Amendment of Affordable Housing Program Regulation

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 960

[No. 96-72]

Amendment of Affordable Housing Program Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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

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

to amend its regulation governing the operation of the Affordable

Housing Program (AHP or Program). Among the significant changes made by

the proposed rule are: Transfer of approval authority for AHP

applications from the Finance Board to the Federal Home Loan Banks

(Banks); modification of the competitive scoring process under which

AHP subsidies are allocated among housing projects; establishment of

specific standards and retention periods for monitoring of AHP-assisted

housing projects; and clarification and expansion of the types of

remedies available in the event of noncompliance with AHP requirements.

The proposed rule is in furtherance of the Finance Board's

continuing effort to devolve management and governance authority to the

Banks. It also is consistent with the goals of the Regulatory

Reinvention Initiative of the National Performance Review.

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

before February 6, 1997.

ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to

the Board, Federal Housing Finance Board, 1777 F Street, N.W.,

Washington, D.C. 20006. Comments will be available for public

inspection at this address.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Deputy Director,

Housing and Community Development, (202) 408-2537, Richard Tucker,

Associate Director, Housing and Community Development, (202) 408-2848,

or Diane E. Dorius, Associate

[[Page 57800]]

Director, Housing and Community Development, (202) 408-2576, Office of

Policy; or Sharon B. Like, Senior Attorney-Advisor, (202) 408-2930, or

Brandon B. Straus, Attorney-Advisor, (202) 408-2589, Office of General

Counsel, Federal Housing Finance Board, 1777 F Street, N.W.,

Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

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

each Bank to establish a Program to subsidize the interest rate on

advances to members of the Federal Home Loan Bank System (Bank System)

engaged in lending for long-term, low and moderate-income, owner-

occupied and affordable rental housing at subsidized interest rates.

See 12 U.S.C. 1430(j)(1). The Finance Board is required to promulgate

regulations governing the Program. See id. The Finance Board's existing

regulation governing the operation of the Program is set forth in part

960 of the Finance Board's regulations. See 12 CFR part 960. The

Program has been operating successfully for approximately six years.

As a result of the Finance Board's and the Banks' experience in

administering the Program, on January 10, 1994, the Finance Board

issued a notice of proposed rulemaking that proposed changes to improve

operation of the Program. See 59 FR 1323 (Jan. 10, 1994). The Finance

Board received over 100 comment letters. During the following 18-month

period, the Finance Board was without a quorum and was unable to take

action on the proposed rule. On November 1, 1995, the Finance Board

published for comment a proposal to amend the existing AHP regulation

to authorize the Banks, in their discretion, to establish limits on the

maximum amount of AHP subsidy that may be requested per member, per

project application, or per project unit, for a given funding period.

See 60 FR 55487 (Nov. 1, 1995) (Subsidy Limits Proposal). The Finance

Board received 25 comment letters on the Subsidy Limits Proposal.

Given the passage of time since the 1994 notice of proposed

rulemaking, and the experience of the Finance Board and the Banks in

overseeing and administering the Program, the Finance Board is issuing

a new comprehensive proposal to revise the Program. The Finance Board

will consider all comments it receives before taking final action,

including comments received in response to the proposed rules published

in January 1994 and November 1995 and this notice of proposed

rulemaking. However, those who submitted comments in response to the

previous proposed rules may wish to update their earlier submissions.

As further discussed below in the Analysis of Proposed Rule

section, the proposed rule makes changes to a number of the existing

regulatory provisions governing the Program, including: (1) scoring and

approval of AHP applications for funding; (2) retention of AHP-assisted

housing; (3) monitoring of AHP-assisted housing; (4) and remedies for

noncompliance with AHP requirements. These changes are intended to

provide clearer standards for operation of the Program and reduce

regulatory burden, while continuing to identify and prevent misuse of

AHP subsidies. Many of the changes codify successful practices

developed by the Banks in implementing the Program.

The proposed amendments also should make the Program more

responsive to low- and moderate-income housing needs in each of the

twelve Bank Districts (Districts), increase efficiency in the

administration of the Program, and enhance coordination of the Program

with other housing programs whose funds are used in conjunction with

AHP subsidies. The proposed rule also reorganizes and streamlines the

text of the regulation.

The Finance Board is proposing these changes in the larger context

of its proposal to decentralize the authority to make final funding

decisions for AHP projects. While section 10(j) of the Act requires

each Bank to establish a Program, and vests in the Finance Board broad

authority to supervise the Banks' AHP activities through regulations

implementing the Act, section 10(j) does not specifically assign the

responsibility for operating the Program to the Finance Board. See 12

U.S.C. 1430(j). Under the existing regulation, each Bank is largely

responsible for the administration of its Program, including the

evaluation and processing of applications for AHP funding. See 12 CFR

960.5 (a) through (e). However, final funding decisions for AHP

projects currently are made by the Finance Board. See id.

Sec. 960.5(f)(3). The proposed rule makes a fundamental change to the

Program by vesting the Banks, instead of the Finance Board, with the

authority to make final funding decisions for AHP projects, subject to

regulatory limitations. See proposed Sec. 960.8(b). Decentralization of

funding decisions under the Program is consistent with the Finance

Board's ongoing efforts to transfer to the Banks those functions

performed by the Finance Board that are related to Bank management and

governance. Further, the Finance Board believes that, in light of the

Banks' six years of experience evaluating and processing AHP

applications, the Banks are fully prepared to take on this new

authority. The Finance Board will continue to exercise its supervisory

oversight role through examinations of each Bank's Program.

II. Analysis of Proposed Rule

A. Definitions--Sec. 960.1

Changes to individual definitions in Sec. 960.1 of the existing AHP

regulation, see 12 CFR 960.1, are discussed below in the context of

specific regulatory requirements, with the exception of the definitions

of ``direct subsidy,'' ``subsidized advance,'' ``subsidy,'' and ``cost

of funds,'' which are discussed here.

1. Definition and Calculation of AHP Subsidy

a. In general. Under the Program, the Banks provide subsidies to

finance AHP-eligible housing through: (1) advances with reduced

interest rates, known as ``subsidized advances;'' and (2) direct cash

grants, known as ``direct subsidies.'' See id. Sec. 960.3. Under the

existing regulation, the terms ``subsidized advance'' and ``direct

subsidy'' are not defined. However, the existing regulation defines the

term ``subsidy'' as ``direct cash payments under the Program or the net

present-value of the foregone interest revenues to the Bank from making

funds available under the Program at rates below the cost of funds.''

See id. Sec. 960.1(n).

The existing rule defines ``cost of funds'' as ``the estimated cost

of issuing Bank System consolidated obligations with maturities

comparable to those of the subsidized advances, as published from time

to time by the Federal Home Loan Bank System's Office of Finance.'' See

id. Sec. 960.1(f).

Based on the Finance Board's and the Banks' experience over the

past six years in calculating subsidies in the context of the various

kinds of financing structures used by members and AHP projects, the

Finance Board is proposing to add definitions of ``subsidized advance''

and ``direct subsidy'' and to amend the definitions of ``subsidy'' and

``cost of funds'' to provide clearer guidance to the Banks in

calculating the amount of AHP subsidy necessary for a proposed project.

These changes also are intended to ensure that the AHP subsidy is

passed through from the Bank to the ultimate borrower. See 12 U.S.C.

1430(j)(9)(E).

b. ``Direct subsidy''. The proposed rule defines ``direct subsidy''

as ``an AHP subsidy in the form of a direct cash

[[Page 57801]]

payment.'' See proposed Sec. 960.1. Direct subsidies may be used either

as cash grants to projects or to write down the interest rate on a loan

to the project. The new definition of ``subsidy'' includes language

that clarifies how direct subsidies are to be calculated when they are

used to write down the interest rate on a loan to a project. See id.

Specifically, if a direct subsidy is used to write down the interest

rate on a loan extended by a member, sponsor, or other party to a

project, the direct subsidy must equal the net present value of the

interest foregone from making the loan below the lender's market

interest rate (calculated as of the date the AHP application is

submitted to the Bank, and subject to adjustment under

Sec. 960.9(c)(1)). See id.

c. ``Subsidized advance''. The proposed rule defines ``subsidized

advance'' as ``an advance to a member at an interest rate reduced below

the Bank's cost of funds, by use of a subsidy.'' See id.

The proposed rule defines ``subsidy,'' for purposes of determining

the amount of the interest rate subsidy incorporated in a subsidized

advance, as ``the net present value of the interest revenue foregone

from making a subsidized advance at a rate below the Bank's cost of

funds, determined as of the date of disbursement of the subsidized

advance or the date prior to disbursement on which the Bank first

manages the funding to support the subsidized advance through its

asset/liability management system, or otherwise. See id.

d. ``Cost of funds''. The proposed rule defines ``cost of funds''

as ``for purposes of a subsidized advance, the estimated cost of

issuing Bank System consolidated obligations with maturities comparable

to that of the subsidized advance.'' See id. The Finance Board

specifically requests comments on whether the interest rate subsidy

incorporated in a subsidized advance should be defined by reference to

a Bank's market advance rate, rather than the Bank's cost of funds.

This would allow a Bank to use AHP subsidies to pay its regular advance

mark-up where AHP subsidy is delivered to a project through a

subsidized advance. Arguably, this eliminates a perceived disincentive

to the Banks to make subsidized advances, versus direct subsidies.

However, an argument can be made that the form in which AHP subsidies

are delivered to projects, i.e., subsidized advances versus direct

subsidies, is determined by the financing structures used by proposed

projects, not by the preferences of Banks in funding such projects.

Consequently, it is argued that allowing Banks to use AHP subsidies to

pay their regular advance mark-up would not affect the level of

subsidized advances made by Banks and would use more AHP subsidies to

produce the same amount of affordable housing.

B. Operation of Program and AHP Implementation Plans--Sec. 960.2

1. Program Operation

Proposed Sec. 960.2(b) provides that each Bank's Program shall be

governed solely by the requirements set forth in 12 U.S.C. 1430(j) and

part 960, and a Bank shall not adopt any additional substantive AHP

requirements, except as expressly provided in part 960. This is

intended to make clear that the Finance Board intends its AHP

regulation to ``occupy the field'' with regard to substantive

requirements governing the Program. A Bank is prohibited from adopting

additional substantive rules or policies governing its Program, unless

expressly authorized to do so by a provision of the AHP regulation.

2. AHP Implementation Plans

The existing regulation requires each Bank's board of directors to

adopt an AHP implementation plan annually, a copy of which must be

submitted to the Finance Board annually. See 12 CFR 960.2(b). Proposed

Sec. 960.2(c) requires adoption of the plan by December 1 of each year,

and prohibits the board of directors from delegating responsibility for

adoption of the plan to Bank officers or other Bank employees.

A Bank's implementation plan must set forth: (1) the Bank's project

cost guidelines, adopted pursuant to proposed Sec. 960.3(b); (2) the

Bank's schedule for AHP funding periods, adopted pursuant to proposed

Sec. 960.6(a); (3) any District threshold requirements, adopted

pursuant to proposed Sec. 960.7(b); (4) the Bank's AHP scoring

guidelines, adopted pursuant to proposed Sec. 960.8(a); (5) the Bank's

procedures for verifying a project's use of AHP subsidies within a

reasonable period of time pursuant to proposed Sec. 960.9(a); (6) the

Bank's procedures for verifying compliance upon disbursement of AHP

subsidies pursuant to Sec. 960.9(b); (7) the requirements for any

homeownership assistance program adopted pursuant to proposed

Sec. 960.12; and (8) the Bank's policies and procedures for carrying

out the Bank's monitoring obligations under proposed Sec. 960.13.

A Bank must give its Advisory Council a reasonable period of time

to review the Bank's plan and any subsequent amendments and provide its

recommendations to the Bank's board of directors prior to adoption.

This provision is intended to expand the Advisory Councils' role in

advising the Banks on how AHP subsidies should be allocated to meet the

low- and moderate-income housing and community development programs and

needs in their Districts. A Bank's plan, and any amendments, must be

made available to members of the public, upon request.

Proposed Sec. 960.2(d) carries forward the requirement in

Sec. 960.6(a) of the existing regulation that each Bank shall provide

reports and documentation concerning the Program as the Finance Board

may request from time to time. See id. Sec. 960.6(a). A Bank must

provide promptly to the Finance Board and the Advisory Council a copy

of the AHP implementation plan and any amendments.

C. Eligible Costs--Sec. 960.3

1. General

The proposed rule revises Sec. 960.3 of the existing regulation by

clarifying the kinds of activities and costs that are eligible to be

financed with AHP subsidies. See id. Sec. 960.3. The Act requires each

Bank to establish a Program ``to subsidize the interest rate on

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

moderate-income, owner-occupied and affordable rental housing * * *.''

