rule.

Based on comparisons such as these, HUD has concluded that a targeted

approach for defining underserved areas is required, to target the goal

and the GSEs' activities to assuring access to mortgage credit in

central cities.

\19\ Urban Institute, George Galster, ``Comments on Defining

`Underserved' Areas in Metropolitan Regions,'' prepared for the U.S.

Department of Housing and Urban Development, August 15, 1995.

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HUD considered the comments that this goal should facilitate

coordination of GSE outreach with the efforts of city governments to

expand investment in

[[Page 61856]]

their jurisdictions. The Secretary does not believe the more targeted

approach adopted in this rule inhibits such valuable coordination. Many

urban revitalization programs and reinvestment efforts, in fact, target

specific neighborhoods and areas, rather than an entire city. These

programs operate on the common-sense premise that targeting all areas

would result in no meaningful targeting. Cities use a neighborhood-

based approach, for example, in implementing their Community

Development Block Grant programs, defining enterprise communities and

empowerment zones, and focusing the activities of redevelopment

authorities.

HUD also considered the argument that the lending industry is

oriented toward market areas defined in city-wide terms. However, the

lending industry does not generally approach lending activity from a

city-wide perspective. Lenders generally try to achieve geographic

diversification within a city, making distinctions among submarkets.

Further, the efforts of lenders to comply with the Community

Reinvestment Act 20 are clearly census-tract-based and are

targeted to neighborhoods, not to all parts of a city.

\20\ The Community Reinvestment Act, 12 U.S.C. 2901 et seq.,

generally requires financial institutions to meet the credit needs

of the communities in which the institutions are located.

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Broaden Tract-Based Approach

Freddie Mac's major observation on the scope of the goal was that

the definition of underserved areas should be expanded to include

census tracts where: (1) the median income of families is not greater

than 100 percent of the area median income; or (2) 20 percent or more

of the residents in the census tracts are minority.

This alternative definition would add substantially more tracts to

the goal, and these tracts have substantially lower denial rates than

the tracts included under the final rule. This is noteworthy because it

indicates that Freddie Mac believes that access to credit is more

limited in more areas throughout the nation than does HUD. The mortgage

credit denial rate for the tracts added by the Freddie Mac definition

is 15 percent, which is only slightly higher than the denial rate for

all metropolitan areas and is significantly less than the 21 percent

denial rate in the tracts covered by the goal established in the final

rule.

Freddie Mac commented further that if the Secretary increased the

scope of the goal to include moderate-income census tracts, a broad,

geographically-based goal would be established, which would be

consistent with the Low- and Moderate-Income Goal and Congress's

intention not to ``force the enterprises to `target' to meet niche

markets.'' HUD does not believe that the final rule's definition, which

covers nearly half of all metropolitan residents, defines a niche

market.

Finally, HUD notes in response to criticism that the goals overlap,

that the three goals established by Congress are distinct. In contrast

to the other goals, income of borrowers is not used in the

Geographically Targeted Goal as a requirement, but as a proxy for those

areas that are underserved by mortgage markets, based on the lower

origination and higher denial rates found in low-income census tracts.

The Geographically Targeted Goal does not depend on the income or

minority status of the individual borrower; the location of the

property determines whether units count under the goal. Some overlap,

however, among the goals can be expected, given the close relationship

between the purposes of serving low- and moderate-income families and

promoting ``access to mortgage credit throughout the Nation (including

central cities, rural areas, and underserved areas) * * *.'' 21 To

the extent that overlap exists, the rule takes this into account, by

providing that mortgage purchases may count toward each of the goals.

\21\ Sections 1381(a)(4) and 1382(a)(4) of FHEFSSA.

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Modify OMB List of Central Cities

Fannie Mae suggested that HUD could exclude from the OMB ``central

cities'' list some central cities that do not qualify, statistically,

as underserved. MBA, which recognized problems with the OMB list, and

the National Association of Affordable Housing Lenders recommended

developing criteria for excluding well-served cities from the OMB list.

A large mortgage company commented that the Secretary should use OMB's

list of central cities and then add other cities that clearly have

underserved needs, but are not on OMB's list. The National Association

of Home Builders (NAHB) recommended that HUD develop a formula for

excluding from the OMB list the higher-income cities, and then adding

``underserved'' areas of other central cities and certain other non-

rural jurisdictions.

The Secretary has carefully considered whether modifying the OMB

list of Central Cities will address the fundamental concern with

continued use of the OMB definition: is it consistent with the

congressional intent to focus a portion of the GSEs' business on

communities that are underserved by the mortgage markets? Modifying the

OMB list to eliminate well-served cities, or retaining the OMB list and

adding distressed non-central cities, does not meet this fundamental

concern. In most cities, some parts are not underserved. Retaining the

bulk of OMB-defined central cities would include many well-off areas

that are not experiencing mortgage credit problems, and it would not

appropriately focus the GSEs on those urban neighborhoods that require

particular attention from the mortgage markets.

Mortgage Purchases in Nonmetropolitan Areas

The final rule provides that for properties in non-metropolitan

areas, mortgage purchases will count toward the Geographically Targeted

Goal where such purchases finance properties that are located in

counties where: either minorities comprise at least 30 percent of the

residents and the median income in the county does not exceed 120

percent of the State nonmetropolitan median income; or the median

income does not exceed 95 percent of the greater of the State or

nationwide nonmetropolitan median income.22

\22\ In New England, portions of counties that are outside

metropolitan areas are used in place of counties.

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This section of the preamble briefly discusses the nature of rural

lending, describes the basic characteristics of HUD's definition of

rural areas, and provides HUD's responses to comments received on the

definition of rural areas.

Problems in Rural Lending

Defining ``rural areas'' requires a different approach than

defining ``central cities'' and ``other underserved areas'' because of

the lack of mortgage data in nonmetropolitan areas, differences in

housing needs between urban and rural areas, and the difficulty of

implementing mortgage programs at the census tract-level 23 in

rural areas. As discussed in Appendix B, evaluating which rural

locations are underserved in terms of access to mortgage credit cannot

be done with HMDA data, on which HUD mainly relied in defining urban

underserved areas. There are few conclusive studies on access to

mortgage credit in rural areas, and the studies that do exist only

suggest broad

[[Page 61857]]

conclusions about credit flows in these areas.

\23\ Block Numbering Areas (BNAs) in rural areas correspond to

census tracts in metropolitan areas. For the sake of simplicity, in

this section this rule refers to BNAs as census tracts.

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For this reason, HUD consulted with researchers from academia, the

Department of Agriculture (USDA), the Census Bureau, and the Housing

Assistance Council (HAC). HUD also conducted a series of forums to

solicit information on rural mortgage markets from rural lenders, rural

housing groups, and the GSEs. The discussions at the forums focused on

the unique nature of mortgage lending and the role of the secondary

market in rural areas.

Mortgage lending in rural areas is very different from lending in

urban areas. The heterogeneity of housing types, the nontraditional and

often seasonal incomes of rural borrowers, and the lack of credit

history for many rural borrowers make underwriting in rural areas

difficult for lenders. Appraisers lack comparable sales data or must

rely on comparables over 1-year old or in a nearby town in order to

determine the value of a property.

Participation of rural lenders in the secondary market is limited.

The low volume of loans originated by rural lenders serving smaller

rural communities makes rural lending business less profitable, and

thus less attractive, to secondary market firms. Based on 1991

Residential Finance Survey data, which is supported by information from

rural lenders and the USDA, rural lenders are more likely than urban

lenders to make short-term loans, 3- to 5-year balloon mortgages, or

adjustable rate mortgages and to hold mortgages in portfolio. Larger

financial institutions, which have experience with the secondary

market, often target the larger rural communities and focus less on

remote areas.

Some studies report significant barriers to accessing mortgage

credit in remote areas and areas with high concentrations of minorities

and low-income households. Barriers include lower lender participation

in Federal mortgage credit programs such as those of the Rural Housing

and Community Development Service, the Federal Housing Administration,

and the Department of Veterans Affairs, lack of financial capacity

among lenders, lack of private mortgage insurance, and a decreasing

number of lending institutions located in rural communities as a result

of the savings and loan crisis of the 1980s.

Characteristics of HUD's Rural Areas Definition

Recognizing both the difficulty in defining rural areas and the

need to encourage GSE activity in such areas, HUD has chosen a

relatively broad, county-based definition of rural areas as the

underserved areas outside of a metropolitan area. HUD's definition

includes 1,511 of the 2,305 counties in nonmetropolitan areas and

accounts for 54 percent of the nonmetropolitan population.

Response to Public Comments

County-Based Definition. Most commenters, including the GSEs, had

argued that a definition based on rural census tracts was ill-advised

because lenders in rural areas do not understand or lend on the basis

of census tracts. Fannie Mae commented that census tracts have ``no

practical meaning'' in rural areas from a marketing standpoint and that

geographic measurements used in the rule should be ``widely understood,

easily measured, and practical from a marketing point of view,'' but

that census tracts in rural areas ``fail these tests.''

