Membership Approval

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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 96-43]

Membership Approval

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

its regulation on membership in the Federal Home Loan Banks (Banks).

The final rule authorizes the 12 Banks, rather than the Finance Board,

to approve or deny all applications for Bank membership, subject to

certain criteria for determining compliance with the statutory

eligibility requirements for Bank membership currently used by the

Finance Board in approving applications. The final rule also provides

for streamlined application processing for certain types of membership

applications. The final rule is part of an effort by the Finance Board

and the Banks to transfer as many governance functions as possible from

the Finance Board to the Banks. The devolution of authority to the

Banks and streamlining of membership application requirements in the

final rule are consistent with the goals of the Regulatory Reinvention

Initiative of the National Performance Review.

EFFECTIVE DATE: September 16, 1996.

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

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

2882, or Sharon B. Like, Senior Attorney-Advisor, Office of General

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

N.W., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

In its role as primary regulator of the savings association

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

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

approved all applications for Bank membership from federally chartered

savings associations, and from state chartered savings associations

seeking federal deposit insurance, institutions for which Bank

membership was required. The FHLBB delegated the authority to approve

membership applications from insurance companies and state chartered

savings banks insured by the Federal Deposit Insurance Corporation

(FDIC), for which Bank membership was voluntary, to the Principal

Supervisory Agents of the FHLBB, which generally were the Bank

presidents. See 12 U.S.C. 1437(a) (1989), repealed by Financial

Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No.

101-73, 103 Stat. 183 (Aug. 9, 1989) (FIRREA); 12 CFR 523.3-3, 541.18

(1989).

FIRREA amended the Federal Home Loan Bank Act, 12 U.S.C.

Secs. 1421-1449 (Bank Act), by creating the Finance Board and

transferring from the FHLBB to the Finance Board the responsibility for

the supervision and regulation of the 12 Banks. See 12 U.S.C. 1422a(a).

The FHLBB's authority to charter federal savings associations was

transferred to the Office of Thrift Supervision (OTS), and the FHLBB's

authority to administer deposit insurance for savings associations was

transferred to the FDIC.

FIRREA also made significant changes to the membership eligibility

criteria in section 4 of the Bank Act. See 12 U.S.C. 1424. First,

FIRREA permitted commercial banks and credit unions to become Bank

members for the first time. Id. Sec. 1424(a). Second, FIRREA added the

requirement that an insured depository institution have at least 10

percent of its total assets in residential mortgage loans in order to

be eligible to become a Bank member. Id. Sec. 1424(a)(2)(A).

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

membership applications were reviewed and approved by the Board of

Directors of the Finance Board. In July 1993, the Managing Director of

the Finance Board was delegated the authority to approve all

applications for Bank membership from institutions that met all of the

statutory eligibility criteria and received a composite rating of

``1,'' ``2'' or ``3'' under the regulatory examination rating system

known as the Uniform Financial Institutions Rating System. See

Chairman's Order No. 93-05 (July 19, 1993); Finance Board Res. No. 90-

143 (Dec. 18, 1990). The Board of Directors of the Finance Board has

not itself considered or acted upon any membership applications since

such authority was delegated to the Managing Director.

In August 1993, the Finance Board amended its membership regulation

in response to the changes made by FIRREA to the Bank Act. The revised

membership regulation established membership application procedures,

general eligibility requirements, criteria for determining the

appropriate Bank district for membership, stock requirements for

membership, requirements and procedures in connection with termination

of membership, and procedures concerning transfer of Bank stock in

consolidations involving member and nonmember institutions. Other than

defining certain terms, the membership regulation did not establish

specific standards for compliance with the statutory membership

eligibility criteria. See 58 FR 43522, 43542 (Aug. 17, 1993), codified

at 12 CFR part 933. Section 933.3(a) of the membership regulation

authorized the Banks' boards of directors to approve only applications

that met all criteria set forth in the Bank Act, the membership

regulation, and policy guidelines established by the Finance Board. See

12 CFR 933.3(a).

In November 1993, the Finance Board adopted policy guidelines to

assist Finance Board staff in processing applications for Bank

membership. See Federal Home Loan Bank System Membership Application

Guidelines, Finance Board Res. No. 93-88 (Nov. 17, 1993) (Guidelines).

The purpose of the Guidelines was to require certain documentation

review requirements, and to clarify and amplify the more subjective

membership eligibility criteria in the Bank Act, such as the financial

condition, character of management, and home financing policy

requirements. See 12 U.S.C. 1424(a)(2)(B), (C). The Guidelines also set

forth the specific criteria that must be satisfied in order for the

Banks to have the authority to approve membership applications, as

provided under Sec. 933.3(a) of the membership regulation. See also 59

FR 13485 (March 22, 1994).

The Guidelines contain specific, primarily financial, criteria that

must be met in order for an applicant to be deemed in compliance with

the statutory eligibility criteria. However, the Guidelines established

neither a minimum level of financial performance nor standards for

evaluating applicants that do not meet the requirements in the

Guidelines. So, for instance, an application from an institution with a

composite regulatory examination rating that did not satisfy the

criteria for approval by the Banks had to be evaluated by Finance Board

staff and approved by the Managing Director. Since December 1993, the

Banks have approved approximately 1,000 membership applications, and

the Finance Board's Managing Director has approved approximately 1,100

membership applications.

The Finance Board and the Banks have been considering ways to

transfer a variety of governance responsibilities from the Finance

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

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

Stat. 3672 (Oct. 28, 1992),

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including the Finance Board's own study completed in April 1993. See

Report on the Structure and Role of the Federal Home Loan Bank System,

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

consistently identified membership application approval as one of the

governance responsibilities that should be devolved from the Finance

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

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

Bank Act and Finance Board regulations. This final rule transfers

authority to approve or deny all Bank membership applications from the

Finance Board to the Banks. The final rule codifies in large part the

criteria for determining compliance with the statutory eligibility

requirements contained in the Finance Board's Guidelines, which shall

be deemed rescinded upon effectiveness of the final rule.

II. Proposed Rulemaking

In October 1995, the Finance Board published for public comment a

notice of proposed rulemaking, which proposed transferring the

authority to approve or deny membership applications from the Finance

Board to the Banks, subject to certain criteria for determining

compliance with the statutory eligibility requirements for Bank

membership (proposed rule) (60 FR 54958) (Oct. 27, 1995). The proposed

rule provided for a 60-day comment period.

The Finance Board received letters from a total of 14 commenters,

including all 12 Banks, one bank trade association, and one insurance

company trade association. The commenters generally supported transfer

of membership approval authority from the Finance Board to the Banks.

Various comments were received on the proposed application procedures,

and the specific criteria that should be applied in determining

membership eligibility. A discussion of relevant comments is included

in the Analysis of the Final Rule. Where no comments were received on a

particular regulatory provision, or a provision was not controversial,

and the Finance Board has determined to adopt the provision as

proposed, the provision generally is not discussed in this preamble.

A few comments also were received on provisions of the current

membership regulation that were not the focus of this rulemaking, such

as the definition of ``state,'' and ``convenience'' applications for

membership in adjoining Bank districts. See 12 CFR 933.1(s),

933.5(a)(2). These comments are not discussed in this final rule, but

will be examined in connection with any future rulemaking on other

provisions of the membership regulation not addressed in this

rulemaking.

III. Analysis of the Final Rule

A. Membership Application Process--Secs. 933.2 to 933.5

1. Requirements--Sec. 933.2

Section 933.2 of the final rule sets forth the procedures for

submission and review of membership applications. Section 933.2(a)

requires an applicant to submit an application which satisfies the

requirements of part 933, and to provide a written resolution or

certification duly adopted by the applicant's board of directors, or by

an individual authorized to act on behalf of the board of directors of

the applicant, stating that the applicant satisfies the requirements

set forth in Sec. 933.2(a). The proposed rule required that the

application include a written certification by a majority of the

applicant's directors. A commenter pointed out that state corporate

laws may impose different requirements for a corporate board to take

valid action and, therefore, that the requirement should be a

resolution or certification duly adopted by the applicant's board,

rather than majority action of the board. The final rule adopts this

recommendation.

Section 933.2(b) of the final rule requires the Bank to prepare a

written digest for each applicant stating whether the applicant meets

each of the eligibility requirements, the Bank's findings, and the

reasons therefor.

Section 933.2(c) requires the Bank to maintain a membership file

for each applicant for at least three years, containing certain

documents as specified therein.

Section 933.2(d) of the proposed rule required the Bank to use

regulatory financial reports and other sources independent of the

applicant to evaluate and analyze all conclusions offered by the

applicant regarding its membership eligibility. This requirement is not

adopted in the final rule, as it is redundant with Sec. 933.11(a) of

the final rule, which also requires the use of regulatory financial

reports and other documents derived independently of the applicant.

Proposed Sec. 933.2(d) also required the Bank to make determinations on

membership eligibility independent of any representations made by the

applicant. The Finance Board intended this provision to ensure that the

Banks evaluate membership applications without relying unduly on simple

representations of compliance made by the applicants. However, as

several commenters pointed out, the rule requires reliance, in part, on

an applicant's representations by requiring that the Bank's membership

determinations be based on review of all available information in the

file, which includes information from the applicant. Accordingly, the

independent evaluation requirement is not adopted in the final rule.

2. Decision on Application--Sec. 933.3

Section 933.3(a) of the final rule authorizes the Banks to approve

or deny all membership applications, subject to the requirements of the

final rule, including the appeal procedure in Sec. 933.5. Eleven

commenters expressly supported transfer of membership approval

authority to the Banks.

Section 933.3(a) also permits a Bank to delegate the authority to

approve applications only to a committee of the Bank's board of

directors, the Bank president, or a senior officer who reports directly

to the Bank president other than an officer with responsibility for

business development. One commenter recommended that the Bank's board

of directors be permitted to delegate the authority to deny membership

applications. However, because of the consequences of membership

denial, the Finance Board believes that such decisions should be made

only by the Bank's board of directors.

Section 933.3(b) requires the Bank to prepare for each applicant a

written decision resolution duly adopted by the Bank's board of

directors, or by a committee of the board of directors or officer with

delegated authority to approve membership applications. The proposed

rule required that the decision resolution be signed by a majority of

the directors, or by an officer with delegated authority. A commenter

pointed out that state corporate laws impose different requirements for

a corporate board to take valid action and, therefore, that the

requirement should be a resolution duly adopted by the Bank's board or

committee of the board, rather than majority action of the board or

committee of the board. The final rule adopts this recommendation.

Section 933.3(c) of the final rule requires the Bank to act on an

application within 60 calendar days of the date the Bank deems the

application to be complete. Section 933.3(c) is intended to ensure

expeditious action on membership applications. A number of commenters

expressed concern that this timeframe may be too restrictive where

there is a need to obtain additional information about the applicant in

order to make a

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membership determination. The final rule clarifies that an application

is ``complete'' when the Bank has obtained all the information required

by this part, and any other information the Bank deems necessary, to

process the application.

Thus, the 60-day clock will not start running until the Bank has

obtained all information necessary to process the application. The

final rule also provides that if a ``complete'' application

subsequently becomes ``incomplete'' because the Bank determines, during

the review process, that additional information is necessary to process

the application, the Bank may stop the 60-day clock until the

application again is deemed complete, and then resume the clock where

it left off. The final rule requires the Bank to notify an applicant

when its application is deemed to be complete. The Bank also is

required to notify an applicant if the 60-day clock is stopped, and

when the clock is resumed.

3. Automatic Membership--Sec. 933.4

Section 933.4 provides for automatic Bank membership for

institutions seeking Bank membership under certain circumstances. Such

institutions need not file an application for membership.

Section 933.4(a) provides for automatic Bank membership for

institutions required by law to be Bank members.

Section 933.4(b) provides for automatic Bank membership for insured

depository institution members that convert from one charter type to

another, provided that the converting institution continues to be an

insured depository institution and the assets of the institution

immediately before and immediately after the conversion are not

materially different. In response to a commenter's suggestion, the

final rule modifies the requirement in the proposed rule that the

assets immediately before and after the charter conversion must be

identical, since there may be insignificant changes in asset

composition after a conversion in order to comply with new charter

requirements.

Section 933.4(c) of the final rule provides for automatic

membership in the Bank to which a member's membership is transferred

pursuant to Sec. 933.18(d).

4. Appeals--Sec. 933.5

Section 933.5 establishes a process by which applicants may appeal

Bank membership denials to the Finance Board. The appeal procedure is

intended to ensure that membership standards are applied fairly by the

Banks, and that similarly situated applicants are treated in a

consistent manner.

Section 933.5 (a), (b) and (c) establishes the procedures and

requirements for appeals by an applicant to the Finance Board.