See 12 U.S.C. 1430(j)(1). The Act further provides that AHP subsidized

advances are to be used to: (1) finance homeownership by families with

incomes at or below 80 percent of the median income for the area (i.e.,

low- or moderate-income households); or (2) finance the purchase,

construction, or rehabilitation of rental housing, at least 20 percent

of the units of which will be occupied by and affordable for very low-

income households for the remaining useful life of such housing or the

mortgage term. See id. Sec. 1430(j)(2).

Proposed Sec. 960.3(a) implements this statutory requirement. It

provides that AHP subsidies may be used to finance: (1) the purchase,

construction, or rehabilitation of owner-occupied housing by or for

very low- or low- or moderate-income households; and (2) the purchase,

construction, or rehabilitation of rental projects where at least 20

percent of the units in the project are occupied by and affordable for

very low-income households. The Finance Board wishes to make clear that

those units in excess of 20 percent are not required to be, but may be

committed to be, occupied by and

[[Page 57802]]

affordable for very low- or low- or moderate-income households.

2. Definitions of ``Low- and Moderate-Income Household'' and ``Very

Low-Income Household''

Section 10(j)(13)(A) of the Act defines the term ``low- or

moderate-income household'' as a household that has an income of 80

percent or less of the area median. See id. Sec. 1430(j)(13)(A).

Section 10(j)(13)(B) of the Act defines the term ``very low-income

household'' as a household that has an income of 50 percent or less of

the area median. See id. Sec. 1430(j)(13)(B).

The Finance Board's existing regulation defines ``low- and

moderate-income households'' as households for which the aggregate

income is 80 percent or less of the area median income, and ``very low-

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

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

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

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

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

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

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

Sec. 960.1(c).

Under section 3 of the United States Housing Act of 1937, the

Secretary of HUD annually publishes median income limits for 2,700

metropolitan statistical areas (MSAs), counties, and nonmetropolitan

statistical areas, and makes adjustments to these limits for various

local conditions as well as for household size. See 42 U.S.C.

1437a(b)(2). In some areas, the Secretary adjusts the income limit

downward to take into account prevailing construction costs, low

housing costs, or unusually high household incomes.

To date, the Finance Board has interpreted Sec. 960.1 (c) and (h)

of the existing regulation to require the use of the income limits

published by HUD, including HUD's adjustments for household size, in

determining household eligibility under the Program. On November 5,

1993, the Finance Board published for comment a proposal to amend the

definitions of the terms described above in order to redefine the AHP

income limits without certain adjustments incorporated in the HUD

income limits. See 58 FR 58988 (Nov. 5, 1993). This proposal also was

part of the Finance Board's January 10, 1994 proposal. See 59 FR 1323

(Jan. 10, 1994).

Proposed Sec. 960.1 continues to require the use of HUD income

limits, including adjustments for household size, in determining

household eligibility under the Program. One reason for this approach

is that arguably, in more affluent areas, limited AHP resources should

go to those households that have greater need for housing assistance

relative to households at the higher end of the median income scale.

Failure to use HUD downward adjustments may create a preference for

relatively affluent areas over other areas within a state.

On the other hand, the HUD adjustment may result in an

inappropriate exclusion of certain relatively higher income households

from affordable housing in a particular local market on the basis that

housing costs are lower or household incomes are higher in that market

than in other regions of the United States. Although using HUD's income

limits, including the downward adjustment, decreases the number of

households in an area that are eligible to receive assistance under the

Program, such areas may continue to have many households with incomes

below HUD's adjusted income limits who are ready and able to qualify

for AHP-assisted housing.

By adopting the HUD program standards, including regional caps and

variations for family size, the Finance Board has made it obligatory to

use the HUD schedule for all AHP projects, even where no HUD money is

involved. There are other legitimate federal, state, and local

government sources for area median income data which may be valid and

more accurate measures of local economic conditions than the HUD

schedule, which reflects internal adjustments to the data furnished by

the U.S. Department of Commerce.

There has been concern that the current regulation has precluded

AHP participation in any state or local, public or private program that

does not conform to the HUD schedule or formula for adjusting for

family size. In some cases, a member may not be able to generate an AHP

project in an area where it offers banking services, simply because the

member's market area is a higher-cost area that is not compatible with

HUD's program limits.

The alternatives discussed below would not change the income

eligibility standards of 80 percent and 50 percent of area median

income, but would provide greater flexibility in determining the basis

on which these percentages are calculated.

In light of the Finance Board's statutory mandate to ensure that

the AHP regulation coordinates the Program with other federal and

federally-subsidized affordable housing activities to the maximum

extent possible, see 12 U.S.C. 1430(j)(9)(G), a more flexible

definition would allow the Program to continue to conform with HUD

programs while improving its compatibility with other housing programs,

such as state mortgage revenue bond programs, that use different income

statistics or different household size adjustments.

The alternatives would allow: (1) median income to be established

using any reliable source for current area information and be

determined for counties and other applicable state and local

subdivisions as well as MSAs; (2) any adjustment for family size to be

made in conformance with the requirements of the lead or controlling

funding source or program; and (3) the use of whatever median income

standard and adjustment is being used by the sponsoring or funding

entity for the project, provided that the standard is from a legitimate

state or federal source that regularly provides such information on

income. The Finance Board specifically requests comments on these

alternatives.

3. Definition of ``Affordable''

The proposed rule eliminates the existing definition of

``affordable for very low-income households,'' see 12 CFR 960.1(b), and

replaces it with a definition of ``affordable,'' which is defined to

mean that the monthly housing costs charged to a household for an AHP-

assisted rental unit cannot exceed 30 percent of the income of a

household of the maximum income and size expected, under the commitment

made in the approved AHP application, to occupy the unit (assuming

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

separate bedroom). See proposed Sec. 960.1. Under the revised

definition, the affordability concept can now be applied not only to

very low-income households, but also to low- or moderate-income

households. In addition, the revisions clarify that the rent for those

units designated for occupancy by households with a specific income

level cannot exceed 30 percent of the income of a household of the

maximum income and size expected, under the commitment made in the

approved AHP application, to occupy the unit (assuming occupancy of 1.5

persons per bedroom or 1.0 person per unit without a separate bedroom).

See id. For example, if a unit is designated for occupancy by a four-

person household with a maximum income equal to 40 percent of the

median income for the area and the household occupying the unit is a

three-person household whose income is 35 percent of the median income

for the

[[Page 57803]]

area, the rent should be equal to 30 percent of 40 percent of the

median income for the area for a four-person household. This is

necessary because project rent projections, which determine, in part,

the amount of subsidy needed by a project, are based on the assumption

that rents will be set based on the maximum income and size of

households expected to occupy designated very low-income units. The

proposed definition of ``affordable'' also incorporates the new

proposed definition of ``monthly housing costs.'' See id.

4. Eligible Costs

Proposed Sec. 960.3(b) clarifies the language in the existing

regulation describing the costs that are eligible to be paid with AHP

subsidies. See 12 CFR 960.3(c). Proposed Sec. 960.3(b) provides that

AHP subsidies may be used to pay only for the customary and standard

costs typically incurred, at fair market prices, to purchase,

construct, or rehabilitate AHP-eligible housing. In addition, the Banks

are required to evaluate the reasonableness of project costs, based

upon project cost guidelines adopted by the Bank. Section 10(j)(9)(F)

of the Act requires the Finance Board to establish maximum subsidy

limitations under the Program, and section 10(j)(9)(D) of the Act

requires the Finance Board to ensure that a preponderance of assistance

provided under the Program is ultimately received by low- and moderate-

income households. See 12 U.S.C. 1430(j)(9)(D), (F). Requiring that

project costs be reasonable is one way of keeping projects from being

over-subsidized, ensuring that a preponderance of the funds are

received by the targeted households, through the lowering of their

housing costs and avoiding any undue benefit to the intermediaries in

the development process. The proposal that Banks undertake a project

cost review of each application merely codifies the existing practice

of many of the Banks.

5. Ineligible Costs

Proposed Sec. 960.3(c) sets forth the following costs that may not

be paid using AHP subsidies.

a. Pre-development expenses. Proposed Sec. 960.1 defines ``pre-

development expenses'' as ``expenses for the purpose of determining the

feasibility of a proposed project.'' Examples of such expenses include

architectural, legal, and engineering fees and survey costs incurred to

determine the feasibility of a proposed project. The Finance Board

believes that, based on its experience with the Program, there is a

great likelihood that expenses incurred during the pre-feasibility

period, rather than the post-feasibility period, of a project will not

result in the actual purchase, construction, or rehabilitation of

housing. Further, since the inception of the Program, demand for AHP

subsidies for projects in the post-feasibility stage has significantly

exceeded available funds. Thus, if AHP subsidies were to be approved

for use during the pre-feasibility period, potentially significant

amounts of subsidies that currently go toward completing projects might

instead be paying for activities that never result in the financing or

production of housing. Proposed Sec. 960.3(c)(1), therefore, prohibits

the use of AHP subsidies for pre-development expenses not yet incurred

by a proposed project as of the date the AHP application is submitted

to the Bank. Nonetheless, projects in the post-feasibility stage may

apply for AHP subsidies to reimburse the pre-development expenses they

incurred during the pre-feasibility period.

b. Prepayment and cancellation fees. Proposed Sec. 960.3(c) (2) and

(3) prohibit the use of AHP subsidies for prepayment and cancellation

fees and penalties imposed by a Bank on a member for a subsidized

advance or advance commitment that is prepaid or canceled,

respectively. The Finance Board believes that funding such fees is an

unproductive use of AHP subsidies and does not meet the statutory

requirement that AHP subsidies be used to finance housing. See 12

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

c. Counseling costs. Counseling can play an important role in the

development and success of affordable housing projects. The Finance

Board specifically requests comments on whether AHP subsidies should be

permitted to pay for counseling costs, generally, and whether they

should be used to pay only for counseling for homebuyers, homeowners,

or tenants of AHP-assisted units. The Finance Board believes that if

AHP subsidies are to be used for counseling, they should be used to

expand the pool of resources available for counseling, rather than

replace existing sources of funding. The Finance Board wishes to

prevent AHP subsidies from being used to pay for counseling that, in

the absence of the AHP subsidy, would customarily be financed by

another source of funding for a project. Therefore, proposed

Sec. 960.3(c)(4) prohibits the use of AHP subsidies for costs incurred

in connection with counseling of homebuyers, homeowners, or tenants

except for costs of homebuyer counseling where: (1) the counseling is

provided to a household that actually purchases an AHP-assisted unit;

and (2) the cost of the counseling has not been covered by another

funding source, including the member.

d. Direct subsidy processing fees. Members do not conduct the same

level of underwriting and processing when providing direct subsidies to

projects as they do when making loans to projects. Therefore, proposed

Sec. 960.3(c)(5) prohibits the use of AHP subsidies for processing fees

charged by members for providing direct subsidies to AHP-assisted

projects. This would not preclude a member from using AHP subsidies to

pay for an origination fee in cases where the member receives both a

subsidized advance and a direct subsidy, or only a direct subsidy, from

a Bank, and in turn makes both a loan and a grant to the project,

provided the AHP subsidies are used to pay only for the loan

origination fee and not for any fee associated with providing the

direct subsidy.

6. Refinancing

Proposed Sec. 960.3(d) provides that AHP subsidies may be used to

refinance an existing single-family or multifamily mortgage loan,

provided the equity proceeds of the refinancing are used only for the

purchase, construction, or rehabilitation of AHP-eligible housing. This

provision is intended to prevent the owner of an existing housing

project from using AHP subsidies to liquidate the owner's equity stake

in the project, for the sole benefit of the owner. Such use of AHP

subsidies would be contrary to the Act, because there would be no

resulting purchase, construction, or rehabilitation of AHP-eligible

housing. See 12 U.S.C. 1430(j)(2).

D. Retention of AHP-Assisted Housing--Sec. 960.4

Under the existing regulation, there is no specified minimum

retention period for AHP-assisted owner-occupied or rental housing.

Projects that commit to longer retention periods receive more points in

the scoring process. See 12 CFR 960.5(d)(2). Further, the existing

regulation does not provide specific requirements governing the kinds

of retention mechanisms that are to be used to ensure that AHP-assisted

housing continues to meet AHP statutory and regulatory requirements and

the obligations committed to in applications for AHP subsidies. The

proposed rule establishes minimum threshold retention periods for AHP-

assisted housing and clarifies the kinds of retention mechanisms that

must be used for such housing.

[[Page 57804]]

a. Owner-occupied units. The Finance Board believes that the

purpose of the language in the Act directing AHP subsidies to be used

to ``finance homeownership by families with incomes at or below 80

percent of the median income for the area,'' is to assist low- and

moderate-income households in achieving homeownership, and then

permitting the households to have rights in a home to the same extent

as other homeowners, including the benefit of appreciation of the value

of the home. See 12 U.S.C. 1430(j)(2)(A). Unlike the statutory

provision governing AHP-assisted rental housing, see id.