Freddie Mac joined Fannie Mae in arguing that the use of a rural

definition based on census tracts was ill-advised because of geocoding

inaccuracies.24 Freddie Mac added that the rule, as proposed would

have automatically excluded single census-tract counties, such as parts

of Texas, which, Freddie Mac noted, include some of the poorest

counties in the country.25

\24\ Geocoding is the process by which a lender or the GSE

identifies the location of a property's address by census tract,

postal code, or some other geographic identifier.

\25\ Freddie Mac noted that, by definition, these tracts will

have median family income equal to 100 percent of the county [tract]

median, thus making them, under the proposed rule, ineligible for

the Geographically Targeted Goal based on income.

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In contrast, some commenters, such as HAC, noted that a county-

based definition is not as targeted as a tract definition, because it

excludes tracts that could be considered underserved in otherwise-

served counties and includes tracts that could be considered adequately

served in underserved counties. HAC cited its own analysis of a

multitude of data and commented that the appropriate criterion for

rural underserved areas would be census tracts with at least 20 percent

minority residents and not more than 100 percent of area-wide median

income, and that the secondary ``income-only'' criterion should be 90

percent of area-wide median. HAC presented statistical evidence to show

that its recommended definitions would: (1) capture a higher percentage

of underserved nonmetropolitan areas; and (2) solve the problem of

omission of census tracts with predominantly white populations. HAC

also recommended supplementing the income and income/minority

population criteria with a special rural area criterion related to

remoteness (such as the Beale codes 26) and sparse population.

\26\ Beale codes are used by the Economic Research Service (ERS)

to classify nonmetropolitan counties according to urban population

size and adjacency to metropolitan areas.

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This final rule uses the county designation, rather than a census

tract-based definition. Counties are easy to identify and geocode,

which will simplify the reporting process for lenders who provide the

GSEs with loan-level data on mortgages. County boundaries in rural

areas are commonly recognized by housing industry representatives

involved in the loan and marketing process, including lenders and

appraisers.

Even though HUD recognizes that a census-tract definition better

targets underserved areas, HUD has decided to use a county-based

definition in rural areas because the operational difficulties

associated with applying census tract boundaries outweigh the benefits

of improved targeting of underserved rural areas. HUD recognizes that,

under its county-based definition, the GSEs could achieve the goal by

purchasing mortgages primarily located in the parts of underserved

counties that have higher incomes. Although 21 percent of the

homeowners who live in underserved counties under this definition

reside in served tracts, these tracts accounted for 39 percent of GSE

purchases in 1994. HUD will require the GSEs to continue to report

nonmetropolitan mortgage purchases at the tract level as they have done

for 1993 and 1994, to enable HUD to assess the desirability of

refinement of the definition in the future.

Area for Median Income. Both Freddie Mac's and Fannie Mae's

comments on the proposed rule's census tract definition in non-

metropolitan areas recommended that tract median income be compared to

the greater of county median income or statewide nonmetropolitan median

income, to ensure the inclusion of poor tracts in poor counties.

Freddie Mac noted that using only county median income could have the

result that census tracts ``that would be considered poor by any

realistic measure * * * would nonetheless be excluded from the goal's

coverage because they happen to be in a very poor county.''

Accordingly, for purposes of the definition of ``rural areas,'' the

rule's new definition of ``underserved areas'' provides that the median

income for a county is compared to the greater of State or nationwide

nonmetropolitan median

[[Page 61858]]

income. Comparing county median income to the greater of statewide

nonmetropolitan or nationwide nonmetropolitan median income ensures

that poor counties in poor States will be included in the definition of

rural areas.

Moreover, the addition of the nationwide designation of median

income addresses a concern expressed by HAC that the proposed

definition cover states that have counties with high poverty rates but

low minority concentrations. With the nationwide designation, counties

in poor States, such as Fulton County, Kentucky, which has a 30 percent

poverty rate, will be included as rural areas. The county median income

is low relative to national median income, but not low relative to

State median income. Without availability of comparison to nationwide

income, Fulton County would not be considered a rural area.

Remote Areas. HAC expressed concern that remote rural areas are

more likely to be underserved than those closer to urban areas. NAHB

also addressed the issue of rural remoteness and recommended that HUD

include counties in certain Beale Codes based on their rural character,

low urbanization, and non-adjacency to a metropolitan area. The rule's

revised nonmetropolitan county definition adequately targets remote

counties. The definition picks up 84 percent of the population that

reside in remote counties, as determined by Beale Codes.

Geographic Coverage of Rural Areas and Demographic Indicators. HUD

uses two demographic indicators--median income and minority

concentration--to identify rural areas. These two indicators correlate

with the common characteristics of underservedness. Fannie Mae

recommended that the rural definition include no demographic

indicators, stating ``the geographic goal was not supposed to focus on

fractions of geographic areas.'' Fannie Mae's definition of rural

areas, therefore, would include all nonmetropolitan counties. As noted

below, HUD does not agree that the Geographically Targeted Goal was

meant to include all rural areas.

Freddie Mac suggested that HUD use a definition covering rural

areas where median income was at or below 100 percent of State median

or where 20 percent of the population was minority. Under Freddie Mac's

definition, 221 counties in addition to those covered by the definition

on the final rule, covering an additional 5.97 million people, would be

considered rural areas. Because HUD does not consider these additional

counties as being underserved by the mortgage market, HUD is not

including these additional counties in its definition of rural areas.

Legal Authority To Limit Goal to Underserved Portions

As noted above, part of Fannie Mae's justification of a definition

using whole ``central cities'' as defined by OMB was based on Fannie

Mae's interpretation of FHEFSSA. HUD believes that Fannie Mae has

interpreted the statutory language too narrowly, and that FHEFSSA did

grant HUD latitude to select from among reasonable definitional

approaches to establish a goal that is appropriately targeted toward

areas underserved by the mortgage lending industry.

Fannie Mae's comments and an opinion prepared for Fannie Mae by the

law firm of Arnold and Porter, and submitted with Fannie Mae's

comments, raised several legal objections to the proposed rule. One

argument was that HUD cannot apply the qualifier ``underserved'' to

limit central cities or rural areas to only portions of central cities

or rural areas that are underserved.

While FHEFSSA does not refer to ``underserved areas of central

cities'' or ``underserved areas in rural areas,'' a general rule of

statutory construction provides that, to determine the word or words to

which the antecedent applies, one may look to legislative

history.27 ``Where the sense of the entire act requires that a

qualifying word or phrase apply to several preceding or even succeeding

sections, the word or phrase will not be restricted to its immediate

antecedent.'' 28

\27\ United States v. Brandenburg, 144 F.2d 656, 660-61 (3d Cir.

1944) (``a clause modifies that antecedent which the draftsman

intended it to modify'').

\28\ Sutherland Secs. 47.33 and 47.26. See also State v. McGee,

122 Wash.2d 783, 864 P.2d 912, 914 (1993); Nemzin v. Sinai Hospital,

143 Mich. App. 798, 372 N.W.2d 667, 668-69 (1985).

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The legislative history of FHEFSSA makes clear that the goal is to

address underserved areas. In explaining the conference bill on the

floor of the Congress, then-Chairman Gonzalez stated: ``In establishing

the definition of a central city and in determining compliance with

such a goal, the Secretary should, to the extent possible, exclude

purchases made in non-low income census tracts that happen to otherwise

be within the central cities area.'' 29 Focusing on ``inner-

cities'' rather than entire OMB cities, the legislative history

provides that ``[t]he purpose of these goals is * * * to service the

mortgage finance needs of low- and moderate-income persons, racial

minorities and inner-city residents,'' and noted that ``mortgage

discrimination and redlining have effectively disadvantaged certain

geographic areas, particularly inner city and rural areas.'' 30

\29\ 138 Cong. Rec. H11453, H11457 (daily ed. Oct. 5, 1992).

Rep. Gonzalez made the identical statement at 138 Cong. Rec. H11077,

H11099 (daily ed. Oct. 3, 1992).

\30\ S. Rep. at 32, 34, and 41 (emphases added). See also 138

Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of Sen.

Riegle) (``inner-city lending * * * is a very important part of this

legislation'').

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The ``Plain Meaning''

Fannie Mae commented that the plain meaning of FHEFSSA had been

breached by HUD in changing the definition of ``central cities'' from

the transition definition and that Congress did not intend that HUD

revise that definition in the years following the 2-year transition

period. For the transition years of 1993-94, FHEFSSA mandated that the

Geographically Targeted Goal be directed only to ``central cities'' as

defined by OMB, and HUD extended this approach to 1995 by regulation.