The current membership regulation does not include the provision in

the proposed rule that would allow a Bank to appeal another Bank's

determination of the appropriate district for membership made pursuant

to Sec. 933.5, but permits applicants or members to appeal such

determinations to the Finance Board. See 12 CFR 933.5. Since the

applicant or member has the option under Sec. 933.18 of the final rule

to appeal the Bank's decision, an appeal by the other Bank is

unnecessary. Moreover, like the current membership regulation,

Sec. 933.18 sets forth specific, objective criteria for determining an

applicant's or member's appropriate district of membership, which

should obviate such conflicts in the application process. Accordingly,

this proposed amendment has not been adopted in the final rule.

B. Membership Eligibility Requirements--Secs. 933.6 to 933.18

1. Setting Membership Standards

Like the Guidelines, the final rule establishes objective standards

for approving applications for Bank membership. For the objective

statutory eligibility criteria, failure to comply with the standards

established by the final rule will render an applicant ineligible for

membership. For the subjective statutory eligibility criteria,

including the requirement that an applicant's financial condition be

such that advances may be safely made, see 12 U.S.C. 1424(a)(2)(B), and

that the character of an applicant's management and its home financing

policy be consistent with sound and economical home financing, see id.

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

objective, yet flexible, standards.

Under Sec. 933.17(a) of the final rule, an applicant that complies

with the regulatory requirements is presumed to satisfy the statutory

eligibility criteria, but the Bank may rebut the presumption of

compliance, and deny membership to the applicant, if the Bank obtains

substantial evidence to overcome the presumption. Conversely, under

Sec. 933.17 (b) to (f), an applicant that does not comply with the

regulatory requirements is presumed not to satisfy the statutory

eligibility criteria, but, as under the Guidelines, the applicant may

rebut the presumption of noncompliance as provided in Sec. 933.17 (b)

to (f), and be deemed to meet the regulatory requirements.

The Finance Board considered establishing rigid, ``bright-line''

eligibility standards, but believes that the results--i.e., that an

applicant not meeting every standard would be ineligible for

membership, regardless of any other evidence the applicant could have

presented to demonstrate its compliance with the statutory eligibility

criteria--would be too harsh. Six commenters expressly supported a

presumption framework, rather than ``bright-line'' tests, for a similar

reason.

2. Section 4(a)(1) Criteria In General

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

institutions eligible to become Bank members as any building and loan

association, savings and loan association, cooperative bank, homestead

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

institution. See 12 U.S.C. 1424(a)(1). The definition of ``insured

depository institution'' in the Bank Act includes commercial banks and

credit unions. See id. Sec. 1422(12).

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

Act apply to all applicants for Bank membership, including insurance

companies (section 4(a)(1) criteria). Under section 4(a)(1) of the Bank

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

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

States;

(B) is subject to inspection and regulation under the banking laws,

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

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

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

See id. Sec. 1424(a)(1) (A) to (C). Sections 933.7 to 933.9 of the

final rule apply the section 4(a)(1) criteria to all applicants for

membership.

3.-``Duly Organized'' Requirement--Sec. 933.7

Section 4(a)(1)(A) of the Bank Act requires that, in order to be

eligible for Bank membership, an applicant must be duly organized under

the laws of any State or of the United States. 12 U.S.C. 1424(a)(1)(A).

This general eligibility requirement is implemented by

Secs. 933.6(a)(1) and 933.7 of the final rule. Noncompliance by an

applicant with the ``duly organized'' requirement is not a rebuttable

presumption under Sec. 933.17.

4.-``Subject to Inspection and Regulation'' Requirement--Sec. 933.8

Section 4(a)(1)(B) of the Bank Act requires that, in order to be

eligible for

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Bank membership, an applicant must be subject to inspection and

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

or of the United States. 12 U.S.C. 1424(a)(1)(B). This general

eligibility requirement is implemented by Secs. 933.6(a)(2) and 933.8

of the final rule. Noncompliance by an applicant with the ``subject to

inspection and regulation'' requirement is not a rebuttable presumption

under Sec. 933.17 except for insurance company applicants, as further

discussed under Sec. 933.17(c).

5. ``Makes Long-Term Home Mortgage Loans'' Requirement--Sec. 933.9

Section 4(a)(1)(C) of the Bank Act requires that, in order to be

eligible for Bank membership, an applicant must make long-term home

mortgage loans. This general eligibility requirement is implemented by

Secs. 933.6(a)(3) and 933.9 of the final rule.

a. Definitions of ``long-term'' and ``home mortgage loan.''

Section 933.1(n) of the final rule lists the specific types of

assets that qualify as ``home mortgage loans'' for purposes of the

``makes long-term home mortgage loans'' requirement. Section 933.1(n),

as well as the definition of ``long-term'' in Sec. 933.1(q), do not

include the Finance Board's current regulatory discretion to determine

that other types of loans not specifically listed in the definitions of

``home mortgage loan'' and ``long-term'' meet these definitions. See 12

CFR 933.1(i), (l).

One commenter noted that this discretionary authority would enable

a Bank first to seek an interpretation from the Finance Board on

whether a particular asset meets the definitions, which may be more

efficient than requiring the Bank to deny an application and the

applicant to appeal to the Finance Board before the Finance Board may

exercise its interpretive discretion. In the event of an appeal of a

Bank membership decision to the Finance Board, this approach would

enable the Finance Board to exercise its interpretive discretion on a

case-by-case basis without having to amend the regulation. However, the

Finance Board believes that the list of assets permitted under

Sec. 933.1(n) is comprehensive, and there is little likelihood that an

applicant will need a non-qualifying asset in order to meet the ``makes

long-term home mortgage loans'' requirement. Should questions arise

regarding particular assets, they could be resolved through amendment

of the regulation, rather than through Finance Board determinations on

a case-by-case basis. Accordingly, the commenter's recommendation is

not adopted in the final rule.

b. Noncompliance not rebuttable.

Noncompliance by an applicant with the ``makes long-term home

mortgage loans'' requirement is not a rebuttable presumption under

Sec. 933.17.

6. Section 4(a)(2) Criteria In General

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

membership eligibility criteria for insured depository institutions

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

criteria):

(A) the institution has at least 10 percent of its total assets in

residential mortgage loans;

(B) the institution's financial condition is such that advances may

be safely made to such institution; and

(C) the character of the institution's management and its home-

financing policy are consistent with sound and economical home

financing.

See 12 U.S.C. 1424(a)(2)(A) to (C). Although the section 4(a)(2)

criteria apply to ``insured depository institutions,'' Sec. 933.6(a)(4)

to (6) of the final rule applies the section 4(a)(2)(B) (financial

condition) and (C) (character of management and home financing policy)

criteria to insurance companies as well as insured depository

institutions. This is consistent with current membership regulatory

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

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

management and home financing policy criteria were applicable to

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

The final rule does not apply the 10 percent requirement in section

4(a)(2)(A) to applicants that are not insured depository institutions,

such as insurance companies. The reasons for this approach are

discussed more fully below under the 10 Percent Requirement.

7. 10 Percent Requirement--Sec. 933.10

a. Insured depository institution applicants. -

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

eligible for Bank membership, an insured depository institution must

have at least 10 percent of its total assets in residential mortgage

loans. See 12 U.S.C. 1424(a)(2)(A). This general eligibility

requirement is implemented by Sec. 933.6(b) of the final rule. Under

Sec. 933.10 of the final rule, an insured depository institution

applicant is deemed to comply with the 10 percent requirement in

section 4(a)(2)(A) of the Bank Act if, based on the applicant's most

recent regulatory financial report, the applicant has at least 10

percent of its total assets in ``residential mortgage loans,'' as

defined in Sec. 933.1(bb) of the final rule, except that any assets

used to secure mortgage debt securities as described in

Sec. 933.1(bb)(6) may not be used to meet this requirement.

b. Applicants that are not insured depository institutions.

The Finance Board's practice has been not to apply the 10 percent

requirement to applicants that are not insured depository institutions,

such as insurance companies. See 12 CFR 933.4(b)(1). Section 933.6(c)

of the final rule continues the current regulatory requirement that

such applicants must meet an alternative requirement that they have

mortgage-related assets reflecting a commitment to housing finance,

with such determination made by the Bank in its discretion, rather than

by the Finance Board. See 12 CFR 933.4(c). Several commenters

specifically supported application of this alternative test to

applicants that are not insured depository institutions.

In the notice of proposed rulemaking, the Finance Board

specifically requested comment on whether the 10 percent requirement

should apply to insurance company applicants, or whether a different

test, or asset test that would achieve the same objectives as the 10

percent requirement, should be applied to insurance company applicants.

The Finance Board questioned whether membership eligibility standards

should be applied consistently to all applicants, in order to ensure

that all Bank members demonstrate a quantifiable minimum commitment to

residential housing finance before they are admitted to membership. See

60 FR 54958, 54962 (Oct. 27, 1995).

Two commenters supported applying the 10 percent requirement to

insurance company applicants on the basis that all applicants for

membership should be treated equally. A majority of the commenters

opposed applying the 10 percent requirement to insurance company

applicants for a number of reasons, including: (1) inconsistency with

section 4(a)(2)(A) of the Bank Act which, on its face, is applicable

only to insured depository institutions; (2) insurance companies that

are active in mortgage lending or have significant investments in

housing-related assets may not be able to meet the 10 percent

requirement because of their asset size; and (3) insurance companies

are required by state law, regulators, and prudent investment standards

to invest in a wide variety of assets.

The Finance Board agrees that these are valid reasons for not

applying the 10

[[Page 42535]]

percent requirement to insurance company applicants, consistent with

current practice. Accordingly, the final rule applies the alternative

mortgage-related assets test, rather than the 10 percent requirement,

to institutions that are not insured depository institutions, including

insurance company applicants.

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

The term ``residential mortgage loans'' is not defined in the Bank

Act. The definition of ``residential mortgage loans'' in the proposed

rule included the current definition, see 12 CFR 933.1(r), as well as

qualified private activity exempt facility bonds where 95 percent or

more of the net proceeds are used for qualified residential rental

projects, as defined in 26 U.S.C. 142(a)(7)(d). Under the current

membership regulation, the Finance Board has interpreted ``residential

mortgage loans'' to include such bonds.

Several commenters supported inclusion of such bonds in the

definition of ``residential mortgage loans.'' The Finance Board has

determined that such bonds are consistent with other assets that are

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

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

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

percent of their total assets in assets that facilitate home mortgage

lending. The Finance Board does not expect the Bank to verify the

actual usage of the bond proceeds for the qualified residential rental

projects. The Finance Board also recognizes that there may be other

similar types of bonds that should be permissible as ``residential

mortgage loans.'' Accordingly, the addition of the word

``substantially'' in the definition of ``residential mortgage loan'' in

Sec. 933.1(bb)(6)(i) of the final rule provides for the inclusion of

such bonds and other similar types of bonds that meet the definition.

In the proposed rule, the Finance Board specifically requested

comment on whether shares of open-end management companies, also known

as ``mutual funds,'' where the assets in the open-end management

company's portfolio are comprised solely of assets that are

``residential mortgage loans,'' should be included as ``residential

mortgage loans.'' Ownership of mutual fund shares could be considered

the functional equivalent of ownership of the mutual fund's underlying

assets. Several commenters specifically supported inclusion of shares

of such mutual funds within the definition of ``residential mortgage

loans.'' One commenter suggested that mutual fund shares be allowed

where the mutual fund has a small percentage of its capital in cash or

liquid assets. However, the Finance Board has not previously

interpreted ``residential mortgage loans'' to include mutual fund

shares, and is not seeking to expand the types of assets that may

qualify as ``residential mortgage loans'' at this time. Accordingly,

the definition of ``residential mortgage loans'' in the final rule does

not include mutual fund shares.

The current membership regulation and proposed rule required that

``residential mortgage loans'' be domestic loans. See 12 CFR 933.1(r).

However, the line items in regulatory financial reports corresponding

to such loans may include foreign as well as domestic loans. In order

to ease applicants' ability to rely on such line items for purposes of

determining their ``residential mortgage loans'' for the 10 percent

requirement, under the final rule, applicants may include foreign

residential mortgage loans.

For the same reasons discussed under part III.B.5.a. above,

Sec. 933.1(bb) of the final rule does not include the Finance Board's

current regulatory discretion to determine that other loans not

specifically listed in the definition of ``residential mortgage loan''

meet the definition. See 12 CFR 933.1(r)(8).

d. Definition of ``total assets.''

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

rule provide that, in order to be eligible for Bank membership, an

applicant must have at least 10 percent of its ``total assets'' in

residential mortgage loans. See 12 U.S.C. 1424(a)(2)(A). The proposed

rule listed the specific assets included in the definition of ``total

assets.'' Since the applicant will be relying on the total assets

reported on its regulatory financial report, the definition in

Sec. 933.1(dd) of the final rule is revised to mean total assets as

reported on the applicant's regulatory financial report.

The total assets line item in regulatory financial reports may

include foreign as well as domestic assets. In order to ease

applicants' ability to rely on such line item for purposes of

determining their ``total assets'' for the 10 percent requirement,

under the final rule, applicants may include foreign assets as part of

total assets.

e. Noncompliance not rebuttable.