Sec. 1430(j)(2)(B), the provision governing AHP-assisted owner-occupied

housing does not mandate continued affordability for subsequent

purchasers of owner-occupied units, nor does it impose restrictions on

the resale price of such units. Therefore, the retention provisions of

the proposed rule do not impose such requirements on owner-occupied

units. However, to minimize opportunities for speculation, proposed

Sec. 960.4(a) requires each AHP-assisted owner-occupied unit to be

subject to a deed restriction, ``soft'' second mortgage, or other

legally enforceable mechanism facilitating recovery of a portion of the

AHP subsidy if, prior to the end of the retention period, the owner

sells the unit to a household that is not a low- or moderate-income

household or refinances the unit and fails to ensure that it continues

to be subject to a retention mechanism for the remainder of the

retention period. In the latter case, the homeowner is required to

repay the full amount of the direct subsidy.

Proposed Sec. 960.1 defines ``retention period'' as the period

during which the sponsor or owner of an AHP-assisted project commits to

comply with the requirements of 12 U.S.C. 1430(j), the AHP regulation,

and the terms of the approved AHP application. Proposed Sec. 960.1

provides that the minimum retention period for an owner-occupied unit

is 5 years, and for a rental unit is 15 years from the date of project

completion. Under proposed Sec. 960.8(a)(2)(v)(E), a Bank may establish

a scoring priority for applications for projects with retention periods

in excess of the required minimums.

Proposed Sec. 960.4(a)(1) provides specifically that an owner-

occupied unit financed by a direct subsidy under the Program must be

subject to a deed restriction, ``soft'' second mortgage, or other

legally enforceable mechanism requiring that the Bank or its designee

is to be given notice of any sale or refinancing of the unit occurring

prior to the end of the retention period. In the case of a sale prior

to the end of the retention period, a pro rata share of the direct

subsidy, reduced for every year the seller owned the unit, must be

repaid to the Bank from any net gain realized upon the sale of the unit

after deduction for sales expenses, unless the purchaser is a low- or

moderate-income household. In the case of a refinancing prior to the

end of the retention period, the full amount of the direct subsidy must

be repaid to the Bank from any net gain realized upon the refinancing

of the unit, unless the unit continues to be subject to a retention

mechanism for the remainder of the retention period. This is intended

to ensure that the owner of an AHP-assisted unit does not circumvent

the retention requirement by refinancing the unit.

Proposed Sec. 960.4(a)(2) provides specifically that an owner-

occupied unit financed by a loan from the proceeds of a subsidized

advance under the Program must be subject to a deed restriction or

other legally enforceable mechanism requiring that the Bank or its

designee is to be given notice of any sale or refinancing of the unit

occurring prior to the end of the retention period. In the case of a

refinancing prior to the end of the retention period, the full amount

of the interest rate subsidy received by the owner, based on the pro

rata portion of the interest rate subsidy imputed to the subsidized

advance during the period the owner occupied the unit prior to

refinancing, must be repaid to the Bank from any net gain realized upon

the refinancing, unless the unit continues to be subject to a retention

mechanism for the remainder of the retention period.

Where a member uses the proceeds of a subsidized advance to make

loans financing owner-occupied units, the Bank must require the member

to agree in writing that if such loans are prepaid by the borrower, the

member may, at its option, either: (1) repay to the Bank that portion

of the subsidized advance used to make the loan to the borrower, and be

subject to a fee imposed by the Bank sufficient to compensate the Bank

for any loss the Bank experiences in reinvesting the repaid amount at a

rate of return below the cost of funds originally used by the Bank to

calculate the interest rate subsidy incorporated in the subsidized

advance; or (2) continue to maintain the subsidized advance

outstanding, subject to the Bank resetting the interest rate on that

portion of the subsidized advance used to make the loan to the borrower

to a rate equal to the cost of funds originally used by the Bank to

calculate the interest rate subsidy incorporated in the subsidized

advance.

The Finance Board specifically requests comments on whether

repayment of AHP subsidy should be triggered in all cases of

refinancing by the owner prior to the end of the retention period, not

just in cases where the owner fails to ensure that the unit continues

to be subject to a retention mechanism after the refinancing.

Refinancing may allow the owner of an AHP-assisted unit, in effect, to

take the subsidy out of the unit prior to the end of the 5-year

retention period, which, arguably, is a windfall to the owner. However,

homeowners, generally, can take advantage of lower interest rates by

refinancing their homes, and households that purchase AHP-assisted

homes should not be denied this opportunity. As long as the owner of an

AHP-assisted home ensures that after the refinancing, the home

continues to be subject to the AHP retention requirement, the goal of

the Program is met.

b. Rental projects. The Act provides that AHP-assisted rental

housing must be occupied by and affordable for very low-income

households ``for the remaining useful life of such housing or the

mortgage term.'' See id. Sec. 1430(j)(2). The Finance Board believes

that the statutory requirement that AHP-assisted rental housing be

affordable for the ``mortgage term'' should not be interpreted to refer

to the term of the mortgage loan actually financing a particular

housing project, because this would encourage owners to obtain the

shortest term financing available in order to limit the time that units

must remain affordable. The Finance Board believes that 15 years

reflects a reasonable period of time for the imposition of

affordability requirements on AHP-financed rental units and is within a

reasonable range of the average mortgage terms for affordable rental

housing. Project sponsors continue to have the option of maintaining

the affordability of units in the project for the remaining useful life

of the housing, see id. Sec. 1430(j)(2), but the regulatory minimum

under the proposed rule is 15 years.

Proposed Sec. 960.4(b)(1) provides that a rental project financed

with a direct subsidy must be subject to a deed restriction or other

legally enforceable mechanism requiring that the project's rental

units, or applicable portion thereof, must remain occupied by and

affordable for households with incomes at or below the levels committed

to be served in the AHP application for the duration of the retention

period, and the Bank or its designee is to be given notice of any sale

or refinancing of the project occurring prior to the end of the

[[Page 57805]]

retention period. In the case of a sale prior to the end of the

retention period, an amount equal to the entire amount of any direct

subsidy received must be repaid to the Bank, unless the subsequent

owner agrees in writing to comply with the income-eligibility and

affordability restrictions committed to in the AHP application. In the

case of a refinancing prior to the end of the retention period, an

amount equal to the entire amount of any direct subsidy received must

be repaid to the Bank, unless the project continues to be subject to a

deed restriction or other legally enforceable mechanism requiring the

project's rental units, or applicable portion thereof, to remain

occupied by and affordable for households with incomes at or below the

levels committed to be served in the AHP application for the duration

of the retention period.

Proposed Sec. 960.4(b)(2) provides that a rental project financed

with a subsidized advance must be subject to a deed restriction or

other legally enforceable mechanism requiring that the project's rental

units, or applicable portion thereof, must remain occupied by and

affordable for households with incomes at or below the levels committed

to be served in the AHP application for the duration of the retention

period, and the Bank or its designee is to be given notice of any sale

or refinancing of the project occurring prior to the end of the

retention period. In the case of a sale prior to the end of the

retention period, the full amount of the interest rate subsidy received

by the seller, based on the pro rata portion of the interest rate

subsidy imputed to the subsidized advance during the period the seller

owned the project prior to the sale, must be repaid to the Bank, unless

the subsequent owner agrees in writing to comply with the income-

eligibility and affordability restrictions committed to in the AHP

application. In the case of a refinancing prior to the end of the

retention period, the full amount of the interest rate subsidy received

by the owner, based on the pro rata portion of the interest rate

subsidy imputed to the subsidized advance during the period the owner

owned the project prior to refinancing, must be repaid to the Bank,

unless the project continues to be subject to a deed restriction or

other legally enforceable mechanism requiring the project's rental

units, or applicable portion thereof, to remain occupied by and

affordable for households with incomes at or below the levels committed

to be served in the AHP application for the duration of the retention

period.

Where a member uses the proceeds of a subsidized advance to make

loans financing a rental project, the Bank must require the member to

agree in writing that if such loans are prepaid by the borrower, the

member may, at its option, either: (1) repay to the Bank that portion

of the subsidized advance used to make the loan to the borrower, and be

subject to a fee imposed by the Bank sufficient to compensate the Bank

for any loss the Bank experiences in reinvesting the repaid amount at a

rate of return below the cost of funds originally used by the Bank to

calculate the interest rate subsidy incorporated in the subsidized

advance; or (2) continue to maintain the subsidized advance

outstanding, subject to the Bank resetting the interest rate on that

portion of the subsidized advance used to make the loan to the borrower

to a rate equal to the cost of funds originally used by the Bank to

calculate the interest rate subsidy incorporated in the subsidized

advance.

The Finance Board specifically requests comments on whether an

owner of an AHP-assisted rental project should be required to repay the

entire amount of the AHP subsidy, versus a pro rata share, where the

project is sold prior to the end of the retention period and the

subsequent owner fails to agree in writing to comply with the income-

eligibility and affordability restrictions committed to in the AHP

application. This requirement arguably serves to discourage the

conversion of AHP-assisted rental projects into projects that charge

market rents, prior to the end of the retention period.

E. Timing of Household Income Qualification--Sec. 960.5

Proposed Sec. 960.5 adds new provisions intended to clarify the

time at which a household's income should be examined to determine

whether it meets the income eligibility requirements for AHP-assisted

housing.

1. Owner-Occupied Projects

Proposed Sec. 960.5(a) provides that in order to qualify as a very

low- or a low- or moderate-income household for purposes of an AHP-

assisted owner-occupied project, a household must have an income at or

below the level committed to in the AHP application at the time the

household is qualified by the sponsor for participation in the project,

but no earlier than the date on which the AHP application was submitted

to the Bank for approval.

2. Rental Projects

Proposed Sec. 960.5(b) provides that in order to qualify as a very

low- or a low- or moderate-income household for purposes of an AHP-

assisted rental project, a household must have an income at or below

the level committed to in the AHP application for a particular unit

upon initial occupancy only. The household may continue to occupy such

designated unit even if its income subsequently increases above the

income-eligibility requirement for that unit. The unit may continue to

count toward meeting the targeted income-eligibility requirement,

provided the rent charged remains affordable, as defined in proposed

Sec. 960.1, for the targeted household.

F. Funding Periods--Sec. 960.6

1. Definition of Member

Proposed Sec. 960.1 revises the definition of ``member'' in the

existing AHP regulation, see 12 CFR 960.1(i), to conform the definition

to that used in the Finance Board's regulation on membership. See id.

Sec. 933.1(s).

2. District-Wide Competitions

Proposed Sec. 960.6(a) continues the existing requirement that each

Bank: (1) administer a District-wide competition for its AHP subsidies;

(2) announce the application due dates by December 1 of the preceding

year; and (3) offer comparable amounts of AHP subsidies in each funding

period. See id. Sec. 960.4(a). Proposed Sec. 960.6(a) revises the

existing regulation by permitting the Banks to accept applications from

members for AHP funding during a specified number of funding periods

each year, as determined by the Bank, instead of only twice a year as

required under the existing regulation. See id. The Finance Board

specifically requests comments on whether the Banks should be permitted

to accept AHP applications on a rolling basis, and, if so, how

applications would be scored under such a process.

3. Funding Availability; Notification to Members

Proposed Sec. 960.6(b) requires each Bank to notify its members and

other interested parties of: (1) the approximate amount of annual AHP

subsidies available for the Bank's District; and (2) the approximate

amount of AHP subsidies to be offered in each funding period. See id.

Sec. 960.4(b).

Proposed Sec. 960.6(b) also adds three new Bank notification

requirements. Each Bank must notify its members and other interested

parties of: (1) the applicability of any District threshold

requirements established pursuant to proposed Sec. 960.7(b); (2) the

scoring guidelines contained in the Bank's AHP

[[Page 57806]]

implementation plan; and (3) the application due dates. The term

``interested parties'' in proposed Sec. 960.6(b) is meant to refer to

those parties that have expressed an interest to the Bank in receiving

information about AHP funding periods.

G. Application Requirements--Sec. 960.7

Proposed Sec. 960.7(a) consolidates, streamlines, and revises the

AHP application requirements in Secs. 960.4(c) and 960.5(a)(1) and (2)

of the existing regulation. See 12 CFR 960.4(c), 960.5(a)(1), (2).

1. Mandatory Requirements

Under proposed Secs. 960.7(a)(1) through (3), each Bank must

require members to include in their AHP applications: (1) a concise

description of the proposed project; (2) the estimated amount of AHP

subsidy required for the proposed project; and (3) a disclosure of the

member's direct or indirect interest, if any, in the property or

proposed project. These requirements generally reiterate application

requirements in the existing regulation. See id. Sec. 960.4(c) (1),

(5), (6). However, proposed Sec. 960.7(a)(2) adds a new requirement

that in the case of an application for a subsidized advance, the member

shall include in its application the interest rate on the member's loan

to the proposed project, and, for purposes of scoring the application,

the Bank shall estimate the subsidy required for the proposed project

based on the Bank's cost of funds as of the date on which all AHP

applications are due for the funding period in which the application is

submitted. This is intended to address the fact that the actual amount

of AHP subsidy that will be incorporated in the subsidized advance for

which the member is applying will not be determined until after the

member submits its application to the Bank. Therefore, in order to

treat all members applying for subsidized advances in a given funding

period on an equal basis, the proposed rule requires that the estimate

of the subsidy in a subsidized advance be based on the Bank's cost of

funds as of the date on which all AHP applications are due for the

funding period in which the application is submitted.