However, following the transition, FHEFSSA authorized the Secretary to

define central cities and to expand the goal to target ``rural areas''

and ``other underserved areas.'' Fannie Mae commented that Congress

intended that only ``other'' underserved areas--that is, areas in

addition to central cities and rural areas generally (which, Fannie Mae

declared, also were to be considered ``underserved'')--be subject to

HUD redefinition in the rule. Fannie Mae commented that ``Congress

actually provided the definition of `central cities' in the subsection

on the two-year transition period. . . . There is no indication in the

statute that Congress intended the definition of `central cities' to be

restricted or narrowed after the two-year transition period.''

Section 1334(d)(3) of FHEFSSA did define ``central cities'' as the

OMB list of central cities. Congress, however, placed that definition

in the transitional provisions of the Geographically Targeted Goal and

thereby limited it to the transition period (1993-94). Had Congress

chosen for HUD to continue using that definition after the transition

period, Congress could have placed the definition in the general

definition section of FHEFSSA. Congress did not do so.

Fannie Mae's argument that HUD must continue with the transition

period definition of central cities would effectively render

superfluous the language of the statute that explicitly limits the

application of the definition to the transition period. The argument,

[[Page 61859]]

thus, would controvert the general rule of statutory construction that

effect must be given, if possible, to every word, clause and sentence

of a statute.31 ``A statute should be construed so that effect is

given to all its provisions, so that no part will be inoperative or

superfluous, void or insignificant, and so that one section will not

destroy another unless the provision is the result of obvious mistake

or error.'' 32

\31\ Sutherland Sec. 46.06. See also United States v. Menasche,

348 U.S. 528, 538-39 (1955); Moskal v. United States, 498 U.S. 103,

109-10 (1990).

\32\ Sutherland Sec. 46.06. See also United States v. Talley, 16

F.3d 972, 975-76 (8th Cir. 1994); Bridger Coal Co./Pacific Minerals,

Inc. v. Director, Office of Workers' Compensation Programs, United

States Dept. of Labor, 927 F.2d 1150, 1153 (10th Cir. 1991).

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``Rural Areas'' and ``Central Cities'' Are Not Terms of Art

Fannie Mae also asserted that ``central cities'' is a term of art

in housing legislation and that ``rural areas'' has a clear meaning.

Fannie Mae commented that OMB has never limited its list of cities in

the manner contemplated by the proposed rule. HUD's definition,

therefore, is inconsistent with commonly understood meaning and

contradicts FHEFSSA's purpose. Fannie Mae argued that the definition of

``central cities'' for the transition period ``is a clear indication of

the type of definition that Congress had in mind when considering this

goal.''

The terms ``central cities'' and ``rural areas'' are not terms of

art and do not have clear meanings. While other statutes and

regulations contain definitions of ``central cities'' and ``rural

areas,'' these definitions are not uniform. With respect to ``central

cities,'' the fact that Congress felt the need to define ``central

cities'' for the transition period indicates that the term may have

more than one reasonable interpretation. In fact, different Federal

agencies define central cities differently.33

\33\ Compare 55 Fed. Reg. 12155 (Mar. 30, 1990) (definition of

``central cities'' used by the Statistical Policy Office of OMB)

with 41 C.F.R. Sec. 101-17.003-35 (General Services Administration's

Federal Property Management Regulations).

Related definitions used by the Bureau of the Census, define

``urbanized area central places'' in a manner which indicates that

the ``central'' area could be only a portion of a political unit.

The Bureau of the Census provides that for extended cities, an

``urbanized area central place'' includes those metropolitan area

central cities entirely or partially within the urbanized area, but

that only the urban portion of an extended city is classified as

central. 55 Fed. Reg. 42593 (Oct. 22, 1993).

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Fannie Mae's comments concede that the term ``rural areas'' has no

established meaning in housing legislation. While other statutes and

regulations contain definitions of ``rural areas,'' these are not

uniform.34 Moreover, while the terms ``central cities'' and

``rural areas'' have been used in other statutes, the purposes of those

statutes have been very different, i.e., they have not been designed to

set goals for providing mortgage credit to such areas. For example,

OMB's statutory authority for defining central cities is the Paperwork

Reduction Act, and OMB's purpose is to define areas that are

``central'' to a large geographic area. OMB established criteria for

central cities which were relevant to this charge. Were HUD to focus on

the same criteria, HUD would be taking into account factors that are

not directly relevant to determining whether an area is underserved by

mortgage credit.

\34\ See, e.g., 42 U.S.C. 11501(a)(2)(B); 24 CFR 596.3

(definition based on having population of less than 50,000 and being

outside of a Metropolitan Statistical Area (MSA)); 12 U.S.C.

2019(b)(3) (definition based simply on having a population of 2500

or less); 42 U.S.C. 294o(e) (definition based simply on being

outside of an MSA).

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The construction given to a term in one statute is not to be

imparted to the construction of the same or similar term in another

act, or even another section of the same act, if the purposes of the

two acts or sections are different.35 Given the different purposes

of the statutes and regulations defining ``central cities'' and ``rural

areas,'' those definitions do not bar HUD from, and in fact mitigate in

favor of HUD's, adopting definitions for these terms more consistent

with the overall structure and purposes of FHEFSSA and its legislative

history.

\35\ Laffey v. Northwest Airlines, Inc., 567 F.2d 429, 461-62 n.

230 (D.C. Cir. 1976), cert. denied, 434 U.S. 1086 (1978).

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Special Affordable Housing Goal, Section 81.14

FHEFSSA requires the Secretary to establish Special Affordable

Housing Goals for the GSEs' mortgage purchases on rental and owner-

occupied housing to meet the then-existing unaddressed needs of, and to

be affordable to, low-income families in low-income areas and very-low-

income families. Under the proposed rule, the goal was equally divided

between rental (single-family and multifamily) and owner-occupied

housing. The rental portion of the goal was targeted to very-low-income

families while the owner-occupied portion targeted very-low-income

families in addition to low-income families in low-income areas.

In response to comments received and upon further consideration by

the Secretary, this final rule substantially changes the proposed

rule's formulation of the Special Affordable Housing Goal. First,

mortgage purchases financing housing for low-income renters in low-

income areas now count toward achievement of the goal. Second, the

equal division between rental and owner-occupied housing has been

removed. Instead, each GSE may choose the type of housing (rental,

owner-occupied, single-family, or multifamily) to finance to achieve

the goal. However, the goal does require a set minimum of each GSE's

purchases to be multifamily mortgages. Finally, the goal allows

dwelling units affordable to low-income families in multifamily

properties to count where thresholds, based on the LIHTC thresholds,

are met.

The final rule provides that the Special Affordable Housing Goal

for 1996 is 12 percent of the total number of dwelling units financed

by each GSE's mortgage purchases. The goal for 1997-1999 and pending

new goals is 14 percent. Of the total Special Affordable Housing Goal,

each GSE must annually purchase multifamily mortgages in an amount at

least equal to 0.8 percent of the total dollar volume of mortgages

purchased by the respective GSE in 1994. In Appendix D, HUD estimates

that 20-23 percent of the conventional conforming mortgage market would

qualify under the Special Affordable Housing Goal. In 1994, 16.7

percent of Fannie Mae's purchases financed dwelling units that would

count toward the achievement of this goal, as defined in the final

rule, compared with 11.4 percent of Freddie Mac's purchases. In 1994,

Fannie Mae purchased $1.91 billion of mortgages on multifamily housing

that would have counted toward the achievement of this goal, or 1.25

percent of its total 1994 business. In 1994, Freddie Mac purchased $425

million of mortgages on multifamily housing that would have counted

toward this goal, or 0.36 percent of its total 1994 business.

Rental and Owner Subgoals

Both GSEs' objected to the fact that the proposed rule would have

imposed a 50-50 split between rental and owner-occupied housing for the

Special Affordable Housing Goal. Fannie Mae commented that the

Secretary ``failed to provide an acceptable rationale'' for dividing

the Special Affordable Housing Goal equally between rental and owner-

occupied dwelling units and provided ``no compelling justification''

for such a split. Freddie Mac also commented that the creation of

subgoals for rental and owner-occupied housing made it more difficult

to attain the overall goal--even under circumstances in which

performance on the owner-occupied subgoal might far surpass the level

set by the regulation.

[[Page 61860]]

Fannie Mae also commented that the even split between rental and

owner-occupied housing would ``significantly alter'' the basic

character of the goal. While Fannie Mae achieved all four subgoals

during the transition years 1993-1994, Fannie Mae stated that it had

done so by ``significantly larger margins'' in its single-family

business, and that this relative ease in meeting subgoals in owner-

occupied housing reflected the relative shares of Fannie Mae business

represented by single-family and multifamily acquisitions.