Noncompliance by an applicant with the 10 percent requirement is

not a rebuttable presumption under Sec. 933.17.

8. Financial Condition Requirement for Applicants Other Than Insurance

Companies--Sec. 933.11

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

eligible for Bank membership, an insured depository institution's

financial condition must be such that advances may be safely made to

it. 12 U.S.C. 1424(a)(2)(B). Section 933.6(a)(4) of the final rule

applies this general requirement to all applicants for membership,

including applicants that are not insured depository institutions such

as insurance companies. Section 933.11 implements this requirement by

establishing specific financial condition standards applicable to

applicants other than insurance companies, and is modeled on the

Guidelines. As discussed below, Sec. 933.16 implements this requirement

by establishing specific financial condition standards applicable to

insurance companies that recognize the specialized nature of the

insurance business.

a. Review requirement.

Section 933.11(a) describes the documents pertaining to financial

condition that must be reviewed for each applicant. Under

Sec. 933.11(a)(1), the Bank must obtain and review the applicant's

regulatory financial reports for at least the last six calendar

quarters and three year-ends. In response to a commenter's suggestion,

the definition of ``regulatory financial report'' in Sec. 933.1(aa) of

the final rule is revised to include a regulatory financial report

maintained by the primary regulator on a computer on-line database.

Section 933.11(a)(2) lists, in order of preference, the financial

statement that a Bank must obtain and review in evaluating the

applicant's financial condition. This provision has been revised from

the proposed rule to make it consistent with the financial statement

requirement in the Guidelines.

Under Sec. 933.11(a)(3) of the final rule, the Bank must obtain and

review the applicant's most recent available regulatory examination

report prepared by its primary regulator, as defined in Sec. 933.1(y),

or appropriate state regulator, as defined in Sec. 933.1(f), and

prepare a summary of the applicant's strengths and weaknesses as cited

in the regulatory examination report. The Bank or the applicant also

must prepare a summary of actions taken by the applicant to respond to

examination weaknesses.

Under Sec. 933.11(a)(4), the Bank also must obtain and review a

description of any outstanding enforcement actions against the

applicant, responses by the

[[Page 42536]]

applicant, reports as required by the enforcement action, and verbal or

written indications, if available, from the primary regulator or

appropriate state regulator, whichever is applicable, of how the

applicant is complying with the terms of the enforcement action. In

response to two comments, ``enforcement action'' is defined in

Sec. 933.1(l) of the final rule to exclude board of directors'

resolutions adopted by applicants in response to examination weaknesses

identified by the regulator.

Under Sec. 933.11(a)(5), the Bank also must obtain and review any

other relevant document or information concerning the applicant that

comes to the Bank's attention in reviewing the applicant's financial

condition. The proposed rule required that a Bank also consider other

relevant information that reasonably should come to the Bank's

attention in reviewing the applicant's financial condition. This was

intended to impose a measure of due diligence on the Bank as a part of

the membership approval process. Several commenters opposed this

requirement because: (1) it imposes an undefined or unreasonably high

standard that could be prohibitively costly (e.g., on-line database

searches); (2) the most valuable information comes from the applicant

and its regulator; and (3) the Banks could be exposed to liability for

reliance on inaccurate or insufficient information. For the reasons

cited by the commenters, the final rule does not incorporate this ``due

diligence'' requirement.

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

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

purposes of membership eligibility, except to say that financial

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

1424(a)(2)(B). The Finance Board believes that specific, uniform and

quantifiable standards for evaluating financial condition are necessary

to ensure that Bank advances may be extended in a safe and sound

manner.

Under Sec. 933.11(b)(1), in order to be presumed to be in adequate

financial condition for purposes of section 4(a)(2)(B) of the Bank Act

and Sec. 933.6(a)(4) of the final rule, an applicant must have received

a composite regulatory examination rating from its primary regulator or

appropriate state regulator within two years preceding the date the

Bank receives the application. The Finance Board requires that the

applicant have been examined within this two-year period in order to

ensure the accuracy of critical information used for financial

condition eligibility determinations. Section 933.11(b)(3) establishes

the minimum performance standard the applicant must satisfy, based on

the applicant's most recent composite regulatory examination rating

from its primary regulator or appropriate state regulator.

The proposed rule required that the applicant have received such a

rating from its primary regulator. Several commenters supported

allowing the Banks to accept composite regulatory examination ratings

from state or federal regulators because: (1) state regulatory

examination reports containing ratings may be obtainable and just as

reliable as federal regulatory examination reports in reviewing an

applicant's financial condition; and (2) state and federal regulators

may alternate examination cycles or may conduct joint examinations for

some state chartered, federally insured institutions, and they

typically examine regulated entities at least every two years. In

response to these comments, the final rule allows use of the most

recent state or federal regulatory examination report containing a

composite regulatory examination rating.

Section 933.11(b)(2) of the final rule requires an applicant to

meet all of its minimum statutory and regulatory capital requirements

in order to satisfy the financial condition requirement.

Under Sec. 933.11(b)(3)(i), in order to be presumed to be in

adequate financial condition, the applicant's most recent composite

regulatory examination rating from its primary regulator or appropriate

state regulator within the past two years must be ``1;'' or must be

``2'' or ``3'' and the applicant also must satisfy certain performance

trend criteria.

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

Sec. 933.1(j) of the final rule as a composite rating assigned to an

institution following the guidelines of the Uniform Financial

Institutions Rating System (UFIRS), including a CAMEL rating, a MACRO

rating or other similar rating, contained in a written regulatory

examination report. The composite regulatory examination rating for an

insured depository institution is determined according to the UFIRS,

commonly referred to as the CAMEL rating system. The UFIRS is an

internal supervisory rating system used by Federal regulatory agencies

for evaluating the soundness of financial institutions on a uniform

basis and for identifying those institutions requiring special

supervisory attention or concern. Under the UFIRS, each institution is

assigned a composite rating based on an evaluation and rating of five

essential components--capital, assets, management, earnings, and

liquidity--of an institution's financial condition and operations. The

composite rating reflects, in a comprehensive fashion, an institution's

overall financial condition, compliance with banking statutes and

regulations, and management capability. A composite rating of ``1'' is

the highest possible rating on a 5-point scale, indicating the

strongest performance and management practices. A composite rating of

``5'' indicates the weakest performance and management practices and,

therefore, the highest degree of supervisory concern. The Federal

Financial Institutions Examination Council recently proposed changes to

the UFIRS, including adding a sixth rating component addressing

sensitivity to market risks. See 61 FR 37472 (July 18, 1996). The

language in Sec. 933.1(j) and (z) of the final rule incorporates this

proposed change by referring generally to the UFIRS and removing

specific references to the five rating components.

The importance of the composite regulatory examination rating in

the membership approval process may be illustrated in the breakdown of

the ratings assigned to applicants approved by the Finance Board since

the enactment of FIRREA--all but one institution approved for

membership have been rated ``1,'' ``2'' or ``3''; the single ``4''-

rated institution approved for membership has since been upgraded. No

``5''-rated institutions have been approved for membership.

Using the UFIRS to evaluate membership applicants reduces the

documentation requirements for applicants, limits the potential for the

Banks to be perceived by applicants as another layer in the financial

regulatory structure, adds considerable efficiency to the application

process, and provides an independent assessment by those responsible

for the soundness of the entity.

Under Sec. 933.11(b)(3)(i) of the final rule, a composite

regulatory examination rating of ``2'' or ``3'' may be an acceptable

financial condition performance standard if the applicant also meets

certain additional performance trend criteria. These criteria are

designed to identify trends in the institution's key performance areas

by reviewing the six most recent calendar quarters of financial data.

The performance trend criteria are: (1) positive adjusted net income in

4 of the 6 most recent calendar quarters; (2) nonperforming loans,

leases and securities plus foreclosed and repossessed real estate not

exceeding 10

[[Page 42537]]

percent of performing loans, leases and securities plus foreclosed and

repossessed real estate, in the most recent calendar quarter; and (3) a

ratio of the allowance for loan and lease losses to nonperforming

loans, leases and securities of 60 percent or greater during 4 of the 6

most recent calendar quarters. These performance trend criteria are

derived from the criteria contained in the Guidelines.

The terms used in the ratios are more specifically defined in

Sec. 933.1(b), (d), (u), and (x) of the final rule, modeled after the

Guidelines, to aid applicants and the Banks in determining the

appropriate line items to use from the regulatory financial reports. In

some cases, the terminology is clarified to reflect that used in the

regulatory financial reports.

In the proposed rule, the denominator for the nonperforming assets

ratio was incorrectly identified as ``total assets.'' The Finance Board

intended to continue requiring use of a denominator consistent with

that used in the Guidelines, i.e., performing assets plus foreclosed

and repossessed real estate. This is corrected in the final rule.

In the proposed rulemaking, the Finance Board specifically

requested comment on whether the nonperforming assets ratio should be 8

percent, instead of the proposed 10 percent. Two commenters supported a

10 percent requirement, in order to provide maximum flexibility in

membership decisions and to prevent ``undue hardship'' in cases of

mergers and acquisitions. One commenter stated that the 10 percent

requirement was too liberal. The final rule adopts the 10 percent

requirement which, to date, has served as an adequate performance trend

indicator.

Two additional performance trend ratios included in the Guidelines

for applications reviewed by the Banks under the delegation criteria

are not included in the final rule. The Finance Board has determined

that the three ratios discussed above are adequate to determine

applicants' performance trends and that no additional criteria are

necessary for this purpose.

Various other comments were received recommending changes to some

of the performance trend criteria. The final rule does not adopt these

changes, as the Finance Board believes that the three ratios as

specified are sufficient for determining an institution's performance

trends.

A number of commenters stated that the financial condition

requirement in Sec. 933.11 is too stringent, arguing that such in-depth

financial review for membership decisions exceeds, and should not be

confused with, that which should be required for lending decisions.

However, the Bank Act requires that an institution have a ``financial

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

1424(a)(2)(B). The argument was made that the Bank Act should be

interpreted to presume that any applicant with ``eligible collateral''

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

the Bank Act. However, in order to minimize the possibility of the

Banks becoming a liquidity source for weak or failing institutions, the

Finance Board has determined that a minimum level of financial analysis

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

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

sufficient eligible collateral to secure advances to the applicant is

presumed and shall not be considered in determining whether an

applicant is in the financial condition required by section 4(a)(2)(B)

of the Bank Act and Sec. 933.6(a)(4) of the final rule. One commenter

expressly supported this provision in the rule.

c. Noncompliance is rebuttable.

As further discussed below under Sec. 933.17(d)(1), noncompliance

by an applicant with the financial condition requirement is a

rebuttable presumption.

9. Character of Management Requirement--Sec. 933.12

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

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

home financing.'' 12 U.S.C. 1424(a)(2)(C). Section 933.6(a)(5) of the

final rule applies this general requirement to all applicants,

including insurance companies. Section 933.12 implements this

requirement by establishing specific character of management standards

applicable to such applicants, modeled after the Guidelines.

a. Standards of adequate ``character of management.''

Section 933.12 has been simplified from the proposed rule by

removing the proposed review requirements and allowing the Bank to rely

solely on an unqualified written certification from the applicant that

it meets all of the specified standards.

Under Sec. 933.12(a), neither the applicant nor any of its

directors or senior officers may be subject to, or operating under, any

enforcement action instituted by its primary regulator or appropriate

state regulator. One commenter suggested that demonstrated full

compliance by an applicant with an enforcement action should be

sufficient to meet the standard. Section 933.17(e)(1) of the final rule

provides, instead, that an applicant may rebut the presumption of

noncompliance by showing substantial compliance with all aspects of the

enforcement action.

Under Sec. 933.12(b), neither the applicant nor any of its

directors or senior officers shall have been the subject of any

criminal, civil or administrative proceedings reflecting upon

creditworthiness, business judgment, or moral turpitude, since the most

recent regulatory examination report.

Under Sec. 933.12(c), there must be no known potential criminal,

civil or administrative monetary liabilities, material pending

lawsuits, or unsatisfied judgments against the applicant or any of its

directors or senior officers, since the most recent regulatory

examination report, that are significant to the applicant's operations.

This provision was revised in response to comments that the proposed

requirement was too burdensome unless it applied only to such

liabilities, lawsuits or judgments that are significant to an

applicant's operations.

The proposed rule required that the written certification be

provided by a majority of the applicant's board of directors, or by an

individual with authority to act on behalf of the board. A commenter

pointed out that state corporate laws impose different requirements for

a corporate board to take valid action and, therefore, that the

requirement should be a certification duly adopted by the applicant,

rather than majority action. The final rule adopts this recommendation.

The Finance Board has found the written certification to be the best

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

explanation of those issues because the burden of disclosure is placed

on the applicant.

b. Noncompliance is rebuttable.

As further discussed below under Sec. 933.17(e), noncompliance by

an applicant with the character of management requirement is a

rebuttable presumption.