Proposed Sec. 960.7(a)(4) requires that AHP applications include an

explanation of how the proposed project will comply with the eligible

costs provision of proposed Sec. 960.3(b). In order to meet this

requirement, applications should include an explanation of how the AHP

subsidy will be used. The proposed requirement is consistent with the

existing application requirements for eligible uses of AHP subsidies.

See id. Secs. 960.4(c)(1), 960.5(a)(1).

Proposed Sec. 960.7(a)(5) requires that AHP applications include an

explanation of how the proposed project will comply with the retention

requirements of proposed Sec. 960.4. In order to meet this requirement,

applications should include an explanation of what legal agreements,

deed restrictions, or other legally enforceable mechanisms are or will

be in place to ensure retention of the project in accordance with the

requirements of proposed Sec. 960.4. This is consistent with the

requirement in the existing regulation that the Bank consider the

extent to which the project facilitates the maximum retention of such

housing as evidenced through the existence of long-term guarantees,

covenants, and similar techniques. See id. Sec. 960.5(d)(2).

Proposed Sec. 960.7(a)(6) requires that AHP applications include an

explanation of how the proposed project is financially viable and

likely to be completed within a reasonable period of time, and why the

requested AHP subsidy is needed. In evaluating the application for

compliance with this requirement, a Bank must analyze all project

sources and uses of funds (including the value of any donated land,

materials, and professional labor), multi-year operating pro formas for

rental projects, sale prices for owner-occupied units, and local market

conditions and review the reasonableness of information relating to

available sources and uses of funding and financing capacity, such as

operating pro formas, to verify the proposed project's need for AHP

subsidy.

This provision amends the feasibility requirement in the existing

regulation by specifying the types of information that must be included

in the project feasibility analysis and by adding an explicit

requirement that the Banks analyze a proposed project's need for the

requested AHP subsidy. See id. Secs. 960.4(c)(3), 960.5(a)(2)(ii). This

change would make clear that the Banks, in addition to reviewing the

reasonableness of project costs, must review the reasonableness of

operating pro formas for the proposed project to ensure that

representations regarding the financing capacity of the project (such

as debt servicing capacity and equity market value), and the consequent

need for AHP subsidy, are reasonable.

The requirement that the project is likely to be completed within a

reasonable period of time replaces the requirement in

Sec. 960.5(a)(2)(iv) of the existing regulation that projects be

evaluated for their ability to begin using AHP subsidies within 12

months of approval. See id. Sec. 960.5(a)(2)(iv).

Proposed Sec. 960.7(a)(7) requires that AHP applications include an

explanation of the project sponsor's qualifications and ability to

perform its responsibilities as committed to in the AHP application.

This provision is consistent with the sponsor qualification requirement

in the existing regulation. See id. Sec. 960.4(c)(4). Proposed

Sec. 960.1 defines a ``sponsor'' as a not-for-profit or for-profit

organization or public entity that is: (1) An owner of a rental

project; or (2) integrally involved in an owner-occupied project, such

as by exercising control over the planning, development or management

of such project, or by qualifying borrowers and providing or arranging

financing for the owners of the units. This definition revises the

definition in the existing regulation to clarify the different roles of

sponsors in rental as opposed to owner-occupied projects.

Proposed Sec. 960.7(a)(8) requires that AHP applications include a

statement that the project sponsor and owner will comply with any

applicable fair housing law requirements, and an explanation of how the

project sponsor and owner intend to affirmatively market the proposed

project and otherwise comply with such requirements. This provision is

consistent with the fair housing requirements in the existing

regulation. See id. Secs. 960.4(c)(2), 960.5(a)(2)(i).

The proposed rule does not include the existing regulatory

requirement that AHP applications be evaluated to ensure the member's

ability to qualify for a subsidized advance. See id.

Sec. 960.5(a)(2)(iii). Since a Bank is always required to determine a

member's creditworthiness before providing funds to the member, see 12

CFR part 935, it is not necessary to repeat this requirement in the AHP

regulation.

Proposed Sec. 960.7(a)(9)(i) requires that AHP applications include

a statement that the proposed project will satisfy the maximum subsidy

requirement, i.e., that no subsidized household in the proposed project

shall pay less than 20 percent of such household's gross monthly income

toward monthly housing costs, as defined in proposed Sec. 960.1 (the 20

percent requirement), unless an exception applies. This provision

carries forward, in revised form, the provisions of Sec. 960.9 of the

existing regulation, which were issued by the Finance Board as an

interim rule. See id. Sec. 960.9. The maximum subsidy provisions

implement the maximum subsidy limitation requirement

[[Page 57807]]

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

1430(j)(9)(F).

Proposed Sec. 960.7(a)(9)(ii)(A) provides that the 20 percent

requirement shall not apply where an AHP-assisted rental project also

receives funds from a federal or state rental housing program that

requires qualifying households to pay as rent a certain percentage of

their monthly income or a designated amount, and the households in the

project meet such requirements. This provision is consistent with the

similar exception in the existing regulation. See 12 CFR 960.9(b)(1).

Proposed Sec. 960.7(a)(9)(ii)(B) also provides that the 20 percent

requirement shall not apply where the total amount of the AHP subsidies

provided to the project to finance rehabilitation of housing units

owned by very low-income households is $10,000 or less per household,

and for housing units owned by low- or moderate-income households,

$5,000 or less per such household. This provision is a change from the

existing regulation which permits an exception to the 20 percent

requirement for rehabilitation only of units owned by very low-income

households. See id. Sec. 960.9(b)(2).

Proposed Sec. 960.7(a)(9)(ii)(C) further provides that the 20

percent requirement shall not apply where the total amount of AHP

subsidies provided to the project to finance the purchase of housing

units is $5,000 or less per household. This is a change from the

existing regulation, which permits an exception to the 20 percent

requirement for purchase of units only by households that are above the

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

the income level to qualify as low- or moderate-income households. See

id. Sec. 960.9(b)(3).

In addition, proposed Sec. 960.7(a)(9)(ii)(D) provides that the 20

percent requirement shall not apply where AHP subsidies are used to

assist a household participating in a self-help, sweat equity or

similar housing program that requires the household to contribute its

skilled or unskilled labor valued at a minimum of $2,000 per household,

working cooperatively with others, to construct or rehabilitate housing

which the household or other program participants are purchasing or

already own and occupy, and that involves supervision of the work

performed by skilled builders or rehabilitators. This provision is

consistent with the similar exception in the existing regulation. See

id. Sec. 960.9(b)(4).

Proposed Sec. 960.7(a)(9)(ii) also deletes the annual Consumer

Price Index adjustments required in the existing regulation, in order

to simplify implementation of the exceptions. See id. Sec. 960.9(b)

(2), (3), (4).

Proposed Sec. 960.7(a)(10) requires that AHP applications include

an explanation of how the proposed project meets any applicable

District threshold requirements adopted by the Bank pursuant to

proposed Sec. 960.7(b), discussed further below.

Proposed Sec. 960.7(a)(11) requires that AHP applications include

an explanation of how the proposed project meets the priorities and

objectives identified in proposed Sec. 960.8(a). This provision carries

forward the similar provision in the existing regulation. See id.

Sec. 960.4(c)(1).

Proposed Sec. 960.7(a)(12) requires that AHP applications include a

certification from the member, project sponsor, and project owner

committing to comply with the requirements of 12 U.S.C. 1430(j), part

960, and all obligations committed to in the AHP application. This

provision incorporates the certification requirements in Secs. 960.4(c)

(8) and (9) of the existing regulation into a general requirement for

certification of compliance with all applicable AHP requirements and

commitments, and requires sponsors and owners, as well as members, to

make such certification. See 12 CFR 960.4(c) (8), (9).

Proposed Sec. 960.7(a)(13) requires that AHP applications include

such other information as the Bank may reasonably require in order to

verify compliance of the AHP applications with the requirements of part

960. This provision carries forward the comparable provision in the

existing regulation, but establishes a standard for when the Banks may

require other additional information not identified in proposed

Sec. 960.7(a). See id. Sec. 960.4(c)(10).

The proposed rule eliminates the requirement in existing

Sec. 960.4(c)(7), see id. Sec. 960.4(c)(7), that a member must explain

in its application how it will monitor the proposed project, because,

as discussed further below, the proposed rule establishes specific

monitoring requirements for all members. See proposed Sec. 960.13.

The proposed rule also eliminates the requirement in existing

Sec. 960.4(c)(8) that a member must explain how any excess AHP subsidy

will be recaptured. See 12 CFR 960.4(c)(8). As discussed further below,

the proposed rule establishes specific requirements for all members

governing the recapture of AHP subsidies as well as other remedies for

noncompliance. See proposed Sec. 960.14.

2. District Threshold Requirements

As discussed in part I of the SUPPLEMENTARY INFORMATION, the

Finance Board published a Subsidy Limits Proposal on November 1, 1995,

see 60 FR 55487 (Nov. 1, 1995), and received 25 comment letters.

Commenters included ten Banks, four Bank Advisory Councils, five Bank

members, three trade associations, one private housing developer, one

not-for-profit sponsor, and one housing authority sponsor. A majority

of the commenters supported the Subsidy Limits Proposal. Three

commenters opposed member subsidy limits, four commenters opposed

project application subsidy limits, and four commenters opposed project

unit subsidy limits.

As discussed below, Sec. 960.7(b) of the proposed rule incorporates

the Finance Board's Subsidy Limits Proposal, taking into account public

comments received. Specifically, the proposed rule permits the Banks,

in their discretion, to establish certain application threshold

requirements in addition to those expressly set forth in Sec. 960.7(a).

a. Member, project, and unit subsidy limits. Proposed

Sec. 960.7(b)(1) provides that a Bank's board of directors, after

consultation with its Advisory Council, may establish limits on the

maximum amount of AHP subsidy available per member per year; or per

member, per project, or per project unit in a single funding period,

provided that such subsidy limits must apply equally to all members.

See 12 U.S.C. 1427(j).

Member subsidy limits may prevent a small number of members,

especially larger members with competitive advantages, from receiving

all of the AHP subsidy available in a given funding period. This would

encourage participation by a greater number of members in the Program.

The benefits of the Program may be distributed across a wider

geographic area and among a broader variety of projects.

There may be an effect on the AHP regulatory program goal of

promoting competition if highly competitive projects have difficulty

finding available members that have not exceeded their limits to submit

AHP applications for them. However, the Finance Board believes that

sufficient numbers of members should be available to accommodate all

AHP applications. Any noncompetitive effect likely would be minimal in

comparison to the benefit of greater member participation in the

Program. Several Banks already unilaterally have adopted member subsidy

limits.

[[Page 57808]]

Project application and project unit subsidy limits may prevent a

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

AHP subsidies in a given funding period. This would encourage funding

of a greater number of AHP projects. Funding more projects may serve

housing needs in more areas of the Bank's District, and promote greater

participation by members, especially small members that cannot handle

large projects, in the Program. Such limits would not prevent

competitive projects from being funded. Those projects merely would be

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

funding sources, thereby enabling the funding of additional AHP

projects.

There may be an effect on the AHP regulatory program goal of

promoting competition if otherwise highly competitive projects that

need a large amount of subsidy, such as some rural or homeownership

projects, have difficulty finding other available sources of funding,

and therefore, remain financially unfeasible. There also could be an

impact on the AHP statutory and regulatory program goal of promoting

funding of units for very low-income households, which often need

larger subsidies to make the projects financially feasible. See 12

U.S.C. 1430(j)(2)(B); 12 CFR 960.5(d)(1). However, the Finance Board

believes that any noncompetitive effect or impact on very low-income

targeting may be outweighed by the benefit of funding a greater number

of AHP projects, and the ability to receive additional scoring points

under the AHP regulatory scoring criterion for very low-income

targeting. Project unit subsidy limits also conform with the goal of

the effectiveness scoring criterion in the existing regulation and

proposed rule to encourage lower levels of AHP subsidy per unit by

giving additional scoring points for projects with lower ratios. See 12

CFR 960.5(d)(3); proposed Sec. 960.8(a)(3)(ii). Several Banks already

unilaterally have adopted project application and project unit subsidy

limits.

Limits on the amount of direct subsidy per project may promote

greater member involvement in the Program by encouraging more members

to borrow AHP subsidized advances and, in turn, lend their own funds to

project borrowers. This would build greater member affordable housing

lending capacity and expertise. If members' own funds were at risk as a

result of such limits, members may have greater incentive to underwrite

and monitor projects for financial feasibility and AHP compliance,

respectively. Direct subsidies, which, in some cases, are passed on by

members to borrowers without members putting any of their own funds at

risk, do not promote these goals. Several Banks already unilaterally

have adopted project direct subsidy limits.