Congress intended that the Secretary have broad authority to

redesign the sub-categories under the goal. The Senate Report states,

``During a transition period, specific dollar amounts are set for four

separate income and housing categories to emphasize that each of these

areas needs attention. After the experience of the first two years, the

[Secretary] may redesign the categories to target more effectively low-

income family needs and reflect any gaps in GSE performance.'' 36

Moreover, FHEFSSA provides that goals should be established for

``rental and owner occupied housing.'' 37 The Secretary considered

the statutorily prescribed factors in section 1333(a)(2) prior to

establishing the proposed goal and, therefore, the Secretary's actions

were neither arbitrary nor capricious. Notwithstanding the fact that

the proposed rule would have withstood judicial scrutiny, the Secretary

determined for policy reasons to revise the Special Affordable Housing

Goal. These revisions include removing the 50-50 split between renter

and owner-occupied housing, and replacing it with a more flexible

division.

\36\ S. Rep. at 37.

\37\ Paragraph 1333(a)(1).

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Level of Special Affordable Housing Goal

Freddie Mac commented that the Special Affordable Housing Goals

proposed for 1995 and 1996 are ``unrealistically high and very likely

infeasible within the meaning of the Act.'' Fannie Mae agreed, arguing

that the proposed level of the goal is unreasonable and recommending

that the Secretary establish the Special Affordable Housing Goal at no

more than 8 percent. Fannie Mae considered the proposed 11 and 12

percent goals ``less unreasonable'' if the Special Affordable Housing

Goal included low-income renters in low-income areas. Other commenters,

largely nonprofit organizations, felt that the proposed goals both for

home ownership and rental housing were too low.

The levels of the Special Affordable Housing Goal in the proposed

and final rules are both feasible and reasonable. The Special

Affordable Housing Goal is consistent with updated and further refined

market share data and analyses, and is reasonable given the GSEs' past

performance. While the specifics of the analyses are detailed in

Appendices C and D, the major findings supporting this goal level are

summarized below.

The proposed rule contained an appendix that analyzed market share

data from the American Housing Survey and HMDA. That analysis

demonstrated that the GSEs were purchasing much smaller proportions of

mortgages of very-low-income families originated by the market than

they were purchasing loans of higher-income families. Based on

additional and updated analysis of the market data, the original

conclusion, discussed in the proposed rule--that there are available

mortgages in the very-low-income end of the mortgage market for the

GSEs to increase the share of very-low-income mortgage originations

they purchase--is unchanged. Additionally, analysis of market share

estimates indicates that approximately 20-23 percent of the

conventional conforming mortgage market would qualify under the Special

Affordable Housing Goal as it is defined in the final rule. This

analysis provides further support that the Special Affordable Housing

Goal is both feasible and eminently reasonable.

The GSEs' 1994 performance also indicates that the goal is

achievable. Using the final rule's conventions for what will count

toward the goal, 16.7 percent of Fannie Mae's 1994 business and 11.4

percent of Freddie Mac's would have qualified under the goal.

Authority To Establish Special Affordable Subgoals

Freddie Mac commented that FHEFSSA provides that the Secretary

shall establish ``a'' Special Affordable Housing Goal. Freddie Mac

argued that the Secretary's proposed approach to implementing the

Special Affordable Housing Goal was not authorized by law because, as

proposed, it was either two completely separate goals (one for rental

housing and one for owner-occupied housing) or one goal with two

subgoals.

FHEFSSA authorizes the Secretary, both during the transition and

thereafter, to establish the goal and define portions thereof. It does

not indicate that subgoals are unenforceable or otherwise prevent the

Secretary from defining enforceable portions. For the transition

period, FHEFSSA itself subdivided the Special Affordable Housing Goal

into two separate portions--single-family and multifamily--and went on

to define specifically what counted towards each portion. For the

period following the transition, FHEFSSA provides that the Secretary

``shall establish a special affordable housing goal.'' 38 FHEFSSA

did not define the structure of the goal, but specified that it should

meet the then-existing unaddressed needs of low-income families in low-

income areas and very-low-income families. The legislative history

indicated that, following the transition, the Secretary was to redefine

the goal. Under FHEFSSA and legislative intent, the Secretary has

adequate flexibility to adjust the goals ``to target more effectively

low-income family needs and reflect any gaps in GSE performance.''

39

\38\ Section 1333(a)(1) (emphasis added).

\39\ S. Rep. at 37.

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Freddie Mac also commented that section 1333 of FHEFSSA, in

establishing the Special Affordable Housing Goal, does not refer to

subgoals. Freddie Mac emphasized that, in contrast, section 1332 of

FHEFSSA, establishing the Low- and Moderate-Income Housing Goal, and

section 1334, establishing the Geographically Targeted Goal,

specifically provided that the Secretary may establish subgoals. To

Freddie Mac, the omission of a similar provision from section 1333

means that such subgoals are not authorized. Freddie Mac relies on the

doctrine of in pari materia, which provides that statutes dealing with

the same matter or subject shall be construed together. Thus, Freddie

Mac argues that sections 1332-34 deal with the same matter, i.e.,

housing goals, and that the Secretary failed to construe those sections

together.

The provisions on subgoals referred to by Freddie Mac at sections

1332 and 1334 concerning the Low- and Moderate-Income Housing Goal and

the Geographically Targeted Goal provide that while the Secretary may

establish subgoals, they are not enforceable. The omission of a similar

provision in section 1333 is not an indication that subgoals or

subcategories within the overall goal are prohibited; rather, such

omission indicates that to the extent that subgoals or subcategories

are promulgated for the Special Affordable Housing Goal, no bar exists

to enforcing them. Since section 1333 contemplates the use of

enforceable subgoals or subcategories, section 1333 does not include

the same type of restriction against enforcing subgoals as do sections

1332 and 1334.

[[Page 61861]]

Rental Versus Multifamily

A number of commenters, including the MBA, the Enterprise

Foundation, the NTIC, the National Low Income Housing Coalition

(NLIHC), and the California Reinvestment Committee, expressed concern

that the proposed Special Affordable Housing Goal did not have an

explicit focus on the multifamily market. They argued that the GSEs

should have some explicit regulatory requirement to purchase

multifamily mortgages, in order to sustain a secondary market for

affordable multifamily loans. These commenters and others recommended

that the Secretary establish a subgoal for the purchase of multifamily

mortgages. Other commenters, including CANICCOR, the National League of

Cities, and the City of Los Angeles, while not recommending an explicit

multifamily subgoal, urged the Secretary to require that the GSEs

support an active secondary market for multifamily loans.

In light of these comments and additional analysis, the Secretary

reconsidered the proposed rule's focus on rental--as opposed to

multifamily--mortgages and has revised the goal. The final rule

provides that a relatively small portion of the goal must be achieved

through the purchase of multifamily mortgages. The remainder of the

goal can be achieved through the purchase of multifamily or single-

family mortgages--whether owner-occupied or 1- to 4-unit rental

properties. A secondary market providing liquidity for financing of 1-

to 4-unit rental properties already exists. In the multifamily arena,

however, a secondary market for affordable multifamily mortgages is

still developing. Given the GSEs' overall experience and financial

strength, it is reasonable to expect that they play major roles in the

development of a stable secondary market for affordable multifamily

mortgages.

Freddie Mac raised concerns that an increased level of multifamily

purchases within the Special Affordable Housing Goal could lead to

credit risk problems. Freddie Mac argued that a higher level of

multifamily purchases may not be possible without relaxing underwriting

standards and purchasing higher-risk properties.

It is the Secretary's intention that the goal ensure that the GSEs

maintain a consistent focus on the very-low-income portion of the

housing market where housing needs are great. Clearly, the intention of

the goal is not to promote or encourage the undertaking of unnecessary

credit risks on the part of the GSEs. The market data presented and

analyzed demonstrates that the level of the Special Affordable Housing

Goal is attainable, and the structure of the goal provides the GSEs

with adequate flexibility to achieve it without taking unnecessary

credit risk. In addition, the Secretary notes that Congress indicated

that ``Freddie Mac should be expected to implement strong multifamily

programs in the near future. The Committee intends that the [goals] be

set at levels consistent with each enterprise having a significant

multifamily program.'' 40

\40\ S. Rep. at 35-36.

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

Units Versus Dollars

Freddie Mac argued that the Secretary's decision to express the

Special Affordable Housing Goal as a percentage of overall units

financed by a GSE is not supported by FHEFSSA and that the statute

requires the Special Affordable Housing Goal to be established in

dollars of mortgage purchases. NAHB provided a critique of a percent-

of-business measurement and urged HUD to retain a dollar-volume target

that could be reset each year based on ``assessment of need, subsidy

availability, and refined market estimates.'' NAHB's concern grows out

of its belief that the Special Affordable Housing Goal, because of its

focus on very-low-income mortgages, is tied to the availability of

public subsidies, which are not market-driven.