10. Home Financing Policy Requirement--Sec. 933.13

Section 4(a)(2)(C) of the Bank Act requires that an applicant's

``home-financing policy'' be ``consistent with sound and economical

home financing.'' 12 U.S.C. 1424(a)(2)(C). Section 933.6(a)(6) of the

final rule applies this general requirement to all applicants,

including insurance companies. Section 933.13 implements this

requirement by

[[Page 42538]]

establishing specific home financing policy standards applicable to

such applicants, modeled after the Guidelines.

a. Standards of adequate ``home-financing policy.''

Under Sec. 933.13(a), an applicant that has received a Community

Reinvestment Act (CRA) rating of ``Satisfactory'' or better on its most

recent formal, or if unavailable, informal or preliminary, CRA

performance evaluation is deemed to meet the home financing policy

requirement. The proposed rule required an applicant to have a CRA

performance evaluation within four years from the date of application.

The Guidelines did not contain this requirement, and it is expected

that all applicants will have received such evaluations within the

four-year timeframe. Accordingly, this four-year requirement is not

adopted in the final rule. If a formal CRA performance evaluation is

unavailable, an informal or preliminary CRA performance evaluation from

the regulator should be permissible as an indicator of the applicant's

recent CRA performance. Allowing informal or preliminary evaluations

makes this requirement the same for other applicants as well as de novo

applicants, which were allowed to provide such evaluations under the

Guidelines.

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

CRA, such as an insurance company, to demonstrate how and why its home

financing policy is consistent with the Bank System's housing finance

mission. The home financing policy requirements for de novo insured

depository institution applicants and recent merger or acquisition

applicants are discussed below under Secs. 933.14 (a)(4) and (b)(3),

and 933.15(b).

Several commenters supported use of CRA performance evaluations to

determine compliance with the home financing policy requirement. The

Finance Board acknowledges that CRA performance evaluations are not a

perfect method for evaluating whether an institution's home financing

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

performance evaluations are based on whether a financial institution

meets the credit needs of its assessment area through a variety of

lending activities, rather than solely on its mortgage lending

activity. See, e.g., 60 FR 22180 (May 4, 1995), 12 CFR 25.22. Further,

CRA performance evaluations do not consider whether a financial

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

However, use of CRA performance evaluations as a proxy for the home

financing policy requirement appears to be the best method at the

present time for determining whether an applicant's home financing

policy meets this requirement.

Since neither the Congress nor the Finance Board have yet

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

Finance Board also acknowledges limitations in requesting a written

justification demonstrating how and why an applicant's home financing

policy is consistent with the Bank System's housing finance mission.

b. Noncompliance is rebuttable.

As further discussed below under Sec. 933.17(f), noncompliance by

an applicant with the home financing policy requirement is a rebuttable

presumption.

11. De Novo Insured Depository Institution Applicants--Sec. 933.14

Section 933.14 of the final rule establishes the membership

eligibility requirements for de novo, i.e., newly chartered, insured

depository institution applicants that have not yet commenced

operations or that have recently commenced operations.

a. Newly chartered applicants that have not yet commenced

operations.

(1) Streamlined requirements.

Section 933.14(a) includes a new provision not included in the

proposed rule, which provides for a streamlined application process for

newly chartered, insured depository institution applicants that have

not yet commenced operations. Since either or both the regulatory

agency that chartered the institution and the agency insuring the

deposits of an insured depository institution will have determined that

the institution's financial condition and character of management are

acceptable, or will have made their approval contingent on the

institution satisfying these and other requirements, the Banks should

be able to rely on the agency's determination without having to do a

duplicative review of these eligibility requirements. Accordingly,

Sec. 933.14(a)(1) provides that such institutions are deemed to meet

the requirements of Secs. 933.11 (financial condition) and 933.12

(character of management), as well as Secs. 933.7 (duly organized) and

933.8 (subject to inspection and regulation).

(2) ``Makes long-term home mortgage loans'' requirement.

Since the agency's charter or insurance approval is not contingent

on the institution agreeing to make long-term home mortgage loans, as

required by section 4(a)(1)(C) of the Bank Act and Sec. 933.9,

Sec. 933.14(a)(2) requires the applicant to file as part of its

application a written justification acceptable to the Bank of how its

home financing credit policy and lending practices will include

originating or purchasing long-term home mortgage loans. See 12 U.S.C.

1424(a)(1)(C).

(3) 10 percent requirement.

Section 933.14(a)(3) implements section 4(a)(2) of the Bank Act by

providing that the applicant shall have until one year after commencing

its initial business operations to meet the 10 percent requirement of

Sec. 933.10. See 12 U.S.C. 1424(a)(2).

(4) Home financing policy requirement.-

Since the agency's charter or insurance approval is not contingent

upon the institution having an adequate home financing policy, as

required by section 4(a)(2)(C) of the Bank Act and Sec. 933.6(a)(6),

Sec. 933.14(a)(4)(i) requires the applicant to file as part of its

application a written justification acceptable to the Bank of how and

why its home financing credit policy and lending practices will meet

the credit needs of its community. See 12 U.S.C. 1424(a)(2)(C).

However, the final rule makes the Bank's approval conditional upon the

applicant receiving a ``Satisfactory'' or better Community Reinvestment

Act (CRA) rating on its first formal, or if unavailable, informal or

preliminary, CRA performance evaluation. Noncompliance with this

requirement is a rebuttable presumption under Sec. 933.17(f). An

applicant that is conditionally approved for membership is subject to

the stock purchase requirements of Sec. 933.20, and is eligible to

receive advances, in the Bank's discretion, pursuant to 12 CFR part

935. Under Sec. 933.14(a)(4)(iii), if the applicant's first CRA rating

is ``Needs to Improve'' or ``Substantial Non-Compliance,'' and the

applicant is unable to rebut the presumption of noncompliance, the

applicant's conditional membership approval shall be deemed null and

void. In such event, Sec. 933.14(a)(4)(iv) provides that the

liquidation of any outstanding indebtedness owed by the applicant to

the Bank and redemption of stock of such Bank shall be carried out in

accordance with Sec. 933.29 of this part.

b.-Newly chartered applicants that have recently commenced

operations.

Section 933.14(b) codifies certain exceptions in the Guidelines to

the membership eligibility standards for newly chartered applicants

that have recently commenced operations.

(1) 10 percent requirement.

Section 933.14(b)(1) of the final rule implements section 4(a)(2)

of the Bank Act by providing that the applicant shall

[[Page 42539]]

have until one year after commencing its initial business operations to

meet the 10 percent requirement of Sec. 933.10. See 12 U.S.C.

1424(a)(2).

(2) Financial condition requirement.

Section Sec. 933.14(b)(2)(i) provides that, for purposes of

Sec. 933.11(a)(1), an applicant that has not yet filed regulatory

financial reports for six calendar quarters and three year-ends shall

provide any regulatory financial reports that it has filed with its

primary regulator. As discussed earlier, ``regulatory financial

report'' is defined in Sec. 933.1(aa) to include such reports

maintained by the primary regulator on a computer on-line database.

Section 933.14(b)(2)(ii) provides that, for purposes of

Sec. 933.11(b) (1) and (3), an applicant that has not yet received a

composite regulatory examination rating from its primary regulator or

appropriate state regulator shall provide a preliminary or informal,

written composite regulatory examination rating, if available, from its

primary regulator or appropriate state regulator. The final rule has

been revised to take into account the availability of such rating,

consistent with the Guidelines.

Under Sec. 933.14(b)(2)(iii) of the final rule, an applicant that

has not yet filed regulatory financial reports for six calendar

quarters need not meet the performance trend criteria in

Sec. 933.11(b)(3)(i) (A) to (C), if: (1) the applicant has filed

regulatory financial reports with its primary regulator for at least

three calendar quarters of operation; and (2) the Bank determines that

the applicant is in substantial compliance with the terms of its

regulatory business plan. The proposed rule required that the applicant

have completed regulatory financial reports for at least six calendar

quarters of operation. Consistent with the Guidelines, the final rule

requires three, instead of six, calendar quarters of operation. The

proposed rule also required the Bank to determine such compliance

either through confirmation in writing by the de novo applicant's

primary regulator or based on a written analysis provided by the de

novo applicant. In response to a commenter's recommendation, the final

rule deletes this requirement, leaving documentation of the Bank's

determination to its discretion.

(3) Home financing policy requirement.

Section 933.14(b)(3) provides that, for purposes of Sec. 933.13, an

applicant that has not received its first formal, or if unavailable,

informal or preliminary, CRA performance evaluation, is subject to the

home financing policy requirements of Sec. 933.14(a)(4).

12. Recent Merger Applicants--Sec. 933.15

a.-``Pending merger applicants.'' The proposed rule, consistent

with the Guidelines, set forth specific eligibility requirements for

pending merger applicants. A ``pending merger applicant'' was defined

as an institution applying for membership that: (1) is a party to a

merger or acquisition agreement expected to be consummated within two

calendar quarters of submission of the membership application (timing

test); and (2) will account for 75 percent or less of the combined

assets of the resulting entity at the time of the merger or acquisition

(materiality test).

The proposed provisions applicable to pending merger applicants are

not adopted in the final rule. Since the merger or acquisition has not

yet been consummated and may never be consummated, the Finance Board

has determined that applicants expecting to shortly consummate a merger

or acquisition should be subject to the standard eligibility

requirements set forth in Secs. 933.7 to 933.13, and should not be

evaluated based on each party to the transaction or the pending

resulting entity.

b.-Recent merger or acquisition applicants. The proposed rule,

consistent with the Guidelines, set forth specific eligibility

requirements for recent merger applicants. A ``recent merger

applicant'' was defined as an institution applying for membership that:

(1) merged with or acquired another institution within the six calendar

quarters preceding submission of the membership application (timing

test); and (2) accounted for 75 percent or less of the combined assets

of the resulting entity at the time of the merger or acquisition

(materiality test). The proposed rule required that, for certain of the

eligibility requirements, each of the parties to the merger or

acquisition had to satisfy the requirements. The timing and materiality

tests for the definition of a recent merger or acquisition applicant

have been eliminated in the final rule.

Section 933.15 of the final rule streamlines the application

process by requiring that an applicant resulting entity must satisfy

the standard eligibility requirements of Secs. 933.7 to 933.13 except

as provided in Sec. 933.15. The Finance Board has determined that it is

not necessary to analyze each party to the transaction to determine

satisfaction of the eligibility requirements.

(1) Financial condition requirement.

Section 933.15(a)(i) of the final rule provides that, for purposes

of Sec. 933.11(a)(1), an applicant that, as a result of a merger or

acquisition prior to the date the Bank receives its membership

application, has not yet filed regulatory financial reports for the

last six calendar quarters and three year-ends (recent merger or

acquisition applicant), shall provide any regulatory financial reports

that the applicant has filed with its primary regulator.

Section 933.15(a)(ii) provides that, for purposes of

Sec. 933.11(b)(3)(i) (A) to (C), an applicant that, as a result of a

merger or acquisition, has not yet filed combined regulatory financial

reports for the last six calendar quarters, shall provide pro forma

combined financial statements for those calendar quarters in which

actual combined regulatory financial reports are unavailable.

(2) Home financing policy requirement.

Section 933.13(b) provides that, for purposes of Sec. 933.13, a

recent merger or acquisition applicant has not received its first

formal, or if unavailable, informal or preliminary, CRA performance

evaluation, must demonstrate how and why its home financing credit

policy and lending practices will meet the credit needs of its

community.

A recent merger or acquisition applicant may provide evidence to

rebut a presumption of noncompliance with an eligibility requirement,

as provided in Sec. 933.17 of the final rule.

13. Insurance Company Applicants--Secs. 933.8, 933.12, 933.13, 933.16

As discussed in part III.B.2. above, the Bank Act requires that an

insurance company applicant must meet the membership eligibility

requirements set forth in section 4(a)(1) of the Bank Act. See 12

U.S.C. 1424(a)(1); Sec. 933.6(a) (1), (2) and (3) of the final rule. As

further discussed in part III.B.6., 7., 9., 10., and 13., the final

rule applies all of the section 4(a)(2) criteria except the 10 percent

requirement to insurance company applicants, even though the Bank Act,

on its face, specifically applies the section 4(a)(2) criteria to

insured depository institution applicants. See 12 U.S.C. 1424(a)(2);

Secs. 933.12, 933.13, 933.16 of the final rule.

a.-``Subject to inspection and regulation'' requirement--

Sec. 933.8.

(1) Standard of adequate inspection and regulation.

Insurance companies are subject to state, not federal, regulation

and, therefore, the standards used to inspect and regulate insurance

companies from state to state are not uniform. Every United States

insurance company is subject to examination and regulation

[[Page 42540]]

by the state insurance department in its domiciliary state, as well as

to some level of regulation by the state insurance department in each

state where the insurance company applicant is licensed to do business.