The proposed rule provides that establishment of member, project,

or unit subsidy limits would be optional with the Banks. The Banks

would be required to consult with their Advisory Councils in

establishing such limits, since Advisory Council members typically have

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

determining the affordable housing needs of the District and how any

subsidy limit would promote those needs. Thus, if a Bank determines

that imposition of particular subsidy limits will have specific

negative impacts on members or projects (e.g., as described by some

commenters in their comments on the Subsidy Limits Proposal) that

outweigh the benefits to the Program, the Bank can choose not to adopt

such limits. The proposed rule, thus, provides flexibility to the

Banks, which best understand their markets, including the availability

of other subsidy sources and affordability levels, to respond to

individual District needs.

b. Sponsor subsidy limits. In the Subsidy Limits Proposal, the

Finance Board requested comments on whether the Banks should be

permitted to establish maximum subsidy limits per project sponsor. See

60 FR 55489.

One commenter supported such authority. Sponsor subsidy limits

might encourage greater participation by sponsors in the Program,

increase the affordable housing development capacity of more sponsors,

and encourage the creation of more sponsors. Such limits might be

especially beneficial where one large or particularly active sponsor in

a District is winning a large portion of the Bank's AHP subsidies.

However, the Finance Board believes that the competitive and market

aspects of the Program will preclude any one sponsor from dominating

the AHP funding process. Accordingly, the proposed rule does not

authorize the Banks to establish a limit on the maximum amount of AHP

subsidy that may be requested per project sponsor.

c. Subsidy limits based on member capital stock investment. Several

commenters proposed that the Banks be permitted to establish subsidy

limits based on the level of a member's capital stock investment in the

Bank. Members are required by the Act to maintain a specified amount of

Bank capital stock to support their advance borrowings. See 12 U.S.C.

1426(b)(2), 1430(e)(1). The argument was made that encouraging member

advance borrowings and the corresponding investment in Bank capital

stock would further the goal of increasing Bank earnings and,

therefore, the AHP fund, which is derived from Bank earnings. However,

such limits may not enlarge the AHP fund by increasing member borrowing

because small member institutions, by virtue of their limited asset

size, would be incapable of increasing or unwilling to increase their

borrowings (due to the increased cost of borrowing resulting from

investing in additional Bank stock) just to receive ``preferred

treatment'' under such a subsidy limits policy. Accordingly, the

proposed rule does not authorize the Banks to establish subsidy limits

based on members' levels of capital stock investment in the Bank.

d. Limitation on access to AHP subsidies based on member's use of

Bank credit products. Proposed Sec. 960.7(b)(3) authorizes a Bank to

require that members submitting AHP applications have made use of a

credit product offered by the Bank within the previous 12 months, other

than AHP or Community Investment Program (CIP) (see 12 U.S.C. 1430(i))

credit products, provided that the requirement is applied equally to

all members.

In the Subsidy Limits Proposal, the Finance Board specifically

requested comments on whether the Banks should be permitted to

establish AHP subsidy limits based on the level of a member's regular

advance borrowings from a Bank. See 60 FR 55490-91. One Bank already

unilaterally has adopted such a policy. Ten commenters supported such

authority, while five commenters opposed it. One reason expressed for

imposing such limits was that they would encourage broader

participation by members in the Program, thereby giving sponsors more

options for financing AHP projects, and providing experience and

education to more members that could help them develop additional

capacity to engage in affordable housing lending. However, such limits

may not achieve this goal if members with high levels of borrowing who

already participate in the Program are allowed to apply for and win the

additional AHP subsidies no longer available to those members subject

to the limits. Uniform limits on the amount of AHP subsidy for which

each member may apply may have a greater likelihood of increasing

member participation in the Program.

It also was argued that credit-based subsidy limits may increase

the pool of available AHP funds by encouraging greater borrowing from

the Bank and, therefore, increasing Bank earnings,

[[Page 57809]]

from which AHP funds are derived. The argument also was made that

members that contribute to Bank earnings by borrowing should have

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

such earnings.

The Act does not restrict availability of AHP subsidies to

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

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

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

outstanding advances of members participating in the Program. Thus,

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

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

increasing member borrowing because, as discussed above, small member

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

of increasing or unwilling to increase their borrowings (due to the

increased cost of borrowing resulting from investing in additional Bank

stock) just to receive ``preferred treatment'' under an AHP subsidy

limits policy.

Instead, proposed Sec. 960.7(b)(3) authorizes a Bank to require

that members submitting AHP applications have made use of a Bank credit

product within the previous 12 months, other than AHP or CIP credit

products, provided that the requirement is applied equally to all

members. The Finance Board believes that there is some merit in tying

access to AHP subsidies to a member's contribution to the Bank's

housing finance mission through its use of one or more of the Bank's

regular credit products. This type of limitation would not discriminate

against a member based on its asset size, as all members would have the

capability to borrow some amount from the Bank.

e. Subsidy limits based on the level of a member's mortgage-related

assets. The Finance Board requested comments in the Subsidy Limits

Proposal on whether the Banks should be permitted to establish AHP

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

assets. See 60 FR 55490-91. Seven commenters supported such authority,

while six commenters opposed it.

Commenters argued that such subsidy limits may encourage members to

increase their mortgage-related lending, consistent with the provisions

of the Act that impose less burdensome advances and stock requirements

on institutions that devote a greater percentage of their assets to

housing finance (qualified thrift lenders). See 12 U.S.C. 1430(e)(1),

(2); 12 CFR 935.13. However, the Finance Board believes that such

limits would defeat this goal since members, especially commercial

banks, with lower levels of mortgage-related assets would have limited

access to AHP subsidies which they could use for such housing finance

purposes. Accordingly, the proposed rule does not authorize the Banks

to establish AHP subsidy limits based on the level of a member's

mortgage-related assets.

f. Limiting or prohibiting AHP applications for out-of-District

projects. Proposed Sec. 960.7(b)(2) authorizes the Banks, at their

option, to establish a threshold requirement prohibiting applications

for AHP subsidies for projects located outside the Bank's District.

Proposed Sec. 960.8(a)(2)(v)(M) also authorizes the Banks to adopt as

an optional Bank District scoring priority a priority for projects

located within the Bank's District.

In the Subsidy Limits Proposal, the Finance Board specifically

requested comments on whether the Banks should be permitted to limit or

prohibit members from submitting AHP applications for projects located

outside of the Bank's District. See 60 FR 55489. Several Banks already

unilaterally have adopted a prohibition or a scoring priority for

projects located within a Bank's District. Seven commenters supported

allowing the Banks to adopt a limit or prohibition, four commenters

opposed a limit or prohibition, and three commenters supported limits

only. Two commenters supported allowing the Banks to adopt a District

scoring priority for projects located within the District, while one

commenter opposed such a priority.

The Finance Board believes that the Banks should have authority to

prohibit AHP applications for out-of-District projects, or to give

scoring priority to applications for in-District projects, because a

few large multistate members could win AHP subsidies for out-of-

District projects, thereby resulting in less AHP subsidies available

for use by other members and sponsors within the District. A

prohibition or priority would help ensure that a Bank can adequately

serve the affordable housing needs within its District. A priority

would not preclude members from competing for AHP subsidies for out-of-

District projects, but would require that they score highly on other

scoring factors in order to qualify for AHP funding. Sponsors of out-

of-District projects would not be precluded from participating in the

Program, as they could apply for AHP subsidies through a member of

another Bank. In addition, it may be more difficult and costly for a

Bank to monitor projects located outside the District for compliance

with AHP requirements.

A prohibition or priority could limit or prevent access to AHP

subsidies by members' out-of-District branches, which would deny that

member the opportunity to take advantage, on behalf of a customer, of a

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

since adopting a prohibition or priority would be optional with the

Bank, the Bank, in consultation with its Advisory Council, would

determine whether the advantages outweigh any disadvantages. The

proposed rule provides flexibility to the Banks to determine whether to

adopt a prohibition or priority in response to their individual

District needs.

g. Member financial involvement as a threshold requirement or

scoring criterion. Proposed Sec. 960.8(a)(2)(v)(D) provides that a Bank

may adopt a District scoring priority for projects involving member

financial participation (excluding the pass-through of AHP subsidy),

such as providing market rate or concessionary financing, fee waivers,

or donations.

In the Subsidy Limits Proposal, the Finance Board specifically

requested comments on whether the Banks should have authority to

require certain types of member financial involvement in a project as a

threshold requirement that a project must satisfy in order to be

considered for scoring and approval for AHP funding, or whether such

member financial involvement should be included as a scoring criterion.

See 60 FR 55490. Six commenters supported a threshold requirement,

while nine commenters supported a scoring criterion.

The Finance Board believes that where a member's own funds and

contributions are at risk in a project, the member has a greater

incentive to underwrite the project for financial feasibility and

monitor the project for AHP compliance. Greater member involvement in

projects builds member affordable housing lending capacity and

expertise. However, the Finance Board does not believe member financial

involvement should be a threshold requirement because some projects may

not require or be able to sustain additional debt related to member

financial involvement, but still may contribute toward the objectives

of the Program, particularly by those members that are not large enough

to finance a project loan, waive fees or donate funds. In addition,

such a threshold requirement could discourage member participation in

the Program. Accordingly, the proposed rule permits a Bank to adopt

member financial involvement in the project as a scoring priority, as

further discussed below.

[[Page 57810]]

H. Application Scoring and Approvals--Sec. 960.8

1. In General

Proposed Sec. 960.8 carries forward the existing regulatory

framework governing the scoring of AHP applications, with revisions

based on a new allocation of points among revised scoring categories,

and additional discretion provided to the Banks, as further discussed

below. The Finance Board specifically requests comments on the proposed

scoring provisions. In particular, comments are requested on ways in

which the scoring system can be simplified, such as by creating

discrete scoring categories containing criteria required by the Act,

criteria established by the Finance Board, and criteria established by

the Banks.

Proposed 960.8(a)(1) provides that a Bank shall score only those

applications meeting the application requirements of proposed

Sec. 960.7. Applications shall be scored based on the extent to which

they meet the scoring priorities and objectives set forth in proposed

Sec. 960.8. The Banks are required to adopt written guidelines

implementing these scoring requirements.

The total possible score an AHP application may receive is 100

points. In determining the number of points to award an application for

any given scoring category, the Bank shall evaluate applications

relative to each other.

2. Revised Scoring Priorities Categories

Applications that meet the application requirements of proposed

Sec. 960.7 are scored according to the priorities in proposed

Sec. 960.8(a)(2). Proposed Sec. 960.8(a)(2) makes the following changes

to the existing regulatory provisions governing scoring priorities. The

Finance Board's existing regulation contains seven priority categories:

homeownership projects; rental projects; projects using federal

government properties; projects with a not-for-profit or state or local

agency sponsor; projects promoting empowerment; homeless permanent

housing projects; and projects meeting a Bank District priority. See 12

CFR 960.5(b). Under the existing regulation, applications meeting at

least three of the seven priorities are scored and ranked, as a group,

before applications meeting fewer than three of the priorities. See id.

Sec. 960.5(a)(3).

Proposed Sec. 960.8(a)(2) contains only six priority categories.

The total points available for the priority categories are increased

from 25 to 60, with the Bank required to allocate the 60 points among

the six priority categories as discussed below. The priority categories

are either fixed-point priorities or variable-point priorities.

Variable-point priorities, which are listed in paragraphs (a)(2)(i)

through (iv), and (v)(A) through (E), are those where there are varying

degrees to which an application can satisfy the priority. Each

variable-point priority category must be allocated at least 8 points.

The number of points that may be awarded to an application for meeting

a variable-point priority will vary, depending on the extent to which

the application satisfies the priority, compared to the other

applications being scored. The application(s) best achieving each

variable-point priority shall receive the maximum point score available

for that priority category, with the remaining applications scored on a

declining scale. An application receiving at least half of the points

allocated to a variable-point priority category shall be considered to

have met that priority.

Fixed-point priority categories, which are listed in paragraphs

(a)(2)(v)(F) through (M), are those which an application must meet in

order to receive the allocated points. Each fixed-point priority

category must be allocated 8 points. An application meeting a fixed-

point priority shall be awarded 8 points.

The priority selected by a Bank under paragraph (a)(2)(vi) may be

either a variable-point or fixed-point priority, depending on the

nature of the priority, and points must be allocated and awarded

accordingly.

Applications meeting at least two of the six priorities shall be

considered priority applications, and, as a group, shall be scored

before applications meeting fewer than two of the priorities.

Priority applications shall be scored against each other, based on

the extent to which they meet the priorities and the scoring objectives

contained in paragraph (a)(3).

As under the existing regulation, the remaining applications are

scored only if there are insufficient priority applications to exhaust

the total AHP subsidy amount available for the funding period. See id.

Sec. 960.5(a)(3).

Proposed Sec. 960.8(a)(2) eliminates the existing priority

categories for homeownership and rental projects because a project must

be either a rental or homeownership project in order to qualify for AHP

funding.