Fannie Mae, on the other hand, did not oppose the change to a

percentage-of-business goal and stated that such a goal will ``more

accurately reflect contemporaneous market trends because it is `self-

adjusting'. It is a more equitable and sensible approach to a changing,

and sometimes volatile, market.'' Other commenters, including the

National Council of State Housing Agencies and America's Community

Bankers agreed, describing the percentage-of-business approach as a

more appropriate way to measure the impact of the GSEs' mortgage

purchases.

The Secretary has concluded that the statute permits the Secretary

to set the goals as a percentage of units financed by the GSEs, as long

as the percentage arrived at exceeds the dollar floor prescribed in

FHEFSSA. Section 1333(a)(1) of FHEFSSA provides: ``The special

affordable housing goal established under this section for [a GSE]

shall not be less than one percent of the dollar amount of the mortgage

purchases by the [GSE] for the previous year.'' (emphasis added)

When interpreting a statute, a court should only go beyond the text

of a statute if the text is ambiguous.41 Such interpretation of

FHEFSSA reveals that it requires the Secretary to: (1) Establish a

Special Affordable Housing Goal; and (2) establish the Special

Affordable Housing Goal so that it will equal or exceed the one percent

dollar amount in section 1333(a)(1). Courts will not reject the literal

meaning of a statute unless such an interpretation ``leads to absurd

results when applied.'' 42 In this case, the Secretary's

interpretation of section 1333(a)(1)--to allow the Secretary to

establish the Special Affordable Housing Goal as a percentage of

dwelling units financed, while ensuring that the Special Affordable

Housing Goal will be set high enough to meet the floor or minimum

required under section 1333(a)(1)--is consistent with FHEFSSA and

appropriate policy.

\41\ National Tax v. Havlik, 20 F.3d 705 (7th Cir. 1994).

\42\ Blue Cross v. Weitz, 913 F.2d 1544, 1548 (11th Cir. 1990).

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

The Secretary recognizes the validity of the concerns expressed by

Freddie Mac and several other commenters that financing for affordable

multifamily units is tied to the availability of public subsidies,

which are not market-driven. Therefore, the final rule establishes the

multifamily portion of the goal as a percentage of each GSE's business

in 1994, rather than for each year. The Secretary believes that 1994

was a reasonable baseline year for the GSEs, given the decline in

mortgage originations. Consequently, 1994 represents a reasonable

baseline from which to calculate a portion of the Special Affordable

Housing Goal that should be devoted to multifamily mortgages.

Low-Income Renters in Low-Income Areas

Under the proposed rule, the Special Affordable Housing Goal would

have been directed to rental housing for very-low-income families and

to owner-occupied housing for low-income families in low-income areas

and very-low-income families. Both GSEs argued that the Special

Affordable Housing Goal must also be targeted to mortgage purchases on

housing for low-income renters in low-income areas and that this

category was improperly excluded from the proposed goal.

The Secretary agrees that the statute requires the inclusion of

low-income rental units in low-income areas. Section 1333 of FHEFSSA

provides that the goal should address ``the then-existing unaddressed

needs of, and affordable to, low-income families in low-income areas

and very low-income

[[Page 61862]]

families.'' Inasmuch as there are unaddressed needs of low-income

renters in low-income areas and of very-low-income renters, the

Secretary has determined that mortgages for low-income renters in low-

income areas should be included under the goal. The final rule reflects

this change.

Counting of Rental Units

The proposed rule specified that only rental units affordable to

very-low-income families (i.e., families whose incomes are 60 percent

of area median income or less) would count toward the goal. This

altered a convention applicable to the Special Affordable Housing Goal

in 1993-1995 that any low-income rental unit in a multifamily property

where at least 20 percent of the units are affordable to especially

low-income families (i.e., families whose incomes are 50 percent of

area median income or less) or where at least 40 percent of the units

are affordable to very-low-income families (i.e. families whose incomes

are 60 percent of area median income or less) would count toward the

goal.

A number of commenters, including both GSEs, the MBA, the

Association of Local Housing Finance Agencies, and the Enterprise

Foundation, argued that the proposed rule's approach would create a

regulatory incentive for the GSEs to focus only on mortgage purchases

for buildings that are entirely occupied by very-low-income tenants, at

the expense of financing mixed-income buildings. These commenters

argued that an exclusive focus on 100-percent very-low-income buildings

is contrary to HUD policy established in other contexts emphasizing

mixed-income rental developments as more beneficial for residents and

communities. The Secretary concluded that the comments have validity

and has revised the final rule to use the transition-period convention

of counting all low-income units in buildings where the percentage of

such units meets the thresholds used during the transition which, in

turn, were modeled on the LIHTC.

Refinancings From Portfolio

Under the Interim Notices establishing transition goals, HUD did

not allow any credit toward the Special Affordable Housing Goal for the

refinancing of mortgages held by the GSEs in portfolio. The proposed

rule provided credit for these refinancings--as long as they were

economically motivated transactions initiated by the borrower--to count

toward the goal. Both Fannie Mae and Freddie Mac supported this

approach. Several commenters expressed concern that including

refinancings would create a disincentive for the GSEs to focus on new

originations for lower-income households.

The exclusion of refinancings, as provided in the Interim Notices,

imposed significant compliance burdens on the GSEs in order to identify

those purchases of refinanced mortgages that represented mortgages

previously purchased by the GSEs. Further, this provision was contrary

to the common method of financing multifamily properties using

relatively short-term balloon mortgages, which by their nature must be

refinanced frequently to maintain project viability. Refinancings in

this context serve the goal of continued availability of housing

meeting the goals. For these reasons, the final rule maintains that

economically motivated, arm's-length refinancings will count toward the

Special Affordable Housing Goal.

General Requirements, Section 81.15

Insufficient Information

Performance under each of the housing goals is based on a fraction

that is converted into a percentage. The numerator of this fraction is

the number of dwelling units that count toward the achievement of a

particular housing goal. The denominator is the number of dwelling

units (for all mortgages purchased) that could, under appropriate

circumstances, count toward achievement of a goal. Under Sec. 81.15(b)

of the proposed rule, dwelling units with insufficient information to

determine whether the unit scored toward a GSE's goal performance would

be excluded from the numerator, but included in the denominator.

Freddie Mac objected that this provision was too strict and ``distorts

the reports to Congress on * * * purchases of mortgages counted within

* * * the goals.'' Freddie Mac recommended that, when a given threshold

of completeness of data is met, the GSE be permitted to eliminate from

the denominator up to a given percentage of units lacking sufficient

data.

HUD is aware that the GSEs have incomplete data for mortgages

originated before 1993. Consequently, when a GSE lacks sufficient

information to determine whether a mortgage originated before 1993

counts toward achievement of any of the housing goals, the purchase of

that mortgage may be excluded from the denominator for purposes of

measuring goal performance. However, the goals must be structured in a

manner that will create incentives for the GSEs to obtain and provide

the data necessary to determine whether the purchase of mortgages

originated during or after 1993 count toward the housing goals.

Permitting the GSEs to exclude from the denominator, because a GSE

lacked complete information, mortgage purchases (of post-1992

originations) that did not meet the goals would create a disincentive

to the collection of such information. This result is contrary to the

legislative history, which emphasizes the importance of accurate and

comprehensive data. Accordingly, the final rule requires all mortgages

originated after 1992 to be included in the determination of the GSE's

performance under each of the housing goals.

Double-Counting

Some dwelling units financed by a GSE mortgage purchase count

toward achievement of one, two, or all three housing goals under

Sec. 81.15(d) of the proposed rule. Two commenters objected to

permitting double- or triple- counting. One commenter noted that the

GSEs may not have to alter their ``programmatic focus to any great

extent'' to meet the goals. In the final rule, HUD has allowed counting

mortgage purchases toward one or more of the goals, because double

counting is consistent with congressional intent. The Senate Report on

FHEFSSA 43 provides that the goals be ``overlapping, in that each

[GSE] activity counts toward the achievement of each goal, if any, for

which the activity qualifies.''

\43\ S. Rep. at 63.

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

Use of Rent

Freddie Mac commented that Sec. 81.15(f)(5) should be clarified so

that use of average rent-by-unit-type continues to be an acceptable

means for reporting rent levels and determining affordability of non-

owner-occupied units. Freddie Mac claimed that requiring it to obtain

individual unit rent data would be a large drain on resources and would

place Freddie Mac at a competitive disadvantage relative to its non-GSE

competitors. Because the current reporting system has worked

satisfactorily and the GSEs' reporting burden is an important

consideration, the rule has been changed to conform to Freddie Mac's

suggestion.