State insurance laws are similar to federal banking laws in that they

require the appropriate state regulator to monitor whether the

insurance company has complied with minimum capital and reserve,

financial condition, asset valuation and various consumer-related

requirements.

Forty-seven states and the District of Columbia now adhere to the

financial regulation standards established by the National Association

of Insurance Commissioners (NAIC) and, thus, are accredited by the

NAIC. In its proposed rulemaking, the Finance Board specifically

requested comment on whether the degree of inspection and regulation

imposed by a particular state, e.g., whether the state insurance

commissioner is NAIC-accredited, should be a factor in determining

whether an insurance company applicant satisfies the ``subject to

inspection and regulation'' requirement of section 4(a)(1)(B) of the

Bank Act. See 12 U.S.C. 1424(a)(1)(B). Two commenters generally opposed

requiring an applicant to be subject to inspection and regulation by an

NAIC-accredited state insurance commissioner, because it could

discourage insurance company membership. One commenter supported

establishing such a requirement as a rebuttable presumption.

Section 933.8 of the final rule requires that an applicant's

appropriate state regulator be NAIC-accredited to meet the ``subject to

inspection and regulation'' requirement, in order to ensure some

minimum degree of inspection and regulation.

(2) Noncompliance is rebuttable.

As further discussed below under Sec. 933.17(c), noncompliance by

an insurance company applicant with the ``subject to inspection and

regulation'' requirement is a rebuttable presumption.

b. Financial condition requirement--Sec. 933.16.

Section 933.16 establishes specific financial condition

requirements applicable to insurance company applicants that differ

from those applicable to other applicants under Sec. 933.11, due to the

differences between the regulatory schemes for insurance companies and

depository institutions.

(1) Capital requirements.

Section 933.16 provides that an insurance company applicant shall

be deemed to meet the financial condition requirement of section

4(a)(2)(B) of the Bank Act and Sec. 933.6(a)(4), if the applicant meets

all of its minimum statutory and regulatory capital requirements and

the capital standards established by the NAIC, based on the information

contained in the applicant's most recent regulatory financial report

filed with its primary regulator. See 12 U.S.C. 1424(a)(2)(B).

Under the proposed rule, an insurance company applicant was deemed

to meet the financial condition requirement if: (1) the applicant

received a regulatory examination by its primary regulator within the

three years preceding the date of the membership application; (2) the

applicant's most recent regulatory examination indicated no major

adverse findings on financial condition; (3) the applicant received a

composite independent insurance company rating from one of the five

principal private companies that rate insurance companies within the

three years preceding the date of the membership application; (4) the

applicant's most recent composite independent insurance company rating

was ``strong,'' as defined therein; or alternatively, the applicant had

an ``adequate rating'' and ``adequate earnings,'' as defined therein;

(5) the applicant met all of its minimum statutory and regulatory

capital requirements and the NAIC capital standards, based on the

applicant's most recent regulatory financial report filed with its

primary regulator; and (6) the applicant met eight specified minimum

performance ratios during the most recent year-end or quarter-end

period. Insurance company regulators do not use the UFIRS to evaluate

the financial condition of insurance companies.

One commenter stated that the financial condition requirement

should be based on satisfaction of the NAIC capital standards, and not

on additional independent ratings and performance ratios. The commenter

noted that the NAIC capital standards are relied upon by insurers,

analysts and regulators to evaluate insurance companies, not all

insurers want to pay for independent ratings, and most rating services

do not rate life insurance companies.

The commenter also stated that the minimum performance ratios may

be too stringent even for financially strong applicants, are in some

cases inapplicable to life insurance companies, and where used in the

NAIC Insurance Regulatory Information System (IRIS), are only intended

as a screening tool to flag an insurance company for further financial

evaluation and not as a measure of its financial condition. The

commenter noted that the IRIS standards require regulatory action only

if there is an abnormal value in four or more of the IRIS ratios, while

the rule would deem an insurance company applicant ineligible for Bank

membership if it fails to meet only one of the rule's eight ratios.

The Finance Board believes that these points have merit and the

proposed rule may have applied overly stringent financial condition

criteria to insurance companies. While not all states have yet adopted

the NAIC capital standards, the Finance Board believes that these

standards are a useful measure of an insurance company's financial

condition. Satisfaction of these standards, as well as the applicant's

minimum statutory and regulatory capital requirements, should be

sufficient to deem an insurance company applicant in compliance with

the financial condition requirement of Sec. 933.6(a)(4). As discussed

earlier, the applicants also will be required to be subject to

inspection and regulation by an NAIC-accredited regulator, to ensure a

minimum degree of inspection and regulation.

(2) Noncompliance is rebuttable.

As further discussed below under Sec. 933.17(d)(2), noncompliance

by an insurance company applicant with the financial condition

requirement applicable to such applicants is a rebuttable presumption.

14. Rebuttable Presumptions--Sec. 933.17

Based on the Finance Board's general supervisory authority over the

Banks, 12 U.S.C. 1422a(a)(3), 1422b(a)(1), and its authority to

interpret the Bank Act's membership eligibility requirements, id.

Sec. 1424, the final rule establishes flexible requirements for each

membership eligibility criterion required by the Bank Act and this

part. An applicant that meets those requirements is presumed to be in

compliance with the statutory membership eligibility criteria.

So, too, an applicant not meeting the requirements is presumed not

to be in compliance with the Bank Act criteria. Section 933.17 of the

final rule provides that certain presumptions may be rebutted if the

applicant provides, or the Bank otherwise obtains, substantial evidence

to overcome the presumption. This approach is modeled after the

Guidelines. A number of commenters expressly supported this approach,

rather than requiring applicants to meet rigid, ``bright line''

eligibility requirements, because it provides definite requirements

while still allowing the Banks to exercise discretion in appropriate

cases.

a. Rebutting presumptive compliance.

Under Sec. 933.17(a), the presumption that an applicant meeting the

[[Page 42541]]

requirements of Secs. 933.7 to 933.16 is in compliance with Sec. 933.6

(a) and (b), may be rebutted, and the Bank may deny membership to the

applicant, if the Bank obtains substantial evidence to overcome the

presumption of compliance.

b. Rebutting presumptive noncompliance.

Under Sec. 933.17(b), the presumption that an applicant not meeting

a particular requirement of Secs. 933.8, 933.11, 933.12, 933.13, or

933.16 is in noncompliance with Sec. 933.6(a) (2), (4), (5) or (6), may

be rebutted, and the applicant shall be deemed to meet such

requirement, if the applicable requirements of Sec. 933.17 are

satisfied.

(1) ``Subject to inspection and regulation'' requirement.-

Section 933.17(c) provides that an insurance company applicant may

rebut a presumption of noncompliance with the ``subject to inspection

and regulation'' requirement of Sec. 933.8 by providing substantial

evidence acceptable to the Bank that it is subject to inspection and

regulation as required by Sec. 933.6(a)(2), notwithstanding the lack of

NAIC accreditation.

(2) Financial condition requirement.

Section 933.17(d) sets forth the requirements for rebutting a

presumption of noncompliance with the financial condition requirements

of Secs. 933.11 and 933.16. Under Sec. 933.17(d)(1), for applicants

other than insurance companies, in the case of an applicant's lack of a

composite regulatory examination rating within the required two-year

period, a variance from the required rating, or a variance from a

required performance trend criterion, as required under Sec. 933.11,

the applicant or the Bank shall prepare a written justification

pertaining to such requirement that provides substantial evidence

acceptable to the Bank that the applicant is in the financial condition

required by Sec. 933.6(a)(4), notwithstanding the lack of rating or

variance. In response to a commenter's suggestion, the final rule

adopts a ``substantial,'' rather than the proposed ``compelling,''

evidence standard, which the Finance Board believes is sufficient for

purposes of determining an applicant's financial condition.

Under Sec. 933.17(d)(2) of the final rule, in the case of an

insurance company applicant's variance from a capital requirement or

standard of Sec. 933.16, the applicant or the Bank shall prepare a

written justification pertaining to such requirement or standard that

provides substantial evidence acceptable to the Bank that the applicant

is in the financial condition required by Sec. 933.6(a)(4),

notwithstanding the variance. The proposed rule did not provide for

rebuttals by insurance company applicants of a presumption of

noncompliance with the financial condition requirement. Making the

financial condition requirement a rebuttable presumption for insurance

companies is consistent with the treatment of other applicants, and is

reasonable because an insurance company applicant may otherwise be able

to show that it is in adequate financial condition to be a member of

the Bank System.

(3) Character of management requirement.

Section 933.17(e) sets forth the requirements for rebutting a

presumption of noncompliance with the character of management

requirement of Sec. 933.12.

(4) Home financing policy requirement.

Section 933.17(f) sets forth the requirements for rebutting a

presumption of noncompliance with the home financing policy requirement

of Secs. 933.13, 933.14(a)(4), and 933.14(b)(3), where an applicant

received a ``Substantial Non-Compliance'' rating on its most recent

formal, or if unavailable, informal or preliminary, CRA performance

evaluation, or a ``Needs to Improve'' CRA rating on its most recent

formal, or if unavailable, informal or preliminary, CRA performance

evaluation and a CRA rating of ``Needs to Improve'' or better on any

immediately preceding CRA performance evaluation. This section has been

revised to incorporate meeting the credit needs of the applicant's

community, since the provision is now being applied to depository

institution applicants and not to insurance company applicants. An

insurance company applicant or recent merger or acquisition applicant

would have no need for rebuttal, since Secs. 933.13(b) and 933.15(b),

respectively, already require such applicants to submit written

justifications regarding their home financing policies.

15. Conforming Changes to Citations

For the sake of brevity, conforming changes to the citations in

subparts D through I of part 933 are set out in a table at the end of

this final rule.

III. Regulatory Flexibility Act

The final rule largely implements statutory requirements binding on

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

Board is not at liberty to make adjustments to those statutory

requirements to accommodate small entities. The final rule does not

impose any additional regulatory requirements that will have a

disproportionate impact on small entities. The final rule will, to some

extent, reduce the criteria for determining compliance with statutory

eligibility requirements that currently are used by the Finance Board

in approving membership applications. Therefore, it is certified,

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

605(b), that this final rule will not have a significant economic

impact on a substantial number of small entities.

IV. Paperwork Reduction Act

The information collection requirements contained in the proposed

rule, as well as the information collection requirements in the

sections redesignated as Secs. 933.18, 933.22, 933.25, 933.26 and

933.31 of the final rule, which are not otherwise affected by this

final rule, were submitted to and approved by the Office of Management

and Budget (OMB) in accordance with the requirements of Sec. 3507(d) of

the Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d), and assigned

OMB control number 3069-0004. The title, description of need and use,

and the respondent description for the information collection

requirements in this final rule are discussed elsewhere in

SUPPLEMENTARY INFORMATION. Any comments on this information collection

should be sent to: Office of Information and Regulatory Affairs of OMB,

Attention: Desk Officer for Federal Housing Finance Board, Washington,

DC 20503, and to the Executive Secretary, Federal Housing Finance

Board, 1777 F Street, N.W., Washington, DC 20006.

The following table discloses the estimated annual reporting and

recordkeeping burden:

a. Number of respondents..........................................6,412

b. Total annual responses.........................................6,412

Percentage of these responses collected electronically...............0%

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

d. Current OMB inventory.......................................38,889.6

e. Difference..................................................20,262.5

The estimated annual reporting and recordkeeping burden is:

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

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

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

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

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

The approved information collection requirements will not otherwise

be adversely affected (and may be reduced) by the requirements of the

final rule.

[[Page 42542]]

List of Subjects in 12 CFR Part 933

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

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

subchapter B, part 933, of the Code of Federal Regulations as follows:

PART 933--MEMBERS OF THE BANKS

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

2. The authority citation for part 933 continues to read as

follows:

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

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

Subpart A--Definitions

Sec.

933.1 Definitions.

Subpart B--Membership Application Process

933.2 Membership application requirements.

933.3 Decision on application.

933.4 Automatic membership.

933.5 Appeals.

Subpart C--Eligibility Requirements

933.6 General eligibility requirements.

933.7 Duly organized requirement.

933.8 Subject to inspection and regulation requirement.

933.9 Makes long-term home mortgage loans requirement.

933.10 10 percent requirement for insured depository institution

applicants.

933.11 Financial condition requirement for applicants other than

insurance companies.

933.12 Character of management requirement.

933.13 Home financing policy requirement.

933.14 De novo insured depository institution applicants.

933.15 Recent merger or acquisition applicants.

933.16 Financial condition requirement for insurance company

applicants.

933.17 Rebuttable presumptions.

933.18 Determination of appropriate Bank district for membership.

Subpart D--Stock Requirements

933.19 Par value and price of stock.

933.20 Stock purchase.

933.21 Issuance and form of stock.

933.22 Adjustments in stock holdings.

933.23 Purchase of excess stock.

Subpart E--Consolidations Involving Members

933.24 Consolidation of members.

933.25 Consolidations involving nonmembers.

Subpart F--Withdrawal and Removal From Membership

933.26 Procedure for withdrawal.

933.27 Procedure for removal.

933.28 Automatic termination of membership for institutions placed

in receivership.