Proposed Sec. 960.8(a)(2)(i) revises the existing priority category

for projects involving federal government properties by including

properties owned or held by state and local governments, agencies, or

instrumentalities thereof, and by requiring that at least 20 percent of

the units in such projects meet this requirement. See id.

Sec. 960.5(b)(3); 12 U.S.C. 1430(j)(3)(B). State and local government

properties are included under this priority category because the stock

of available federal government properties is decreasing. The 20

percent of units requirement is intended to ensure that a reasonable

number of units in a project previously were government owned in order

for an AHP application to receive credit under this priority category.

Proposed Sec. 960.8(a)(2)(ii) retains the priority category for

projects sponsored by not-for-profit organizations, or state or local

government entities in the existing regulation. See 12 CFR 960.5(b)(4);

12 U.S.C. 1430(j)(3)(C).

The existing priority category for projects that empower the poor

is subsumed under proposed Sec. 960.7(a)(2)(v)(B), as further discussed

below. See 12 CFR 960.5(b)(5).

Proposed Sec. 960.8(a)(2)(iii) revises the existing homeless

housing priority category to provide that in order to meet this

priority, projects financing permanent or transitional housing for the

homeless must reserve at least 20 percent of their units for occupancy

by homeless households. See id. Sec. 960.5(b)(6). Proposed Sec. 960.1

defines ``permanent or transitional housing'' as housing with six-month

minimum occupancy, but excluding overnight shelters.

Proposed Sec. 960.8(a)(2)(iv) adds a new priority category for

projects meeting housing needs documented as part of a community

revitalization or economic development strategy approved by a unit of

state or local government.

Proposed Sec. 960.8(a)(2)(v) retains the existing Bank District

priority category but requires the Bank to select the priority, as

recommended by the Bank's Advisory Council, for each funding period,

from the specific priorities listed in paragraphs (a)(2)(v)(A) through

(M) in the proposed rule, most of which are derived from priorities

Banks have chosen in the past. The priority category in paragraph

(a)(2)(v)(B) replaces the priority category in Sec. 960.5(b)(5) of the

existing regulation for projects empowering the poor with a priority

for housing incorporating the following elements of empowerment:

programs offering employment, education, training, homeownership

counseling, or daycare services that assist AHP-eligible residents to

move toward better economic opportunities. See id. Sec. 960.5(b)(5).

As discussed above, among the priority categories that a Bank may

select are priorities for: projects involving member financial

participation; projects with retention

[[Page 57811]]

periods in excess of 5 and 15 years for owner-occupied and rental

projects, respectively; and projects located within the Bank's

District. See proposed Sec. 960.7(a)(2)(v) (B), (E), (M).

Proposed Sec. 960.8(a)(2)(vi) adds a new Bank District priority

category under which a Bank may adopt a priority for projects meeting a

housing need in the Bank's District, as defined and recommended by the

Bank's Advisory Council. The priority may be chosen from the list of

priorities in proposed paragraph (a)(2)(v), provided the priority is

different from the Bank District priority adopted under that paragraph.

The Finance Board specifically requests comments on whether a

seventh priority category should be added for projects involving member

financing (excluding the pass-through of AHP subsidies). Proposed

Sec. 960.8(a)(2)(v)(D) permits the Banks to adopt member financial

involvement as a Bank District priority. Although members have played a

critical role in the Program, their participation has not generally

involved lending their own funds. Where a member lends its own funds to

a project, it is more likely to underwrite the project for financial

feasibility and monitor the project for AHP compliance. Greater member

financial involvement in projects also builds member affordable housing

lending capacity and expertise. Adding a permanent seventh priority for

applications submitted by members that will have a financial stake in

the AHP project may serve to encourage more of such activity. The

Finance Board also requests comments on whether a member should be

deemed to meet such a priority for member financial involvement based

on the member's record of affordable housing lending activities apart

from its lending under the Program.

3. Revised Scoring Objectives

The Finance Board's existing regulation contains the following six

scoring ``objectives'' categories: targeting; long-term retention;

effectiveness (subsidy per unit); community involvement; community

stability; and innovation. See 12 CFR 960.5(d), (e). Proposed

Sec. 960.8(a)(3) eliminates the need for long-term retention as a

scoring objective because proposed Sec. 960.1 establishes minimum

retention periods of 5 and 15 years as threshold requirements for

owner-occupied and rental projects, respectively.

Proposed Sec. 960.8(a)(3) also eliminates the innovation objective

category. See 12 CFR 960.5(e)(3). The Finance Board believes that

innovation is an important part of producing affordable housing in many

cases, but is not an objective in itself. In some cases, reliance on

well-established approaches may better serve a project, and the project

should not be penalized for this. Further, innovation is a highly

subjective element that is difficult to assess consistently among

projects.

Proposed Sec. 960.8(a)(3) also makes the following revisions to the

remaining four objectives categories. The total points available for

the objectives categories are reduced from 75 to 40, with a Bank

required to allocate the 40 points among the four objectives

categories, provided that the targeting objective category is allocated

no less than 8 points. The application(s) best achieving each objective

shall receive the maximum point score available for that objective

category, with the remaining applications scored on a declining scale.

Under the targeting objective category in the existing regulation,

applications for projects serving the greatest number of very low-

income households are awarded the most points. See id.

Sec. 960.5(d)(1). Applications targeting 100 percent of the units in a

project to very low-income households generally receive the most

points. The Finance Board believes that this scoring practice creates

an inappropriate bias against mixed-income rental projects. Under the

Act, a minimum of 20 percent of the units in an AHP rental project must

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

U.S.C. 1430(j)(2)(B). In order to reduce the emphasis on funding

projects that are occupied solely by very low-income households,

proposed Sec. 960.8(a)(3)(i) provides that applications for rental

projects shall be awarded the maximum number of points available for

the targeting objective category if at least 60 percent of the units in

a project are reserved for occupancy by households with incomes at or

below 50 percent of the area median income.

The Finance Board specifically requests comments on ways in which

the targeting objective may be structured so that it is more closely

compatible with the monitoring requirements for AHP projects, discussed

below under proposed Sec. 960.13.

Proposed Sec. 960.8(a)(3)(ii) clarifies the subsidy-per-unit

objective (effectiveness) category in the existing regulation. See 12

CFR 960.5(d)(3). The proposed rule provides that applications are

awarded points based on the extent to which a project proposes to use

the least amount of AHP subsidy per AHP-targeted unit. The Finance

Board wishes to clarify that in calculating subsidy per unit, only AHP-

targeted units should be counted. Further, this scoring criterion may

not include a ``leveraging'' criterion whereby the application is

scored based on the percentage of the project's total development cost

that is to be financed with the AHP subsidy. The subsidy-per-unit

objective, in effect, favors projects with a shallower subsidy. Under

the proposed scoring system, a Bank may de-emphasize this effect and

promote deeper subsidies per unit by allocating as few as one point to

this objective. The Finance Board specifically requests comments on

whether this gives the Banks adequate flexibility in applying the

subsidy-per-unit objective in their Districts.

Proposed Sec. 960.8(a)(3) (i) and (ii) provide that applications

for owner-occupied projects and rental projects must be scored

separately for purposes of the targeting and subsidy-per-unit

objectives, because these two objectives inherently favor rental

projects, which, in general, have more units targeted to lower income

households and lower amounts of subsidy per unit than do owner-occupied

projects.

Proposed Sec. 960.8(a)(3) (iii) and (iv) clarify the community

involvement and community stability objectives in the existing

regulation, respectively, by adding examples of activities satisfying

the objectives. See id. Sec. 960.5(e) (1), (2).

4. Application Approvals

Proposed Sec. 960.8(b) provides that the board of directors of each

Bank (without delegation to Bank officers or other Bank employees)

shall approve promptly the AHP applications in descending order

starting with the highest scoring application until the total funding

amount for the particular funding period, except for any amount

insufficient to fund the next highest scoring application, has been

allocated. The board also must approve the next four highest scoring

applications as alternates and, within one year of approval by the

Bank, may fund such alternates if any previously committed AHP

subsidies become available.

I. Disbursement of AHP Subsidies--Sec. 960.9

1. Failure to Use AHP Subsidies Within Reasonable Period of Time

Proposed Sec. 960.9(a) adds a new provision requiring a Bank to

determine whether a member or project sponsor draws down and begins

using AHP subsidies for an approved project within a reasonable period

of time after application approval. If a member or project sponsor

fails to draw down and

[[Page 57812]]

begin using AHP subsidies within a reasonable period of time, the Bank

shall cancel its approval of the project's application, and those

subsidies approved for the project shall be made available for other

AHP-eligible projects.

2. Compliance Upon Disbursement of AHP Subsidies

Proposed Sec. 960.9(b) adds provisions codifying the Banks' duty to

verify that the member and project sponsor are in compliance with AHP

statutory requirements, regulatory requirements, and the obligations

committed to in the approved application, prior to initial disbursement

of AHP subsidies by the Bank for an approved project, and prior to each

disbursement thereafter. The Bank is required to obtain, and maintain

in its project file, documents sufficient to demonstrate such

compliance prior to making such disbursement, including, but not

limited to, an independent, current (6 months or less) appraisal (or

recertification of a prior independent appraisal, if appropriate)

provided by the member indicating the fair market value of the property

or project if the member has a direct or indirect interest in such

property or project.

3. Changes in Approved AHP Subsidy Amount Where a Direct Subsidy is

Used For a Principal or Interest Rate Write-Down

Proposed Sec. 960.9(c) adds a new provision addressing changes in a

project's approved AHP subsidy amount where the Banks provide direct

subsidies to write down the principal amount or the interest rates on

loans provided by members to projects. The proposed rule provides that

if a member is approved to receive a direct subsidy to write down the

principal amount or the interest rate on a loan to a project and the

amount of subsidy required to maintain the debt service cost required

by the project varies from the amount of subsidy initially approved by

the Bank due to a change in interest rates between the time of approval

and the time the lender commits to the interest rate to finance the

project, the Bank shall modify the subsidy amount accordingly. For

example, if, in the interim period, interest rates rise, thereby

requiring more direct subsidy for the lender to write down its loan to

the project (keeping the loan's interest rate constant), the Bank must

increase the amount of direct subsidy for the project accordingly.

Under proposed Sec. 960.9(c)(2), the amount of such increase shall

be drawn first from any uncommitted or recaptured AHP subsidies for the

current year and then from the Bank's required AHP contribution for the

next year.

Proposed Sec. 960.9(c) transfers the interest rate risk associated

with the lag time between AHP application approval and funding from the

AHP projects to the AHP fund in cases where direct subsidies are used

for interest rate write-downs. The practical effect of this is to

guarantee AHP-assisted financing at a specific interest rate in such

cases. The Finance Board believes this is necessary to help ensure that

changes in lenders' market interest rates do not render approved AHP

projects financially infeasible at the time they are ready for funding.

4. Banks' Responsibility to Ensure Proper Use of AHP Subsidies

a. In general. Proposed Sec. 960.9(d)(1) carries forward the

existing regulatory requirements reiterating the statutory requirements

that each Bank shall ensure that: (1) AHP subsidies provided by the

Bank to members are passed on to the ultimate borrower; and (2) the

preponderance of AHP subsidies provided by the Bank ultimately is

received by very low- and low- or moderate-income households. See 12

CFR 960.3(d); 12 U.S.C. 1430(j)(9) (D), (E).

b. Fairness in transactions. Proposed Sec. 960.9(d)(2) adds a new

requirement that each Bank shall ensure that the terms of any member's

participation in a transaction benefiting from an AHP subsidy are fair

to the Program. This provision is intended to highlight the public

purpose of the Program--providing housing to benefit low- and moderate-

income households--and to put the Banks and members on notice that they

should view all transactions involving the Program in light of this

purpose.

c. Market interest rate and charges. Proposed Sec. 960.9(d)(3)

requires each Bank to ensure, with respect to any loan financing an AHP

project, that the rate of interest, fees, points, and any other charges

by the lender shall not exceed a reasonable market rate of interest,

fees, points, and charges for a loan of similar maturity, terms, and

risk. This provision is intended to prevent a lender from recouping

part of the direct subsidy provided to the project by coupling the

direct subsidy with an above-market rate loan to the project.

Accordingly, Sec. 960.9(c) of the existing regulation, which provides

that ``a member receiving a subsidized advance shall extend credit to

qualified borrowers at a rate of interest discounted at least to the

same extent as the subsidy granted to the member by the Bank,'' is

eliminated. See 12 CFR 960.9(c).

d. Lending direct subsidies. For various tax reasons, sponsors

prefer to structure projects involving federal Low-Income Housing Tax

Credits so that AHP direct subsidies are loaned to the project, with

principal and interest payments deferred until the end of the loan

term. This use of direct subsidies raises the question whether the

direct subsidies, which are grants, are being passed on to the ultimate

recipients, as required under section 10(j)(9)(E) of the Act, since

they ultimately may be repaid by the recipients. See 12 U.S.C.