Seasoned Mortgages

In determining whether mortgages count toward the goals, Freddie

Mac asked for revision of Secs. 81.15(f)(6) and 81.16(c)(6), to allow

the GSEs to use tenant information (for 2- to 4-unit mortgages) and

income or rent level information (for single-family

[[Page 61863]]

mortgages) as of the time of origination, regardless of the age of the

mortgages when acquired by the GSE. According to Freddie Mac, the rule

would then conform to industry practice and would avoid requiring the

modification of data collection and underwriting practices for these

types of units. This practice was also allowed under the Notice of

Interim Housing Goals published in October 1993, to avoid costly

reverification of information. For the same reasons, the final

regulation continues this requirement.

Split Areas

Freddie Mac criticized Sec. 81.15(g) of the proposed rule, which

would have provided an allocation formula for split census tracts in

measuring performance under the Geographically Targeted Goal, as

``cumbersome and inconsistent with HMDA requirements'' in its treatment

of determining area median income in census tracts that cross

metropolitan area boundaries in New England. Freddie Mac stated that

the additional precision in reporting that HUD was apparently seeking

was not worth the cost. Freddie Mac recommended that where the ``area''

cannot be determined and the census tract or property lies in a ``split

area,'' the GSEs should be permitted to use the convention adopted by

the Federal Financial Institutions Examination Council (FFIEC) for HMDA

reports. The final rule adopts this suggestion, which uses an

allocation that distinguishes only portions of the county within a

metropolitan area from those portions outside of a metropolitan area.

Special Counting Requirements, Section 81.16

Low-Income Housing Tax Credit Purchases (LIHTC) and Mortgage Revenue

Bonds (MRB)

Fannie Mae objected to Secs. 81.16(b) (1) and (2) of the proposed

rule, which would have provided that the GSEs' LIHTC equity investments

and MRB purchases would not count toward any of the goals, including

the Special Affordable Housing Goal. Fannie Mae commented that the

Secretary's position on these forms of investment is ``inconsistent and

counter-productive.'' Several other commenters agreed with Fannie Mae.

One commented that the Secretary should at least give credit for LIHTCs

in central cities and underserved areas. Another commenter stated that

LIHTC equity investments are not mortgage purchases and, therefore, it

might be appropriate to place ``an upper limit on the amount of credit

to be taken for such activities.''

The final rule does not change the provision that the purchase of

LIHTCs will not count toward the housing goals. The GSEs' support of

affordable housing through the provision of equity in exchange for tax

benefits is an important activity. Although the legislative history

states that equity investments should not count toward the achievement

of the Special Affordable Housing Goal, the legislative history

indicates that it is the Secretary's decision whether the purchase of

LIHTCs should count toward achievement of the other two housing

goals.44 Because the purchase of LIHTCs is not the equivalent of

the purchase of a mortgage, equity investments in LIHTCs do not count

toward achievement of any of the housing goals.

\44\ See, e.g., S. Rep. at 38; H. Rep. at 60 and 61.

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

Freddie Mac commented that the purchase of MRBs should receive full

credit. Freddie Mac commented that:

* * * where revenue bonds are issued that are not supported by

any pledge or promise from the state or local issuer of the bonds,

or by any other credit enhancement or collateral, other than the

payments from the mortgage itself, the purchaser of these bonds

would be in the exact same economic position as the purchaser of the

mortgage itself.

The final rule allows units financed by a mortgage revenue bond

purchased by the GSEs to count under the housing goals with certain

restrictions to assure that such MRB purchases are the functional

equivalent of mortgage purchases by the GSEs. Under the rule, purchases

of MRBs count only where the MRB is to be repaid from the principal and

interest of the underlying mortgages originated with funds made

available by the MRB. Purchase of an MRB which is either a general

obligation of a state or local government or agency or is otherwise

credit enhanced, by any government or agency, third party guarantor or

surety, will not count.

Risk-Sharing Arrangements

Freddie Mac commented that the exception in Sec. 81.16(b)(3) should

be modified so that mortgages purchased by the GSEs under risk-sharing

arrangements with HUD or other Federal agencies would receive full

credit under the Special Affordable Housing Goal. Freddie Mae stated

that such an approach would better comport with the statutory language

and would provide an incentive for completing mortgage purchases that

may entail greater underwriting risks and a higher level of monitoring.

Freddie Mac commented that HUD's rationale in the proposed rule for

denying full credit under risk-sharing arrangements of the kind

described was ``flawed,'' and that the Secretary lacked authority under

FHEFSSA to refuse to give credit, or to provide for only partial

credit.

NTIC disagreed with Freddie Mac's comment and with the proposed

rule's provision of partial credit for risk-sharing activities. NTIC

asserted that the GSEs' risk-sharing activities should supplement

affordable housing programs, not replace them. NTIC stated: ``The

legislation was enacted to ensure regular, conventional business is

available to all citizens and neighborhoods. Allowing Fannie and

Freddie to use the government's money to make their goals is

unacceptable!''

Under section 1333(b)(1)(A) of FHEFSSA, the Secretary is required

to give full credit toward the Special Affordable Housing Goal for the

purchase or securitization of federally-insured or guaranteed mortgages

where: (1) such mortgages cannot be readily securitized through the

Government National Mortgage Association or any other Federal agency;

(2) the GSEs' participation substantially enhances the affordability of

the housing subject to such mortgages; and (3) the mortgages involved

are on housing that otherwise qualifies under the Special Affordable

Housing Goal to be considered for purposes of that goal. The Secretary

has determined that the GSEs' current risk-sharing activities meet the

requirements in (1) and (2). To the extent the third requirement is

satisfied, risk-sharing activities will receive full credit toward

achievement of the Special Affordable Housing Goal under the final

rule, as long as the dwelling units financed meet the other

requirements of the goal.

Furthermore, the final rule provides full credit under the Low- and

Moderate-Income Goal and the Geographically Targeted Goal for mortgages

purchased under risk-sharing arrangements where the GSE assumes

substantial risk, which serve to increase available housing

opportunities. HUD intends to monitor future GSE purchases under risk-

sharing arrangements to assure that providing full credit for such

purchases remains warranted.

Forward Commitments

Freddie Mac commented that Sec. 81.16(b)(4) should be revised to

permit commitments to purchase mortgages to count as mortgage purchases

in the year the commitments were made. Freddie Mac stated that such

revision would make the rule consistent with requirements imposed under

FHEFSSA, which mandate that Freddie Mac hold

[[Page 61864]]

capital against forward commitments. Freddie Mac added that the rule

could add language to ensure against ``double counting.''

Under FHEFSSA, the Secretary is to establish housing goals for

mortgage purchases. Section 1303(11) of FHEFSSA defines mortgage

purchases to include mortgages purchased for portfolio or

securitization. The use of the past tense of the verb, i.e.,

``purchased,'' rather than the future tense, i.e., ``purchased or to be

purchased,'' indicates that a transaction does not constitute a

mortgage purchase simply because a mortgage may be purchased in the

future based on a commitment, but that the mortgage must actually have

been ``purchased.'' Accordingly, this section of the rule has not been

revised.

Second Homes

Freddie Mac commented that Sec. 81.16(b)(5) should be eliminated so

that the purchase of mortgages on secondary residences would receive

full credit toward the goals. Freddie Mac stated that the majority of

secondary residences are located in low- and moderate-income census

tracts and ``serve an important role in bolstering local housing

markets and providing a supplement to the local housing stock.''

Many second homes, which are frequently owned by affluent families,

are located in predominantly low- or moderate-income areas. These

second homes provide few, if any, affordable housing opportunities for

the permanent residents of areas defined as underserved. Accordingly,

the final rule does not provide goal credit for secondary residences.

Credit Enhancements

Freddie Mac expressly supported the Secretary's decision to allow

credit enhancements to count toward achievement of the housing goals.

However, Freddie Mac commented that certain revisions should be made to

Sec. 81.16(c)(1): (1) the requirement that the GSE provide specific

mortgages as collateral should be dropped because it does not relate to

the economic substance of a credit enhancement or to the rating of the

bonds; (2) in a credit enhancement, Freddie Mac does not ``guarantee

bonds,'' but ensures that payments are made on the underlying

mortgages; thus, the reference to guaranteeing should be omitted; (3)

the proposed rule was unclear because it referred to ``State or local

housing finance agency'' in one place and ``any entity'' in another

place; Freddie Mac commented that ``any entity'' should be used; and

(4) the rule should include credit enhancements where a GSE

``'reinsures' mortgage insurance provided by a public purpose mortgage

insurance entity or fund.'' Freddie Mac provided revised language for

this section consistent with its comments.

The National Council of State Housing Agencies stated that it was

``pleased'' that HUD proposed to count the GSEs' credit enhancement

transactions, and it opposed the rule's limitation of this credit to

transactions in which a GSE provides specific mortgages as collateral.