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

933.29 Orderly liquidation of advances and redemption of stock.

Subpart H--Reacquisition of Membership

933.30 Reacquisition of membership.

Subpart I--Bank Access to Information

933.31 Reports and examinations.

Subpart J--Membership Insignia

933.32 Official membership insignia.

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

Through J]

4. Subparts C through I of part 933 are redesignated as Subparts D

through J, respectively.

Secs. 933.6 through 933.19 [Redesignated as Secs. 933.19 through

933.32]

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

through 933.32, respectively.

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

Subpart A--Definitions

Sec. 933.1 Definitions.

For purposes of this part:

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

1421 through 1449).

(b) Adjusted net income means net income, excluding extraordinary

items such as income received from or expense incurred in sales of

securities or fixed assets, reported on a regulatory financial report.

(c) Aggregate unpaid loan principal means the aggregate unpaid

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

purchase contracts, and similar obligations.

(d) Allowance for loan and lease losses means a specified balance-

sheet account held to fund potential losses on loans or leases, that is

reported on a regulatory financial report.

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

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

mean the National Credit Union Administration.

(f) Appropriate state regulator means any state officer, agency,

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

empowered to institute enforcement action against, an applicant for

Bank membership.

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

authority of the Act.

(h) Board means the Federal Housing Finance Board.

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

which the total appraised value is attributable to residential, and

business or farm uses.

(j) Composite regulatory examination rating means a composite

rating assigned to an institution following the guidelines of the

Uniform Financial Institutions Rating System (Issued by the Federal

Financial Institutions Examination Council; for availability contact

the Federal Housing Finance Board, FOIA Office, 1777 F Street, NW.,

Washington, DC 20006.), including a CAMEL rating, a MACRO rating, or

other similar rating, contained in a written regulatory examination

report.

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

rooms designed for residential use.

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

or agreement initiated by an applicant for Bank membership or by its

primary regulator or appropriate state regulator to address any

operational, financial, managerial or other deficiencies of the

applicant identified by such regulator, but does not include a board of

directors resolution adopted by the applicant in response to

examination weaknesses identified by such regulator.

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

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

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

property disbursed to the borrower.

(n) Home mortgage loan means:

(1) A loan, whether or not fully amortizing, or an interest in such

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

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

interests in property:

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

simple;

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

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

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

date the mortgage was executed; or

(iii) Combination business or farm property where at least 50

percent of the total appraised value of the combined property is

attributable to the residential portion of the property; or

(2) A mortgage pass-through security that represents an undivided

ownership interest in:

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

security, all of the loans meet the requirements of paragraph (n)(1) of

this section; or

[[Page 42543]]

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

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

security, all of the loans meet the requirements of paragraph (n)(1) of

this section.

(o) Institutions which are eligible to make application to become

members means, for purposes of 12 U.S.C. 1431(e)(2)(A), any building

and loan association, savings and loan association, cooperative bank,

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

depository institution, regardless of whether the institution applies

for or would be approved for membership.

(p) Insured depository institution means an insured depository

institution as defined in 12 U.S.C. 1422(12).

(q) Long-term means a term to maturity of five years or greater.

(r) Manufactured housing means a manufactured home as defined in

section 603(6) of the Manufactured Home Construction and Safety

Standards Act of 1974, as amended (42 U.S.C. 5402(6)).

(s) Member means an institution that has been approved for

membership in a Bank and has purchased capital stock in the Bank in

accordance with Secs. 933.20 or 933.25 of this part.

(t) Multifamily property means:

(1) Real property that is solely residential and includes five or

more dwelling units; or

(2) Real property that includes five or more dwelling units

combined with commercial units, provided that the property is primarily

residential; or

(3) Nursing homes, dormitories, or homes for the elderly.

(u) Nonperforming loans, leases and securities means the sum of the

following, reported on a regulatory financial report: loans, leases and

debt securities that have been past due for 90 days (60 days in the

case of credit union applicants) or longer but are still accruing;

loans, leases and debt securities on a nonaccrual basis; and

restructured loans and leases (not already reported as nonperforming).

(v) Nonresidential real property means real property that is not

used for residential purposes, including business or industrial

property, hotels, motels, churches, hospitals, educational and

charitable institution buildings or facilities, clubs, lodges,

association buildings, golf courses, recreational facilities, farm

property not containing a dwelling unit, or similar types of property.

(w) One-to-four family property means:

(1) Real property that is solely residential, including one-to-four

family dwelling units or more than four family dwelling units if each

dwelling unit is separated from the other dwelling units by dividing

walls that extend from ground to roof, such as row houses, townhouses

or similar types of property;

(2) Manufactured housing if applicable state law defines the

purchase or holding of manufactured housing as the purchase or holding

of real property;

(3) Individual condominium dwelling units or interests in

individual cooperative housing dwelling units that are part of a

condominium or cooperative building without regard to the number of

total dwelling units therein; or

(4) Real property which includes one-to-four family dwelling units

combined with commercial units, provided the property is primarily

residential.

(x) Performing loans, leases and securities means loans, leases and

debt securities, reported on a regulatory financial report, that do not

meet the definition of ``nonperforming loans, leases and securities,''

as provided in paragraph (u) of this section.

(y) Primary regulator means the chartering authority for federally-

chartered applicants, the insuring authority for federally-insured

applicants that are not federally-chartered, or the appropriate state

regulator for all other applicants.

(z) Regulatory examination report means a written report of

examination prepared by the applicant's primary regulator or

appropriate state regulator, containing, in the case of insured

depository institution applicants, a composite rating assigned to the

institution following the guidelines of the Uniform Financial

Institutions Rating System, including a CAMEL rating, a MACRO rating,

or other similar rating.

(aa) Regulatory financial report means a financial report that an

applicant is required to file with its primary regulator on a specific

periodic basis, including the quarterly call report for commercial

banks, thrift financial report for savings associations, quarterly or

semi-annual call report for credit unions, the National Association of

Insurance Commissioners' annual or quarterly report for insurance

companies, or other similar report, including such report maintained by

the primary regulator on a computer on-line database.

(bb) Residential mortgage loan means any one of the following types

of loans, whether or not fully amortizing:

(1) Home mortgage loans;

(2) Funded residential construction loans;

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

state law as secured by an interest in real property;

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

multifamily property;

(5) Mortgage pass-through securities representing an undivided

ownership interest in:

(i) Loans that meet the requirements of paragraphs (bb) (1) through

(4) of this section at the time of issuance of the security;

(ii) Securities representing an undivided ownership interest in

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

the loans meet the requirements of paragraphs (bb) (1) through (4) of

this section; or

(iii) Mortgage debt securities as defined in paragraph (bb)(6) of

this section;

(6) Mortgage debt securities secured by:

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

substantially all of the loans meet the requirements of paragraphs (bb)

(1) through (4) of this section;

(ii) Securities that meet the requirements of paragraph (bb)(5) of

this section; or

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

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

paragraphs (bb) (1) through (5) of this section; or

(7) Home mortgage loans secured by a leasehold interest, as defined

in paragraph (n)(1)(ii) of this section, except that the period of the

lease term may be for any duration.

(cc) State means a State of the United States, the District of

Columbia, Guam, Puerto Rico or the U.S. Virgin Islands.

(dd) Total assets means the total assets reported on a regulatory

financial report.

7. Subpart B of part 933 is revised to read as follows:

Subpart B--Membership Application Process

Sec. 933.2 Membership application requirements.

(a) Application. An applicant for membership in a Bank shall submit

to that Bank an application that satisfies the requirements of this

part. The application shall include a written resolution or

certification duly adopted by the applicant's board of directors, or by

an individual with authority to act on behalf of the applicant's board

of directors, of the following:

(1) Applicant review. Applicant has reviewed the requirements of

this part

[[Page 42544]]

and, as required by this part, has provided to the best of applicant's

knowledge the most recent, accurate and complete information available;

and

(2) Duty to supplement. Applicant will promptly supplement the

application with any relevant information that comes to applicant's

attention prior to the Bank's decision on whether to approve or deny

the application, and if the Bank's decision is appealed pursuant to

Sec. 933.5 of this part, prior to resolution of any appeal by the

Board.

(b) Digest. The Bank shall prepare a written digest for each

applicant stating whether or not the applicant meets each of the

requirements in Secs. 933.6 to 933.18 of this part, the Bank's findings

and the reasons therefor.

(c) File. The Bank shall maintain a membership file for each

applicant for at least three years after the Bank decides whether to

approve or deny membership and the resolution of any appeal to the

Board. The membership file shall contain at a minimum:

(1) Digest. The digest required by paragraph (b) of this section.

(2) Required documents. All documents required by Secs. 933.6 to

933.18 of this part, including those documents required to establish or

rebut a presumption under this part, shall be described in and attached

to the digest. The Bank may retain in the file only the relevant

portions of the regulatory financial reports required by this part. If

an applicant's primary regulator or appropriate state regulator

requires return or destruction of a regulatory examination report, the

date that the report is returned or destroyed shall be noted in the

file.

(3) Additional documents. Any additional document submitted by the

applicant, or otherwise obtained or generated by the Bank, concerning

the applicant.

(4) Decision resolution. The decision resolution described in

Sec. 933.3(b) of this part.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.3 Decision on application.

(a) Authority. The Board authorizes the Banks to approve or deny

all applications for membership, subject to the requirements of this

part. The Bank may delegate the authority to approve membership

applications only to a committee of the Bank's board of directors, the

Bank president, or a senior officer who reports directly to the Bank

president other than an officer with responsibility for business

development.

(b) Decision resolution. For each applicant, the Bank shall prepare

a written resolution duly adopted by the Bank's board of directors, by

a committee of the board of directors, or by an officer with delegated

authority to approve membership applications. The decision resolution

shall state:

(1) That the statements in the digest are accurate to the best of

the Bank's knowledge, and are based on a diligent and comprehensive

review of all available information identified in the digest; and

(2) The Bank's decision and the reasons therefor. Decisions to

approve an application should state specifically that: the applicant is

authorized under the laws of the United States and the laws of the

appropriate state to become a member of, purchase stock in, do business

with, and maintain deposits in, the Bank to which the applicant has

applied; and the applicant meets all of the membership eligibility

criteria of the Act and this part.

(c) Action on applications. The Bank shall act on an application

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

be complete. An application is ``complete'' when a Bank has obtained

all the information required by this part, and any other information

the Bank deems necessary, to process the application. If an application

that was deemed complete subsequently is deemed incomplete because the

Bank determines during the review process that additional information

is necessary to process the application, the Bank may stop the 60-day

clock until the application again is deemed complete, and then resume

the clock where it left off. The Bank shall notify an applicant when

its application is deemed by the Bank to be complete. The Bank also

shall notify an applicant if the 60-day clock is stopped, and when the

clock is resumed. Within three business days of a Bank's decision on an

application, the Bank shall provide the applicant and the Board's

Executive Secretary with a copy of the Bank's decision resolution.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.4 Automatic membership.

(a) Automatic membership for mandatory members. Any institution

required by law to become a member of a Bank automatically shall become

a member of the Bank of the district in which its principal place of

business is located upon the purchase of stock in that Bank pursuant to

Sec. 933.20(b)(1) of this part.

(b) Automatic membership for certain charter conversions. An

insured depository institution member that converts from one charter

type to another automatically shall become a member of the Bank of

which the converting institution was a member on the effective date of

such conversion, provided that the converting institution continues to

be an insured depository institution and the assets of the institution

immediately before and immediately after the conversion are not

materially different. In such case, all relationships existing between

the member and the Bank at the time of such conversion may continue.

(c) Automatic membership for transfers. Any member whose membership

is transferred pursuant to Sec. 933.18(d) of this part automatically

shall become a member of the Bank to which it transfers.

Sec. 933.5 Appeals.

(a) Appeals by applicants--(1) Filing procedure. Within 90 calendar

days of the date of a Bank's decision to deny an application for

membership, the applicant may file a written appeal of the decision

with the Board.

(2) Documents. The applicant's appeal shall be addressed to the

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

Washington, DC 20006, with a copy to the Bank, and shall include the

following documents:

(i) Bank's decision resolution. A copy of the Bank's decision

resolution; and

(ii) Basis for appeal. A statement of the basis for the appeal by

the applicant with sufficient facts, information, analysis and

explanation to rebut any applicable presumptions and otherwise support

the applicant's position.

(b) Record for appeal--(1) Copy of membership file. Upon receiving

a copy of an appeal, the Bank whose action has been appealed (appellee

Bank) shall provide the Board with a copy of the applicant's complete

membership file. Until the Board resolves the appeal, the appellee Bank

shall supplement the materials provided to the Board as any new

materials are received.

(2) Additional information. The Board may request additional

information or further supporting arguments from the appellant, the

appellee Bank or any other party that the Board deems appropriate.