1430(j)(9)(E).

Proposed Sec. 960.9(d)(4) is intended to accommodate the needs of

sponsors and the statutory requirement governing the pass-through of

AHP subsidies. It provides that a member or a sponsor may lend a direct

subsidy in connection with an AHP rental project involving federal Low-

Income Housing Tax Credits, provided that all payments by the borrower

are deferred until the end of the loan term and no interest is charged.

Upon repayment of the loan, the entire amount of the direct subsidy

must be repaid to the Bank.

e. Matched repayment schedules. Proposed Sec. 960.9(d)(5) requires

the term of a subsidized advance to be no longer than the term of the

member's loan to the AHP project funded by the advance, and the

scheduled principal repayments for the subsidized advance to be

reasonably related to the scheduled principal repayments for the

member's loan to the AHP project, such that at least once in every 12-

month period, the member must pay to the Bank the principal repayments

received by the member on its loan to the project. This new requirement

is intended to ensure that the repayment schedules of subsidized

advances and the loans that they fund are closely matched, because the

closer the match, the more efficient the use of the AHP subsidy.

Furthermore, without a close match, a portion of the interest rate

subsidy, in effect, is retained by the member each time the project

makes a scheduled repayment of principal. For example, if the member's

loan to the project is fully amortizing with level periodic payments

over the term of the loan, less subsidy is needed for a subsidized

advance that is also fully amortizing with level periodic payments over

the term of the advance, than for a subsidized advance with the same

term as the member's loan, but with all principal payments due at

maturity (a bullet advance). If a member makes a non-amortizing loan to

a project, the member typically would match its loan structure by

borrowing a non-amortizing, or bullet, advance.

[[Page 57813]]

Since a member's loan typically involves an interest rate mark-up

to cover the member's cost and profit, it is not possible to match

perfectly the scheduled principal repayments of a member's equal-

payment amortizing loan to the AHP project with the scheduled principal

repayments of the equal-payment amortizing advance with a similar term.

However, the Finance Board will consider such repayments to be

reasonably related if both the member's loan and the subsidized advance

are fully amortized with level periodic payments over the term of the

loan, and the member makes principal repayments on the advance no less

frequently than once in every 12-month period. As a practical matter,

requiring the member to make principal repayments to the Bank at least

annually will avoid requiring the establishment of complicated systems

to account for monthly principal repayments.

Proposed Sec. 960.9(e) adds a new provision requiring a Bank to

provide in its advances agreement with each member receiving a

subsidized advance that upon prepayment of a subsidized advance, the

Bank shall charge a prepayment fee only to the extent the Bank suffers

an economic loss from the prepayment.

J. Modifications of Approved AHP Applications--Sec. 960.10

The Finance Board's existing regulation does not directly address

project modifications after approval. Under Decision Memorandum 94-DM-

27, dated July 22, 1994, the Banks, subject to certain standards, have

authority to approve modifications to previously approved AHP

applications, except for modifications involving increases in the

amount of AHP subsidy approved for a project. Proposed Sec. 960.10

establishes a procedure and standards under which a member may request

approval by the Bank of a modification prior to completion of the

project. The proposed procedures and standards largely codify the

Finance Board's current procedure and standards for approving

modifications, except that changes to a project after completion, full

occupancy, and closing of permanent financing no longer will be

considered modifications.

Proposed Sec. 960.1 defines a ``project modification'' as any

change in the project prior to the project's completion, full occupancy

and closing of permanent financing, that materially affects the facts

under which the project's AHP application was originally scored under

proposed Sec. 960.8 and approved.

K. Avoidance of Actual or Apparent Conflicts of Interest--Sec. 960.11

Proposed Sec. 960.11 adds a new requirement that the board of

directors of each Bank, without delegation to Bank officers or other

Bank employees, must adopt a written policy preventing a Bank director,

officer, employee, or contractor who has a personal interest in, or who

is a director, officer or employee of an organization involved in a

project that is the subject of a pending or approved AHP application,

from participating in or attempting to influence the evaluation,

approval, funding, monitoring, or any remedial process for such project

under the Program.

L. Homeownership Assistance Programs--Sec. 960.12

Proposed Sec. 960.12 revises the homeownership set-aside provisions

of Sec. 960.5(g) of the existing regulation to allow the Banks more

flexibility in establishing AHP-funded programs targeted specifically

to promote homeownership. See 12 CFR 960.5(g). Existing

Sec. 960.5(g)(1) of the AHP regulation allows the Banks to establish

such homeownership assistance programs based on a matched savings

model, in which a Bank provides its members with matching funds for

first-time homebuyers who are saving to pay for a downpayment and

closing costs on the purchase of a home. See id. Sec. 960.5(g)(1).

Under the existing regulation, Banks must establish their programs in

accordance with the specific requirements set forth in

Sec. 960.5(g)(1), unless they obtain Finance Board approval to

establish ``nonconforming'' programs. See id. Sec. 960.5(g)(2).

In the seven months following the establishment of the

homeownership set-aside provisions of Sec. 960.5(g), five Banks

requested and were granted Finance Board approval to establish

nonconforming homeownership set-asides that vary from the matched

savings model to some degree. For instance, some Banks do not have a

matched savings requirement and do not require participating households

to qualify as first-time homebuyers. Some Banks give priority to

certain categories of households, such as those with incomes below

specified levels or households located in rural areas.

The purpose of proposed Sec. 960.12 is to revise the homeownership

set-aside requirements in order to encompass the variations adopted by

the Banks in their ``nonconforming'' set-asides and to allow the Banks

flexibility to adopt new variations, within the general framework of

Sec. 960.12, without having to obtain prior Finance Board approval.

Among the changes made by proposed Sec. 960.12 is elimination of the

requirement that participating households be first-time homebuyers. See

id. Sec. 960.5(g)(1). Under proposed Sec. 960.12(b), Banks may now

provide funds under their programs for rehabilitation by current

homeowners, as well as for home purchases. The proposed rule clarifies

that, notwithstanding proposed Sec. 960.3(c)(4), which permits AHP

subsidies to be used for homebuyer counseling costs under certain

limited circumstances, homeownership assistance program funds may not

be used for homebuyer or homeowner counseling costs. In addition, the

proposed rule eliminates the existing requirement that participating

households provide matching funds through dedicated savings accounts

with members. See 12 CFR 960.5(g)(1)(iii)(B). Under proposed

Sec. 960.12(d)(2), Banks are free to establish their own fair and

reasonable procedures and criteria for allocating funds under their

programs. The proposed rule also no longer gives a Bank the option to

extend the retention period for homes financed under the program beyond

5 years. See 12 CFR Sec. 960.5(g)(1)(xi). Instead, proposed

Sec. 960.12(f) provides that such homes are subject to the same 5-year

retention period as owner-occupied units financed through the Banks'

District-wide AHP competitions. See proposed Sec. 960.3(b)(1)(i).

M. Monitoring Requirements--Sec. 960.13

1. In General

Section 10(j)(9)(C) of the Act requires the Finance Board to issue

regulations ensuring ``that advances made under this program will be

used only to assist projects for which adequate long-term monitoring is

available to guarantee that affordability standards and other

requirements of [section 10(j) of the Act] are satisfied.'' See 12

U.S.C. 1430(j)(9)(C).

The existing regulation requires each Bank to monitor member and

project compliance with the AHP requirements, but does not establish

procedures, standards or documentation to assist the Banks in meeting

that requirement. See 12 CFR 960.7 (b), (c). Sections 960.6 (b) and (c)

of the existing regulation require members to file annual reports and

certifications on the use of AHP subsidies. See id. Sec. 960.6 (b),

(c).

In the absence of specific regulatory guidance, over the six years

that the Program has been in operation, the Banks have attempted to

comply with

[[Page 57814]]

their monitoring obligations by developing their own individual

approaches to monitoring. This practice has led to uncertainty about

the sufficiency of any one monitoring procedure. In addition, some

members consider the certification and reporting requirements of the

existing regulation to be too burdensome. As discussed below, the

Finance Board is proposing to establish clear, uniform monitoring

procedures and standards that take into account the costs of monitoring

relative to the benefits, and reduce the overall monitoring burden,

including eliminating the annual certification requirement for members

under the existing regulation. The Finance Board's proposal is based on

the principles that: (1) monitoring a project closely in its initial

stages of development will ensure that less monitoring is necessary in

the project's later stages of operation; (2) the degree of monitoring

of AHP-assisted projects should be directly related to the amount of

AHP subsidy invested in such projects; and (3) the Banks should be

permitted to rely, to the extent feasible, on monitoring by housing

credit agencies.

2. AHP Monitoring Agreements Between Members and Project Sponsors and

Owners

Under proposed Sec. 960.13(a), a Bank must require each member

receiving an AHP subsidy to have in place an AHP monitoring agreement

with each project sponsor--in the case of owner-occupied projects--or

project owner--in the case of rental projects--under which the project

sponsor or owner agrees to monitor the AHP project as discussed below.

a. Owner-occupied projects. Under proposed Sec. 960.13(a)(1),

during the period of construction or rehabilitation of an owner-

occupied project, the project sponsor must report to the member

semiannually on whether reasonable progress is being made towards

completion. Until all approved AHP subsidies are provided to eligible

households in a project, the project sponsor must certify annually to

the member and the Bank that the AHP subsidies have been used according

to the commitments made in the AHP application, and such certifications

shall be supported by household income verification documentation

maintained by the project sponsor and available for review by the

member or the Bank.

b. Rental projects. Under proposed Sec. 960.13(a)(2), during the

period of construction or rehabilitation of a rental project, the

project owner must report to the member semiannually on whether

reasonable progress is being made towards completion. Within the first

year after project completion, the project owner must certify to the

member and the Bank that the services and activities committed to in

the AHP application have been provided in connection with the project.

Within the first year after project completion to the end of the

project's retention period, the project owner annually must provide a

list of tenant rents and incomes to the Bank and certify that: (1) the

tenant rents and incomes are accurate and in compliance with the rent

and income targeting commitments made in the AHP application; (2) the

project is habitable; and (3) the project owner regularly informs

households applying for and occupying AHP-assisted units of the address

of the Bank that provided the AHP subsidy to finance the project. A

project owner must maintain tenant income verification documentation,

available for review by the member or the Bank, to support such

certifications.

3. AHP Monitoring Agreements Between Banks and Members

Under proposed Sec. 960.13(b), a Bank must have in place an AHP

monitoring agreement with each member receiving an AHP subsidy, under

which the member agrees to monitor the AHP project as discussed below.

a. Owner-occupied projects. Under Sec. 960.13(b)(1), during the

period of construction or rehabilitation of an owner-occupied project,

the member must take the steps necessary to determine whether

reasonable progress is being made towards completion and report to the

Bank semiannually on the status of the project. Within one year after

disbursement to a project of all approved AHP subsidies, the member

must review the project documentation and certify to the Bank that: (1)

the AHP subsidies have been used according to the commitments made in

the AHP application; and (2) the AHP-assisted units are subject to deed

restrictions, ``soft'' second mortgages, or other legally enforceable

mechanisms pursuant to the requirements of proposed Sec. 960.4(a).

b. Rental projects. Under proposed Sec. 960.13(b)(2), during the

period of construction or rehabilitation of a rental project, the

member must take the steps necessary to determine whether reasonable

progress is being made towards completion and report to the Bank

semiannually on the status of the project. Within the first year after

project completion, the member must review the project documentation

and certify to the Bank that: (1) the project is habitable; (2) the

project meets its low- and moderate-income targeting commitments; and

(3) the rents charged for income-targeted units do not exceed the

maximum levels committed to in the AHP application. For projects

receiving $500,000 or less in AHP subsidy, during the period from the

second year after project completion to the end of the retention

period, the member must certify to the Bank biennially that, based on

an exterior visual inspection, the project continues to be occupied and

appears habitable.

4. Monitoring Requirements for Banks

a. Owner-occupied projects. Proposed Sec. 960.13(c)(1) provides

that each Bank must establish a monitoring procedure that provides

reasonable assurances that, based on a review of the documentation for

a sample of projects and units within one year of receiving the

certification from a member described in proposed

Sec. 960.13(b)(1)(ii): (1) the incomes of the households that own the

AHP-assisted units did not exceed the levels committed to in the AHP

application at the time the households qualified for the AHP subsidy;

(2) the AHP subsidies were used for eligible purposes; and (3) the AHP-

assisted units are subject to deed restrictions, ``soft'' second

mortgages, or other legally enforceable mechanisms pursuant to the

requirements of proposed Sec. 960.4(a)(1).

b. Rental projects. Proposed Sec. 960.13(c)(2) provides that each

Bank must establish a monitoring procedure providing reasonable

assurances that: (1) within the first year after completion of an AHP-

assisted rental project, the services and activities committed to in

the AHP application have been provided; and (2) during the period from

the second year after project completion to the end of the retention

period: (i) the project is habitable; (ii) the project meets its low-

and moderate-income targeting commitments; and (iii) the rents charged

for income-targeted units do not exceed the maximum levels committed to

in the AHP application.