The counting of a credit enhancement should not depend on whether a

GSE's insurance of mortgage payments is provided through

collateralizing specific mortgages. This section of the rule has been

modified to require the GSE to provide only a specific contractual

obligation to ensure mortgage payments. In addition, the Secretary

agrees with Freddie Mac that reinsurance of mortgage insurance provided

by a public purpose mortgage insurance entity or fund is beneficial to

the mortgage markets. Accordingly, the Secretary has decided that, on a

case-by-case basis, a GSE may seek the Secretary's approval for

counting such transactions toward the achievement of the housing goals.

The Secretary does not want to create a regulatory distortion of

corporate decisions on how to develop and initiate credit enhancement

transactions. The inconsistency in the proposed rule--limiting credit

enhancement transactions to State and local agencies--referred to by

Freddie Mac has been removed, and the broader language that it

recommended has been adopted.

Real Estate Mortgage Investment Conduits (REMICS)

Freddie Mac commented that Sec. 81.16(c)(2) should be drafted so

that purchases of REMICs would count toward fulfillment of all three

housing goals ``to the extent that the purchase of the mortgages

underlying the REMICs would provide credit under the goals and there is

no resulting 'double counting' of these mortgages.'' Freddie Mac stated

that this type of transaction increases the liquidity of the mortgage-

backed securities market and lowers costs for borrowers.

Fannie Mae commented that the purchase of REMICs should count

toward the goals because such activity is functionally equivalent to a

mortgage purchase. Fannie Mae commented: ``REMICs that do not contain

MBS [Mortgage-Backed Securities] or mortgages purchased by Fannie Mae,

Freddie Mac, or a government insured entity do not cause `double

counting' . . . .'' Fannie Mae noted that it has never purchased a

REMIC that contained anything other than mortgages and property related

to mortgages. (Under the Internal Revenue Service (IRS) Code, 26 CFR

1.860G-2(a)(4) and 1.856-3(c), REMICs may include other interests in

real property such as ``options to acquire land or improvements

thereon'' and ``timeshare interests.'')

In large measure, HUD agrees with these comments concerning

purchases of REMICs. Accordingly, the purchase of REMICs by the GSEs

may count toward the goals as long as the underlying mortgages or

mortgage-backed securities were not previously purchased or issued by

the GSEs or otherwise would result in double counting. Subject to the

same restrictions, the guarantee of a REMIC by a GSE may also count

toward the goals.

HUD recognizes that the development of new and distinct REMIC

structures is dynamic and HUD does not in any manner seek to impede

these developments. However, the GSEs are advised that when there is

any question about whether a new structure meets these restrictions for

counting under the goals, the GSEs should seek the advice of HUD before

counting the transaction.

Participations

Instead of counting participations in mortgages toward achievement

of the housing goals based on the percentage of the participation

purchased by a GSE, as proposed under Sec. 81.16(c)(4), Freddie Mac

commented that the rule should provide for full credit whenever the

GSE's participation percentage is 50 percent or more and no credit when

a participation is below 50 percent.

Freddie Mac's proposal would reduce the reporting and compliance

burden, and the final rule adopts this proposal. Participations have

played, and are expected to play, a de minimis role in the GSEs'

purchases, and for that reason the counting approach adopted should

have little impact on housing goal performance.

Second Mortgages

In response to the proposed rule's questions concerning whether and

how to count second mortgages, Freddie Mac commented that second

mortgages should receive full, rather than partial, credit under the

goals, because of the difficulty in arriving at an appropriate means of

allocating partial credit and because second mortgages frequently

fulfill the same purpose as refinancing, at lesser cost to the

borrower. Fannie

[[Page 61865]]

Mae generally agreed. The Los Angeles Housing Department commented:

If a second mortgage loan is made to a low income or minority

borrower who otherwise would have had to resort to the loan

companies which charge exorbitant interest rates and points (``hard

money lenders'') the loan should carry full GSE credit. Otherwise,

the loan is being made to borrowers who have already shown

themselves to be a good risk, and should not generate full credit.

To simplify counting and monitoring for goals purposes and

encourage the GSEs to purchase second mortgages, including low- and

moderate-income rehabilitation loans, the final rule, by revising the

definition of ``mortgage,'' provides that second mortgages will receive

full credit toward achievement of the housing goals. This change will

be monitored closely by HUD, to assure, for example, that a GSE does

not purchase an excessive number of second mortgages with low unpaid

principal balances solely to enhance goal performance.

Income Level Definitions--Tenants (Family Size Not Known), Section

81.18

Freddie Mac commented that Sec. 81.18 (determining affordability

for rental units where family size is not known) should apply to actual

tenants because Freddie Mac normally has data on unit size, instead of

family size, for actual tenants.

HUD agrees and has inserted ``actual or'' before the word

``prospective'' where it appears in Sec. 81.18. Unit size serves as an

adequate proxy for family size in instances where the data on family

size is not readily available, and requiring family size information

could, in some cases, impose an unnecessary cost on the GSEs in

exchange for very little information.

Rent Level Definitions for Tenants (Income Not Known), Section 81.19

Freddie Mac objected to Sec. 81.19(d), which would have provided

that, for purposes of determining whether a rental unit is affordable,

units without data on the number of bedrooms must be counted as

efficiency units in making affordability calculations. Freddie Mac

commented that this assumption would have the effect of understating

the GSEs' performance against the goals, and if information is

available on the number of bedrooms of a high percentage of units in a

property, the GSE should be allowed to apply the known percentages of

efficiencies, one-bedrooms, etc., to the unknown units.

The formulation in the proposed rule has been maintained has been

maintained in the final rule. It provides an incentive for the GSEs to

secure necessary information regarding bedroom size. Freddie Mac's

suggestion would increase HUD's burden in monitoring performance

without improving accuracy of the data, and this is contrary to the

intent in estimating affordability. Therefore, the assumption

respecting efficiency units is not changed.

Additional Goals/Subgoals

Several commenters suggested that the Secretary should, in some

manner, provide for additional goals and subgoals. One commenter

advocated additions to the regulation to ensure that members of

minority communities have access to housing finance from the GSEs

commensurate with the minority groups' locally determined percentage

shares of single-family mortgage purchases. Similarly, several other

commenters suggested subgoals for purchases of mortgages on properties

occupied by minority households. Another commenter recommended that

regional goals be set, taking into account the variation in housing

markets from city to city, as well as urban-rural variations. In a

similar vein, another commenter suggested that the Secretary ``require

the GSEs to increase their . . . purchases in areas of acute need.''

Two commenters recommended that the Secretary establish a goal

under which the GSEs would receive full credit toward achievement of

the goals for the disposition of real property to nonprofits.

HUD is refraining from establishing a range of subgoals in this

final rule. HUD is concerned about micromanaging the GSEs' efforts to

achieve the housing goals. In addition, the objectives sought by the

commenters can be served through the three existing goals.

Notice and Determination of Failure To Meet Goals, Section 81.21

Although Freddie Mac supported the proposed rule's ``close

adherence'' to the language of FHEFSSA in Secs. 81.21 and 81.22 of the

proposed rule on monitoring and enforcement, Freddie Mac commented on

several points. Under the proposed Sec. 81.21(a), the Secretary, in

determining whether a GSE has failed or there is a substantial

probability that a GSE will fail to meet a housing goal, will consider

the GSEs' reports and ``other data available to the Secretary.''

Freddie Mac noted that it did not understand what ``other data''

referred to and Freddie Mac commented that the phrase should be

clarified or removed.

In response to this comment and to mirror FHEFSSA, Sec. 81.21 no

longer refers to the information that the Secretary will consider in

making the determination.

Freddie Mac commented that Sec. 81.21(b)(1) should be revised to

track section 1336(b)(2) of FHEFSSA so that a GSE has 30 days from the

date of notice to respond to a preliminary determination from the

Secretary. The final regulation has been revised to reference the

requirement of section 1336(b).

Housing Plans, Section 81.22

In determining feasibility of a housing goal under Sec. 81.22(a),

Fannie Mae commented that the final rule should note specifically that

the economic environment and fiscal and monetary policies outside

Fannie Mae's control will sometimes determine a particular goal's

feasibility.

Section 1336(b)(3)(A)(ii) of FHEFSSA provides that, in determining

the feasibility of a housing goal, the Secretary must consider market

and economic conditions and the GSE's financial condition. The

regulation includes this language and the specific reference suggested

by Fannie Mae is not needed.

Under Sec. 81.22(b)(4), the proposed rule would have allowed the

Secretary to require a GSE's housing plan to address additional matters

as required by the Secretary. Freddie Mac objected to the ``any

additional matters'' language and insisted that only the statutory

description should be used.

The final rule does not make this change because the Secretary may

find it necessary and proper to require the GSE to include specific

additional matters relevant to achieving the goal in a housing plan.

Citing section 1336(c)(3) of FHEFSSA, which provides that the

Secretary shall, by regulation, establish a deadline for submission of

housing plans and that such deadline may not be longer than 45 days

after notice to the GSE, Freddie Mac asked for 45 days for submission

of a housing plan, rather than the 30-day period provided for in

Sec. 81.22(c).