(c) Deciding appeals. The Board shall consider the record for

appeal described in paragraph (b) of this section and shall resolve the

appeal based on the requirements of the Act and this part within 90

calendar days of the date the appeal is filed with the Board. In

deciding the appeal, the Board shall

[[Page 42545]]

apply the presumptions in this part, unless the appellant or appellee

Bank presents evidence to rebut a presumption as provided in

Sec. 933.17 of this part.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

8. Subpart C is added to part 933 to read as follows:

Subpart C--Eligibility Requirements

Sec. 933.6 General eligibility requirements.

(a) Requirements. Any building and loan association, savings and

loan association, cooperative bank, homestead association, insurance

company, savings bank, or insured depository institution, upon

application satisfying all of the requirements of the Act and this

part, shall be eligible to become a member of a Bank if:

(1) It is duly organized under the laws of any State or of the

United States;

(2) It is subject to inspection and regulation under the banking

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

(3) It makes long-term home mortgage loans;

(4) Its financial condition is such that advances may be safely

made to it;

(5) The character of its management is consistent with sound and

economical home financing; and

(6) Its home financing policy is consistent with sound and

economical home financing.

(b) Additional eligibility requirement for insured depository

institutions. In order to be eligible to become a member of a Bank, an

insured depository institution applicant also must have at least 10

percent of its total assets in residential mortgage loans.

(c) Additional eligibility requirement for applicants that are not

insured depository institutions. In order to be eligible to become a

member of a Bank, an applicant that is not an insured depository

institution also must have mortgage-related assets that reflect a

commitment to housing finance, as determined by the Bank in its

discretion.

(d) Ineligibility. Except as otherwise provided in this part, if an

applicant does not satisfy the requirements of this part, the applicant

is ineligible for membership.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.7 Duly organized requirement.

An applicant shall be deemed to be duly organized as required by

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

is chartered by a state or federal agency as a building and loan

association, savings and loan association, cooperative bank, homestead

association, insurance company, savings bank or insured depository

institution.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.8 Subject to inspection and regulation requirement.

An applicant shall be deemed to be subject to inspection and

regulation as required by section 4(a)(1)(B) of the Act and

Sec. 933.6(a)(2) of this part, if, in the case of a depository

institution applicant, it is subject to inspection and regulation by

the Federal Deposit Insurance Corporation, the Federal Reserve Board,

the National Credit Union Administration, the Office of the Comptroller

of the Currency, the Office of Thrift Supervision, or other appropriate

state regulator, and, in the case of an insurance company applicant, it

is subject to inspection and regulation by an appropriate state

regulator accredited by the National Association of Insurance

Commissioners.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.9 Makes long-term home mortgage loans requirement.

An applicant shall be deemed to make long-term home mortgage loans

as required by section 4(a)(1)(C) of the Act and Sec. 933.6(a)(3) of

this part, if, based on the applicant's most recent regulatory

financial report filed with its primary regulator, the applicant

originates or purchases long-term home mortgage loans.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.10 10 percent requirement for insured depository institution

applicants.

An insured depository institution applicant shall be deemed to be

in compliance with the 10 percent requirement of section 4(a)(2)(A) of

the Act and Sec. 933.6(b) of this part, if, based on the applicant's

most recent regulatory financial report filed with its primary

regulator, the applicant has at least 10 percent of its total assets in

residential mortgage loans, except that any assets used to secure

mortgage debt securities as described in Sec. 933.1(bb)(6) of this part

shall not be used to meet this requirement.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.11 Financial condition requirement for applicants other than

insurance companies.

(a) Review requirement. In determining whether an applicant other

than an insurance company has complied with the financial condition

requirement of section 4(a)(2)(B) of the Act and Sec. 933.6(a)(4) of

this part, the Bank shall obtain as a part of the membership

application and review each of the following documents:

(1) Regulatory financial reports. The regulatory financial reports

filed by the applicant with its primary regulator for the last six

calendar quarters and three year-ends preceding the date the Bank

receives the application;

(2) Financial statement. In order of preference: the most recent

independent audit of the applicant conducted in accordance with

generally accepted auditing standards by a certified public accounting

firm which submits a report on the applicant; the most recent

independent audit of the applicant's parent holding company conducted

in accordance with generally accepted auditing standards by a certified

public accounting firm which submits a report on the consolidated

holding company but not on the applicant separately; the most recent

Directors' examination of the applicant conducted in accordance with

generally accepted auditing standards by a certified public accounting

firm; the most recent Directors' examination of the applicant performed

by other external auditors; the most recent review of the applicant's

financial statements by external auditors; the most recent Compilation

of the applicant's financial statements by external auditors; or the

most recent audit of other procedures of the applicant;

(3) Regulatory examination report. The applicant's most recent

available regulatory examination report prepared by its primary

regulator or appropriate state regulator, a summary prepared by the

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

regulatory examination report, and a summary prepared by the Bank or

applicant of actions taken by the applicant to respond to examination

weaknesses;

(4) Enforcement actions. A description prepared by the Bank or

applicant of any outstanding enforcement actions against the applicant,

responses by the applicant, reports as required by the enforcement

[[Page 42546]]

action, and verbal or written indications, if available, from the

primary regulator or appropriate state regulator, whichever is

applicable, of how the applicant is complying with the terms of the

enforcement action; and

(5) Additional information. Any other relevant document or

information concerning the applicant that comes to the Bank's attention

in reviewing the applicant's financial condition.

(b) Standards. An applicant other than an insurance company shall

be deemed to be in compliance with the financial condition requirement

of section 4(a)(2)(B) of the Act and Sec. 933.6(a)(4) of this part, if:

(1) Recent composite regulatory examination rating. The applicant

has received a composite regulatory examination rating from its primary

regulator or appropriate state regulator within two years preceding the

date the Bank receives the application;

(2) Capital requirement. The applicant meets all of its minimum

statutory and regulatory capital requirements as reported in its most

recent quarter-end regulatory financial report filed with its primary

regulator; and

(3) Minimum performance standard. (i) The applicant's most recent

composite regulatory examination rating from its primary regulatory or

appropriate state regulator within the past two years was ``1;'' or,

was ``2'' or ``3'' and, based on the applicant's most recent regulatory

financial report filed with its primary regulator, the applicant

satisfied all of the following performance trend criteria:

(A) Earnings. The applicant's adjusted net income was positive in

four of the six most recent calendar quarters;

(B) Nonperforming assets. The applicant's nonperforming loans,

leases and securities plus foreclosed and repossessed real estate, did

not exceed 10 percent of its performing loans, leases and securities

plus foreclosed and repossessed real estate, in the most recent

calendar quarter; and

(C) Allowance for loan and lease losses. The applicant's ratio of

its allowance for loan and lease losses to nonperforming loans, leases

and securities was 60 percent or greater during 4 of the 6 most recent

calendar quarters.

(ii) For applicants that are not required to report financial data

to their primary regulator on a quarterly basis, the information

required in paragraph (b)(3)(i) of this section may be reported on a

semiannual basis.

(c) Eligible collateral not considered. The availability of

sufficient eligible collateral to secure advances to the applicant is

presumed and shall not be considered in determining whether an

applicant is in the financial condition required by section 4(a)(2)(B)

of the Act and Sec. 933.6(a)(4) of this part.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.12 Character of management requirement.

An applicant shall be deemed to be in compliance with the character

of management requirement of section 4(a)(2)(C) of the Act and

Sec. 933.6(a)(5) of this part, if the applicant provides to the Bank an

unqualified written certification duly adopted by the applicant's board

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

the applicant's board of directors, that:

(a) Enforcement actions. Neither the applicant nor any of its

directors or senior officers is subject to, or operating under, any

enforcement action instituted by its primary regulator or appropriate

state regulator;

(b) Criminal, civil or administrative proceedings. Neither the

applicant nor any of its directors or senior officers has been the

subject of any criminal, civil or administrative proceedings reflecting

upon creditworthiness, business judgment, or moral turpitude since the

most recent regulatory examination report; and

(c) Criminal, civil or administrative monetary liabilities,

lawsuits or judgments. There are no known potential criminal, civil or

administrative monetary liabilities, material pending lawsuits, or

unsatisfied judgments against the applicant or any of its directors or

senior officers since the most recent regulatory examination report,

that are significant to the applicant's operations.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.13 Home financing policy requirement.

(a) Standard. An applicant shall be deemed to be in compliance with

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

and Sec. 933.6(a)(6) of this part, if the applicant has received a

Community Reinvestment Act (CRA) rating of ``Satisfactory'' or better

on its most recent formal, or if unavailable, informal or preliminary,

CRA performance evaluation.

(b) Written justification required. An applicant that is not

subject to the CRA shall file as part of its application for membership

a written justification acceptable to the Bank of how and why the

applicant's home financing policy is consistent with the Bank System's

housing finance mission.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.14 De novo insured depository institution applicants.

(a)- Newly chartered applicants that have not commenced

operations--(1) Duly organized, subject to inspection and regulation,

financial condition and character of management requirements. An

insured depository institution applicant that is newly chartered and

has not yet commenced operations, is deemed to meet the requirements of

Secs. 933.7, 933.8, 933.11 and 933.12 of this part.

(2) Makes long-term home mortgage loans requirement. The applicant

shall be deemed to make long-term home mortgage loans as required by

Sec. 933.9 of this part, if it has filed as part of its application for

membership a written justification acceptable to the Bank of how its

home financing credit policy and lending practices will include

originating or purchasing long-term home mortgage loans.

(3) 10 percent requirement. The applicant shall have until one year

after commencing its initial business operations to meet the 10 percent

requirement of Sec. 933.10 of this part.

(4) Home financing policy requirement--(i) Conditional approval. An

applicant that has not received its first formal, or if unavailable,

informal or preliminary, Community Reinvestment Act (CRA) performance

evaluation, shall be conditionally deemed to be in compliance with the

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

Sec. 933.6(a)(6) of this part, if the applicant has filed as part of

its application for membership a written justification acceptable to

the Bank of how and why its home financing credit policy and lending

practices will meet the credit needs of its community. An applicant

that receives such conditional membership approval is subject to the

stock purchase requirements of Sec. 933.20 of this part and the

advances provisions of 12 CFR part 935.

(ii) Approval. The applicant shall be deemed to be in compliance

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

Act and Sec. 933.6(a)(6) of this part upon receipt by the Bank of

evidence from the applicant that it received a CRA rating of

``Satisfactory'' or better on its first

[[Page 42547]]

formal, or if unavailable, informal or preliminary, CRA performance

evaluation.

(iii) Conditional approval deemed null and void. If the applicant's

first such CRA rating is ``Needs to Improve'' or ``Substantial Non-

Compliance,'' the applicant shall be deemed to be in noncompliance with

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

and Sec. 933.6(a)(6) of this part, subject to rebuttal by the applicant

under Sec. 933.17(f) of this part, and its conditional membership

approval is deemed null and void.

(iv) Treatment of outstanding advances and Bank stock. If the

applicant's conditional membership approval is deemed null and void

pursuant to paragraph (a)(4)(iii) of this section, the liquidation of

any outstanding indebtedness owed by the applicant to the Bank and

redemption of stock of such Bank shall be carried out in accordance

with Sec. 933.29 of this part.

(b) Newly chartered applicants that have recently commenced

operations. An insured depository institution applicant that is newly

chartered and has commenced operations, is subject to the requirements

of Secs. 933.7 to 933.13 of this part except as provided in this

paragraph (b).

(1) 10 percent requirement. The applicant shall have until one year

after commencing its initial business operations to meet the 10 percent

requirement of Sec. 933.10 of this part.

(2) Financial condition requirement. (i) Regulatory financial

reports. For purposes of Sec. 933.11(a)(1) of this part, if the

applicant has not yet filed regulatory financial reports with its

primary regulator for the last six calendar quarters and three year-

ends preceding the date the Bank receives the application, the

applicant shall provide any regulatory financial reports that it has

filed with its primary regulator.

(ii) Recent composite regulatory examination rating. For purposes

of Sec. 933.11(b)(1) and (3) of this part, if the applicant has not yet

received a composite regulatory examination rating from its primary

regulator or appropriate state regulator, the applicant shall provide a

preliminary or informal, written composite regulatory examination

rating, if available, from its primary regulator or appropriate state

regulator.

(iii) Performance trend criteria. If the applicant has not yet

filed regulatory financial reports with its primary regulator for the

last six calendar quarters preceding the date the Bank receives its

application for membership, the applicant need not meet the performance

trend criteria in Sec. 933.11(b)(3)(i)(A) to (C) of this part, if:

(A) Reports for three quarters. The applicant has filed regulatory

financial reports with its primary regulator for at least three

calendar quarters of operation; and

(B) Business plan compliance. The Bank determines that the

applicant is in substantial compliance with the terms of its regulatory

business plan.

(3) Home financing policy requirement. For purposes of Sec. 933.13

of this part, an applicant that has not received its first formal, or

if unavailable, informal or preliminary, CRA performance evaluation, is

subject to the home financing policy requirements of paragraph (a)(4)

of this section.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.15 Recent merger or acquisition applicants.

An applicant that merged with or acquired another institution prior

to the date the Bank receives its application for membership is subject

to the requirements of Secs. 933.7 to 933.13 of this part except as

provided in this section.

(a) Financial condition requirement--(i) Regulatory financial

reports. For purposes of Sec. 933.11(a)(1) of this part, an applicant

that, as a result of a merger or acquisition preceding the date the

Bank receives its application for membership, has not yet filed

regulatory financial reports with its primary regulator for the last

six calendar quarters and three year-ends preceding such date, shall

provide any regulatory financial reports that the applicant has filed

with its primary regulator.

(ii) Performance trend criteria. For purposes of

Sec. 933.11(b)(3)(i)(A) to (C) of this part, an applicant that, as a

result of a merger or acquisition preceding the date the Bank receives

its application for membership, has not yet filed combined regulatory

financial reports with its primary regulator for the last six calendar

quarters preceding such date, shall provide pro forma combined

financial statements for those calendar quarters in which actual

combined regulatory financial reports are unavailable.

(b) Home financing policy requirement. For purposes of Sec. 933.13

of this part, an applicant that, as a result of a merger or acquisition

preceding the date the Bank receives its application for membership,

has not received its first formal, or if unavailable, informal or

preliminary, Community Reinvestment Act performance evaluation, shall

file as part of its application a written justification acceptable to

the Bank of how and why the applicant's home financing credit policy

and lending practices will meet the credit needs of its community.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.16 Financial condition requirement for insurance company

applicants.

An insurance company applicant shall be deemed to meet the

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

Sec. 933.6(a)(4) of this part, if, based on the information contained

in the applicant's most recent regulatory financial report filed with

its primary regulator, the applicant meets all of its minimum statutory

and regulatory capital requirements and the capital standards

established by the National Association of Insurance Commissioners.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.17 Rebuttable presumptions.

(a) Rebutting presumptive compliance. The presumption that an

applicant meeting the requirements of Secs. 933.7 to 933.16 of this

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

and (b) of this part, may be rebutted, and the Bank may deny membership

to the applicant, if the Bank obtains substantial evidence to overcome

the presumption of compliance.

(b) Rebutting presumptive noncompliance. The presumption that an

applicant not meeting a particular requirement of Secs. 933.8, 933.11,

933.12, 933.13, or 933.16 of this part is in noncompliance with section

4(a) of the Act and Sec. 933.6(a) (2), (4), (5) or (6) of this part,

may be rebutted, and the applicant shall be deemed to meet such

requirement, if the applicable requirements in this section are

satisfied.

(c) Presumptive noncompliance by insurance company applicant with

``subject to inspection and regulation'' requirement of Sec. 933.8. If

an insurance company applicant is not subject to inspection and

regulation by an appropriate state regulator accredited by the National

Association of Insurance Commissioners (NAIC), as required by

Sec. 933.8 of this part, the applicant or the Bank shall prepare a

written justification that provides substantial evidence acceptable to

the Bank that the

[[Page 42548]]

applicant is subject to inspection and regulation as required by

Sec. 933.6(a)(2) of this part, notwithstanding the lack of NAIC

accreditation.

(d) Presumptive noncompliance with financial condition requirements

of Secs. 933.11 and 933.16--(1) Applicants other than insurance

companies. For applicants other than insurance companies, in the case

of an applicant's lack of a composite regulatory examination rating

within the two-year period required by Sec. 933.11(b)(1) of this part,

a variance from the rating required by Sec. 933.11(b)(3)(i) of this

part, or a variance from a performance trend criterion required by

Sec. 933.11(b)(3)(i) of this part, the applicant or the Bank shall

prepare a written justification pertaining to such requirement that

provides substantial evidence acceptable to the Bank that the applicant

is in the financial condition required by Sec. 933.6(a)(4) of this

part, notwithstanding the lack of rating or variance.

(2) Insurance company applicants. In the case of an insurance

company applicant's variance from a capital requirement or standard of

Sec. 933.16 of this part, the applicant or the Bank shall prepare a

written justification pertaining to such requirement or standard that

provides substantial evidence acceptable to the Bank that the applicant

is in the financial condition required by Sec. 933.6(a)(4) of this

part, notwithstanding the variance.

(e) Presumptive noncompliance with character of management

requirement of Sec. 933.12--(1) Enforcement actions. If an applicant or

any of its directors or senior officers is subject to, or operating

under, any enforcement action instituted by its primary regulator or

appropriate state regulator, the applicant shall provide or the Bank

shall obtain:

(i) Regulator confirmation. Written or verbal confirmation from the

applicant's primary regulator or appropriate state regulator, whichever

is applicable, that the applicant or its directors or senior officers

are in substantial compliance with all aspects of the enforcement

action; or

(ii) Written analysis. A written analysis acceptable to the Bank

indicating that the applicant or its directors or senior officers are

in substantial compliance with all aspects of the enforcement action.

The written analysis shall state each action the applicant or its

directors or senior officers are required to take by the enforcement

action, the actions actually taken by the applicant or its directors or

senior officers, and whether the applicant regards this as substantial

compliance with all aspects of the enforcement action.

(2) Criminal, civil or administrative proceedings. If an applicant

or any of its directors or senior officers has been the subject of any

criminal, civil or administrative proceedings reflecting upon

creditworthiness, business judgment, or moral turpitude since the most

recent regulatory examination report, the applicant shall provide or

the Bank shall obtain:

(i) Regulator confirmation. Written or verbal confirmation from the

applicant's primary regulator or appropriate state regulator that the

proceedings will not likely result in enforcement action; or

(ii) Written analysis. A written analysis acceptable to the Bank

indicating that the proceedings will not likely result in enforcement

action. The written analysis shall state the severity of the charges,

and any mitigating action taken by the applicant or its directors or

senior officers.

(3) Criminal, civil or administrative monetary liabilities,

lawsuits or judgments. If there are any known potential criminal, civil

or administrative monetary liabilities, material pending lawsuits, or

unsatisfied judgments against the applicant or any of its directors or

senior officers since the most recent regulatory examination report,

that are significant to the applicant's operations, the applicant shall

provide or the Bank shall obtain:

(i) Regulator confirmation. Written or verbal confirmation from the

applicant's primary regulator or appropriate state regulator that the

liabilities, lawsuits or judgments will not likely cause the applicant

to fall below its applicable capital requirements set forth in

Secs. 933.11(b)(2) and 933.16 of this part; or

(ii) Written analysis. A written analysis acceptable to the Bank

indicating that the liabilities, lawsuits or judgments will not likely

cause the applicant to fall below its applicable capital requirements

set forth in Secs. 933.11(b)(2) and 933.16 of this part. The written

analysis shall state the likelihood of the applicant or its directors

or senior officers prevailing, and the financial consequences if the

applicant or its directors or senior officers do not prevail.

(f) Presumptive noncompliance with home financing policy

requirements of Secs. 933.13, 933.14(a)(4), and 933.14(b)(3). If an

applicant received a ``Substantial Non-Compliance'' rating on its most

recent formal, or if unavailable, informal or preliminary, Community

Reinvestment Act (CRA) performance evaluation, or a ``Needs to

Improve'' CRA rating on its most recent formal, or if unavailable,

informal or preliminary, CRA performance evaluation and a CRA rating of

``Needs to Improve'' or better on any immediately preceding CRA

performance evaluation, the applicant shall provide or the Bank shall

obtain:

(1) Regulator confirmation. Written or verbal confirmation from the

applicant's primary regulator of the applicant's recent satisfactory

CRA performance, including any corrective action that substantially

improved upon the deficiencies cited in the most recent CRA performance

evaluation(s); or

(2) Written analysis. A written analysis acceptable to the Bank

demonstrating that the CRA rating is unrelated to home financing, and

providing substantial evidence of how and why the applicant's home

financing credit policy and lending practices meet the credit needs of

its community.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

Sec. 933.18 Determination of appropriate Bank district for

membership.

(a) Eligibility. (1) An institution eligible to become a member of

a Bank under the Act and this part may become a member only of the Bank

of the district in which the institution's principal place of business

is located, except as provided in paragraph (a)(2) of this section.

(2) An institution eligible to become a member of a Bank under the

Act and this part may become a member of the Bank of a district

adjoining the district in which the institution's principal place of

business is located, if demanded by convenience and then only with the

approval of the Board.

(b) Principal place of business. Except as otherwise designated in

accordance with this section, the principal place of business of an

institution is the state in which the institution maintains its home

office established as such in conformity with the laws under which the

institution is organized.

(c) Designation of principal place of business. (1) A member or an

applicant for membership may request in writing to the Bank in the

district where the institution maintains its home office that a state

other than the state in which it maintains its home office be

designated as its principal place of business. Within 90 calendar days

of receipt of such written request, the board of directors of the Bank

in the district where the institution maintains its home office shall

designate a state other than the state where the

[[Page 42549]]

institution maintains its home office as the institution's principal

place of business, provided all of the following criteria are

satisfied:

(i) At least 80 percent of the institution's accounting books,

records and ledgers are maintained, located or held in such designated

state;

(ii) A majority of meetings of the institution's board of directors

and constituent committees are conducted in such designated state; and

(iii) A majority of the institution's five highest paid officers

have their place of employment located in such designated state.

(2) Written notice of a designation made pursuant to paragraph

(c)(1) of this section shall be sent to the Bank in the district

containing the designated state, the Board and the institution.

(3) The notice of designation made pursuant to paragraph (c)(1) of

this section shall include the state designated as the principal place

of business and the resulting Bank to which membership will be

transferred.

(4) If the board of directors of the Bank in the district where the

institution maintains its home office fails to make the designation

requested by the member or applicant pursuant to paragraph (c)(1) of

this section, then the member or applicant may request in writing that

the Board make the designation.

(d) Transfer of membership. (1) No transfer of membership from one

Bank to another Bank shall take effect until the Banks involved reach

agreement on a method of orderly transfer.

(2) In the event that the Banks involved fail to agree on a method

of orderly transfer, the Board shall determine the conditions under

which the transfer shall take place.

(e) Effect of transfer. A transfer of membership pursuant to this

section shall be effective for all purposes including directorial

representation under section 7(c) of the Act, 12 U.S.C. 1427(c), and

Sec. 932.11 of this chapter, but shall not be subject to the provisions

on termination of membership set forth in section 6 of the Act, 12

U.S.C. 1426, or Secs. 933.26, 933.27 and 933.29 of this part, including

the restriction on reacquiring Bank membership set forth in Sec. 933.30

of this part.

(The information collection requirements contained in this section

have been approved by the Office of Management and Budget under

control number 3069-0004.)

9. In the list below, for each newly designated section indicated

in the left column, remove the reference indicated in the middle column

from where it appears and add the reference indicated in the right

column:

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

Section Remove Add

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

933.20(b)(1)................ Secs. 933.2(c) or Sec. 933.3, Sec.

933.3, Sec. 933.4(a).

933.2(d).

933.20(b)(2)................ Sec. 933.2(d)...... Sec. 933.4(a).

933.22(b)(1)................ Sec. 933.7(a), Sec. Sec. 933.20(a),

933.18(d). Sec. 933.31(d).

933.23...................... Sec. 933.7(a)...... Sec. 933.20(a).

933.24(a)(2)................ Sec. 933.7(a)...... Sec. 933.20(a).

933.24(b)(2)................ Sec. 933.16........ Sec. 933.29.

933.25(c)................... Sec. 933.2......... Subpart B.

933.25(d)(2) (ii) (A) and Sec. 933.7(a)...... Sec. 933.20(a).

(B), and (iii).

933.25(d)(3)................ Sec. 933.16........ Sec. 933.29.

933.26(c)................... Sec. 933.16........ Sec. 933.29.

933.27(e)................... Sec. 933.16........ Sec. 933.29.

933.28(b)................... Sec. 933.16........ Sec. 933.29.

933.29(a)(1)................ Secs. 933.13, Secs. 933.26,

933.14 or 933.15, 933.27 or 933.28,

Sec. 933.15, Secs. Sec. 933.28, Secs.

933.11(b), or 933.24(b) or

933.12(d)(3). 933.25(d)(3).

933.30 introductory text.... Sec. 933.13........ Sec. 933.26.

933.30(a)................... Sec. 933.5......... Sec. 933.18.

933.30(b)................... Sec. 933.2(d)...... Sec. 933.4(a).

933.31(d)................... Sec. 933.9(b)(1)... Sec. 933.22(b)(1).

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Dated: August 2, 1996.

By the Board of Directors of the Federal Housing Finance Board.

--------

Bruce A. Morrison,

Chairman.

[FR Doc. 96-20487 Filed 8-15-96; 8:45 am]

BILLING CODE 6725-01-U