FHEFSSA allows the Secretary to establish a time period of less

than 45 days and the Secretary has determined that 30 days is necessary

to avoid further delay in achieving the housing goal.

Under Sec. 81.22(e), where the first two housing plans submitted by

a GSE are disapproved by the Secretary, Freddie Mac commented that the

GSEs be granted 30 days to submit a third housing plan, rather that the

15-day period provided for in Sec. 81.22(e).

In the event that a GSE's housing plans are so deficient that the

Secretary disapproves the first two submitted by

[[Page 61866]]

the GSE, the Secretary notes that the GSE will have already had a total

of 60 days to develop the first two plans. At that point, the GSE's

plan should be sufficiently developed so that an additional 30 days is

unnecessary to develop a third plan. Accordingly, this provision has

not been changed.

Subpart C--Fair Housing

The GSEs' Role

While expressing their strong commitment to participating in the

elimination of discriminatory practices in the mortgage lending

process, both GSEs, in similar arguments, objected to certain features

of Subpart C--Fair Housing.

Both enterprises outlined their efforts to encourage fair lending

practices by primary mortgage lenders through outreach, consumer

education, and innovative products. The GSEs stressed their interest in

contributing to the elimination of unlawful discrimination in the

mortgage finance industry. However, both objected to a fair housing

enforcement role which they argued the proposed rule would have imposed

on them.

Fannie Mae saw its appropriate role in fair lending as being a

provider of outreach, consumer education, and flexible, innovative

mortgage products to its customers. Freddie Mac also maintained that

its primary role should be to provide a ready source of financing for

all creditworthy borrowers and to provide market leadership. Freddie

Mac took issue with what it saw as the proposed rule's implication that

it should be doing more with respect to fair lending.

Several other commenters endorsed the GSEs' position in this regard

and stated that, for the GSEs, the role of regulator is inconsistent

with the business partnership relationship that exists between the GSEs

and their customers. A major mortgage company commented that GSEs ought

not be required to develop fair lending plans, because such plans

would, in effect, establish the GSEs as ``primary market regulators.''

Referencing its long established business partnership with both GSEs,

the commenter said it did not want these entities ``to also be our

regulators.''

On the other hand, the San Diego Housing Commission had no

objection to an expanded role for GSEs associated with fair housing:

The proposed rule essentially requires the GSEs to cooperate

with HUD in providing data and other information to assist in the

investigation of mortgage discrimination by a lender with which

either does business. * * *

In general Fannie Mae and Freddie Mac have been successful in

expanding the availability of credit, lowering interest rates, and

in stabilizing and liquefying the finance market. However, there

have been shortcomings in the extent to which they help meet the

housing needs of households at the lower end of the housing market.

Given their size and the key role they play in housing finance, they

are in a position to wield a significant amount of influence.

This final rule follows the clearly expressed intention of Congress

that the GSEs comply with the Fair Housing Act and the Equal Credit

Opportunity Act (``ECOA'') and aid the efforts of investigators.45

HUD does not intend that the GSEs will become the Federal government's

regulatory or enforcement operation for the primary mortgage market.

The Federal fair lending enforcement agencies, not the GSEs, enforce

the fair lending laws.

\45\ See S. Rep. at 43-44.

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HUD has carefully examined the various points made by the GSEs and

other commenters on subpart C of the proposed rule. This final rule

contains modifications which respond to the commenters' concerns about

the proposed rule's nondiscrimination requirements, assessment of

disparate results, and information and recordkeeping requirements.

Additionally, many suggestions made by the commenters for language

changes and modifications of other aspects of the proposal have been

accepted and incorporated. These revisions are discussed elsewhere in

this preamble.

Disparate Impact

Freddie Mac argued that section 1325(1) of FHEFSSA reaches only

intentional discrimination and that application of a disparate impact

test is therefore unauthorized. Both GSEs claimed that, even if the

disparate impact standard was supported by FHEFSSA, HUD had misstated

the standard as articulated by the courts, and had shifted the burden

of proof from the plaintiff to the GSE. Other commenters shared this

view, although there was little comment in support of Freddie Mac's

assertion that FHEFSSA prohibits only intentional discrimination.

Fannie Mae claimed that there is no statutory basis and little case law

in support of applying a disparate impact analysis to matters arising

under ECOA or the Fair Housing Act.

Several other industry commenters joined in this criticism of the

proposed rule. The ABA, the MBA, the Western League of Savings

Institutions and a major mortgage lender all characterized the

application of disparate impact analysis or an ``effects test''

standard in this particular rule as premature and a potential source of

marketplace uncertainty.

Both GSEs urged HUD to postpone application of the disparate impact

standard in this rule until the issue is addressed in the HUD's broader

Fair Housing Act regulations. Adopting the standard in FHEFSSA rules

first, the GSEs claimed, would create confusion and increase the

likelihood of the development of divergent standards governing mortgage

finance. Both GSEs and several major industry organizations argued that

subpart C would result in a dual enforcement mechanism, applicable to

their operations but not to other segments of the housing marketplace,

and would subject them to the application of legal theories that are

``largely untested in mortgage finance.'' The GSEs urged the Secretary

not only to delay implementation of a disparate impact standard in

advance of a fair lending addition to HUD's Fair Housing regulations,

but also to coordinate the development of any such revisions with

primary market financial institution regulators and the Department of

Justice. Fannie Mae claimed that none of these regulators or enforcers

has provided industry-wide guidance to date.

The American Bankers Association questioned the proposed rule's

explanation of business necessity, suggesting that it failed to afford

the GSEs adequate guidance. It further maintained that HUD's position

on the meaning of business necessity was inconsistent with and

constituted a more difficult legal test than the understanding of the

term reflected in the Interagency Policy Statement on Discrimination in

Lending (``Interagency Policy Statement'').\46\

\46\ 59 FR 18266 (1994).

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Fannie Mae also claimed that the proposed rule would create a

potential ``litigation and enforcement nightmare'' for the GSEs and

that the rule would inhibit innovation. Freddie Mac argued that the

rule would also inhibit the GSEs' efforts to identify and eradicate

barriers in their underwriting guidelines.

Section 1325(1) of FHEFSSA requires the Secretary to prohibit the

GSEs from discriminating ``in any manner''-- including a prohibition on

any consideration of the age or location of a dwelling or neighborhood

in a manner that has a ``discriminatory effect.'' The use of the

phrases ``in any manner'' and ``discriminatory effect'' in section

1325(1) makes clear Congress's intent

[[Page 61867]]

that the statute's prohibitions extend beyond intentional

discrimination. The Senate Report states that Congress intended to

proscribe ``policies and practices, including inappropriate

underwriting guidelines, [which] may unintentionally yield

discriminatory patterns in mortgage lending.'' \47\ The Senate

Committee report cited testimony that ``. . .there are other business

practices of the enterprises which have the effect of discriminating

against minorities . . . .'' \48\ Examples cited by the Senate Report

included differential pricing and fee structures for mortgage products

which effectively discouraged lending in minority and low-income

communities.\49\

\47\ S. Rep. at 43 (emphasis added).

\48\ Id. at 31 (emphasis added).

\49\ See id.

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However, HUD has taken into account the considerable comments it

received from the GSEs and others, and has determined to track the

statutory prohibition as enacted by Congress.

In response to the GSEs' comments regarding a lack of guidance, the

disparate impact (or discriminatory effect) theory is firmly

established by Fair Housing Act case law. That law is applicable to all

segments of the housing marketplace, including the GSEs. All of the

circuit courts, except for the D.C. Circuit which has not considered

the issue, have held that the Fair Housing Act includes claims based

upon the disparate impact theory.\50\

\50\ No courts have ever held in Fair Housing Act or ECOA cases

that the disparate impact standard does not apply to lenders.

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All the Federal financial regulatory and enforcement agencies

recognize the role that disparate impact analysis plays in scrutiny of

mortgage lending. In the Interagency Policy Statement, the bank,

thrift, and credit union regulators, the Justice Department, Treasury,

OFHEO, Federal Trade Commission (FTC), and HUD jointly recognized the

disparate impact standard as a means of proving lending discrimination

under the Fair Housing Act and ECOA. The disparate results assessment

requirement included in this final rule mirrors the statutory

requirement and is consistent with the Interagency Policy Statement,

which explicitly applies a similar ``disparate impact'' standard to

proving violations of the Fair Housing Act and ECOA.\51\

\51\ Additionally, the Federal Reserve, in its Regulation B,

recognizes the role of disparate impact analysis under ECOA. 12 CFR

202.6(a)(2); Federal Reserve System Handbook at 1-24.

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Congress, in enacting FHEFSSA, expressly stated that it was

concerned with the subtle, often ``unintentional'' forms of

discrimination that

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