A Bank must use the following monitoring procedure, depending on

the amount of AHP subsidy received by a project. For all projects, the

Bank shall make reasonable efforts to investigate any complaints

received about a specific project. For projects receiving $50,001 to

$250,000 of AHP subsidies, the Bank must review tenant rent and income

documentation, including tenant income verification documents, for a

sample of the project's units at least once every six years, to verify

compliance with the rent and income targeting commitments in the AHP

application. Currently, approximately 330 projects have received

between $0 and $50,000 of AHP subsidy, and

[[Page 57815]]

approximately 1,000 projects have received between $50,001 and $250,000

of AHP subsidy. For projects receiving $250,001 to $500,000 of AHP

subsidies, the Bank must review tenant rent and income documentation,

including tenant income verification documents, for a sample of the

project's units at least once every four years, to verify compliance

with the rent and income targeting commitments in the AHP application.

Currently, approximately 200 projects have received between $250,001 to

$500,000 of AHP subsidies. For projects receiving over $500,000 of AHP

subsidies, the Bank must perform an annual on-site inspection of the

project, including review of tenant rent and income verification

documentation, for a sample of the project's units, to verify

compliance with the rent and income targeting commitments in the AHP

application. Currently, only 60 projects have received over $500,000 of

AHP subsidy.

A Bank may use a reasonable sampling plan to select the projects

monitored each year and to review the documentation supporting the

certifications made by members and project sponsors and owners.

5. Monitoring by a Housing Credit Agency

In order to take advantage of opportunities to reduce the costs of

monitoring where there are multiple funders of AHP-assisted projects,

the Finance Board is proposing to permit the Banks to rely on

monitoring by state or local housing agencies that have provided

federal Low-Income Housing Tax Credits to an AHP project. Under 26 CFR

1.42-5, housing credit agencies administering such Tax Credits must

establish a procedure for monitoring for compliance with the applicable

provisions of the Internal Revenue Code governing use of federal Low-

Income Housing Tax Credits. See 26 U.S.C. 42; 26 CFR 1.42-5. The

Finance Board believes that where a housing credit agency undertakes

such monitoring, it would be unnecessarily duplicative for the Banks to

undertake independent monitoring if the income targeting requirements,

the rent requirements, and the retention period requirements being

monitored by the housing credit agency are the same as, or more

restrictive than, those committed to for purposes of the Program.

Therefore, proposed Sec. 960.13(c)(iv) provides that for projects

receiving $500,000 or less of AHP subsidies, a Bank may rely on

monitoring by a housing credit agency that also has provided funds to

the project if: (1) the income targeting requirements, the rent

requirements, and the retention period monitored by the housing credit

agency are the same as, or more restrictive than, those committed to in

the AHP application; (2) the housing credit agency agrees to inform the

Bank of instances where tenant rents or incomes are found to be in

noncompliance with the rent and income targeting requirements being

monitored by the housing credit agency or where the project is not in a

habitable condition; (3) the Bank does not have information that

monitoring by such housing credit agency is not occurring or is

inadequate; and (4) the Bank makes reasonable efforts to investigate

any complaints received about the project. In projects involving more

than $500,000 in AHP subsidies, the Finance Board believes that

monitoring should remain the responsibility of the Bank, rather than a

third party, in light of the substantial amount of the AHP subsidy.

In cases where a Bank relies on a housing credit agency to monitor

a project, the project owner annually must provide a list of tenant

rents and incomes to the Bank and certify that they are accurate and in

compliance with the rent and income targeting commitments made in the

AHP application.

The Finance Board specifically requests comments on whether there

are any other state or local government entities, in addition to

housing credit agencies, that monitor rental projects for compliance

with requirements comparable to AHP requirements. In order to be able

to rely on the monitoring of another government housing program that

also has funded an AHP project, that program's income targeting, rent,

and retention requirements must be the same as, or more restrictive

than, those committed to by the project for purposes of the AHP. The

Act requires that AHP subsidies be used to finance homeownership by

low- or moderate-income households, or finance rental housing where at

least 20 percent of the units are occupied by and affordable for very

low-income households. See 12 U.S.C. 1430(j)(2). On their face, these

statutory minimum income targeting and rent requirements are consistent

with the requirements of certain other government housing programs that

also fund AHP projects, such as the federal Low-Income Housing Tax

Credit, HOME, and Section 8 programs. However, the targeting scoring

criterion in the existing and proposed AHP regulation appears to

encourage projects to target greater numbers of very low-income

households in order to receive higher scores and AHP funding. See 12

CFR 960.5(d)(1); proposed Sec. 960.8(a)(3)(i). Most AHP projects have

AHP income targeting and rent commitments that are more restrictive

than those required and monitored by other government housing programs

also funding the project, thereby preventing reliance on such third

parties for monitoring of AHP compliance.

Under the Act, the Finance Board's AHP regulation must ``coordinate

activities under [the Program] with other Federal or federally-

subsidized affordable housing activities to the maximum extent

possible.'' See 12 U.S.C. 1430(j)(9)(G). The Finance Board specifically

requests comments on ways in which the targeting scoring objective in

the proposed rule may be modified, or whether it should be eliminated,

so that the income targeting and rent requirements for AHP projects

will be compatible with those required and monitored by other

government housing entities.

The following table summarizes the proposed monitoring framework

discussed above for AHP-assisted rental projects:

Rental Project Monitoring Requirements

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

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

(2) Projects for which there is no Projects monitored by All projects receiving

qualifying 3rd party monitoring a qualifying 3rd over $500,000 of AHP

party monitor subsidy

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

Project Construction or

Rehabilitation.

(4)--Member and owner submit semi-

annual progress reports for each

project.

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

Within First Year After

(4)--Owner certifies project

habitability, provision of

services promised in AHP

application, compliance of project

rents

Project Completion...............

(4) and tenant incomes

(4)--Member certifies compliance of

project rents and tenant incomes

[[Page 57816]]

(4)--Bank monitors compliance with

provision of services promised in

AHP application, and compliance of

project rents

(4) and tenant incomes

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

2nd Year After Project

(4)--Bank responds to any

complaints about projects

Completion to the

(4)--Owner certifies annually to

project habitability, accuracy of

tenant rents and incomes, and that

tenants of, and

End of the Retention

(4) applicants for, project units

are notified of the Bank's

address.

Period

(4)

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

(2)Member visually inspects

exterior of project every 2 years

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

(2)$AHP Subsidy in Project

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

$0-$50,000 $50,001-$250,000 $250,001-$500,000

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

No Bank review........ Bank reviews tenant Bank reviews tenant 3rd party reports to Bank performs annual

incomes and rents incomes and rents Bank on any failure on-site inspection

every 6 years. every 4 years. to meet rent and of project, and

income requirements reviews tenant rents

and on habitability. and incomes

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

The Finance Board specifically requests comments on the proposed

monitoring requirements.

N. Corrective and Remedial Actions for Noncompliance--Sec. 960.14

Section 10(j) of the Act is silent on what specific corrective and

remedial actions should be imposed when there is noncompliance with the

requirements of the Program. See 12 U.S.C. 1430(j). The existing

regulation provides that, where funds provided under the Program will

not be or are no longer being used for their approved purposes, the

amount of committed but unused subsidy or improperly used subsidy shall

be recovered and made available by the Bank for future AHP projects.

See 12 CFR 960.8(a). The existing regulation requires the Bank, in

recapturing such funds, to take any or all of the following actions,

without limitation on other remedies, in its discretion: (1) reprice

the advance at the interest rate charged to members on non-subsidized

advances of comparable type and maturity at the time of the original

advance; (2) call the advance; (3) assess a prepayment fee; or (4)

require the member to reimburse the Bank for the amount of the unused

or improperly used subsidy on the advance or other assistance. See id.

Sec. 960.8(b). In addition, some Banks have adopted procedures that

require a direct subsidy to be converted to an advance if the project

is found to be in noncompliance with the requirements of the AHP

regulation.

A number of concerns have been raised about the recapture

provisions of the existing regulation. Given the range of potential

circumstances of noncompliance, limiting the universe of remedies to

one--recapture--is by necessity assuring that the remedy will be too

harsh in some cases, and too liberal in others. For instance, it may

not always be equitable to require the member to reimburse the Bank

when the project sponsor is in noncompliance with AHP requirements.

Requiring recapture of the AHP subsidy could in some situations result

in the member having to foreclose against a property in order to

recover the funds to repay an advance to the Bank, thereby eliminating

affordable housing units even when only a few of the units in the

project may be out of compliance with AHP requirements. In short, it

has become clear through the operation of the Program that recapture

will not be the appropriate remedial action in all circumstances. Other

less severe remedial actions may be more appropriate depending on the

nature of the noncompliance that has occurred. In addition, the

remedial actions should be directed only at the parties that are in

noncompliance. Accordingly, the proposed rule contains a wider range of

remedies and tailors the remedial actions required to the nature of the

noncompliance and the party committing the noncompliance, as discussed

further below.

1. Noncompliance by Project Sponsors and Project Owners

Proposed Sec. 960.14(a) provides that a Bank shall require a member

receiving an AHP subsidy to have in place a recapture agreement with

each sponsor of an owner-occupied project and each owner of a rental

project, under which the sponsor or owner agrees: (1) to ensure that

the AHP subsidy is used in compliance with the requirements of 12

U.S.C. 1430(j), part 960, and the obligations committed to in the AHP

application; (2) to make reasonable efforts to cure any noncompliance,

pursuant to a compliance plan approved by the Bank; and (3) to repay

the amount of any misused AHP subsidy (plus interest, if appropriate)

resulting from the sponsor's or owner's noncompliance, if the

noncompliance is not cured within a reasonable period of time.

2. Noncompliance by Members

Proposed Sec. 960.14(b) requires a Bank to have in place a

recapture agreement with each member receiving an AHP subsidy under

which the member agrees: (1) to ensure that the AHP subsidy is used in

compliance with the requirements of 12 U.S.C. 1430(j), part 960, and

the obligations committed to, and to be performed, by the member in its

AHP application; (2) to make reasonable efforts to cure any

noncompliance by the member; (3) to repay the amount of any misused AHP

subsidy (plus interest, if appropriate) resulting from the member's

noncompliance, if the noncompliance is not cured within a reasonable

period of time; (4) to recover any misused AHP subsidy from a project

sponsor or owner under the terms of the member's recapture agreement

with the project sponsor or owner, provided that the member shall not

be liable to the Bank for failure to return amounts that cannot be

recovered from the project sponsor or owner despite reasonable

collection efforts by the member; and (5) to return any misused subsidy

recovered by the

[[Page 57817]]

member from a project sponsor or owner to the Bank.

3. Noncompliance by Banks

Proposed Sec. 960.14(c)(1) provides that the Finance Board, upon

determining that a misuse of AHP subsidy, or the failure to recover

misused AHP subsidy, is attributable to the action or inaction of a

Bank, may order the Bank to reimburse its AHP fund in an amount equal

to the misused subsidy, plus interest, if appropriate.

Proposed Sec. 960.14(c)(2) is intended to eliminate uncertainty

about the sufficiency of a Bank's recovery of misused subsidies in

cases of noncompliance by members or project sponsors or owners,

including cases where misuse results from ``acts of God'' or from

personal or financial hardship. If a Bank enters into a settlement

agreement or other arrangement with a member resulting in the return of

a sum that is less than the full amount of any misused AHP subsidy, the

Finance Board may, in its sole discretion, require the Bank to

reimburse its AHP fund in an amount equal to the difference between the

full amount of the misused subsidy and the sum actually recovered by

the Bank, plus interest, if appropriate, unless: (1) the Bank has

sufficient documentation showing that the sum agreed to be repaid under

any settlement agreement or other arrangement is reasonably justified,

based on the facts and circumstances of the noncompliance (including

the degree of culpability of the noncomplying parties and the extent of

the Bank's recovery efforts); or (2) the Bank obtains a determination

from the Finance Board that the sum agreed to be repaid under any

settlement agreement or other arrangement is reasonably justified,

based on the facts and circumstances of the noncompliance (including

the degree of culpability of the noncomplying parties and the extent of

the Bank's recovery efforts). The latter provision would avoid a later

determination by the Finance Board that such recovery was legally

insufficient.

Proposed Sec. 960.14(d) provides that AHP subsidies recovered by a

Bank under this section shall be made available for other AHP projects.

This is a change from the requirement of Sec. 960.8(a) of the existing

regulation that recaptured subsidies must be made available for future

AHP projects. See 12 CFR 960.8(a). The change is intended to make clear

that recovered subsidies may be made available for alternate projects

previously approved by a Bank pursuant to proposed Sec. 960.8(b), as

well as other AHP projects.

Proposed Sec. 960.14(e) provides that a Bank or the Finance Board,

after notice and opportunity for a hearing, may suspend or debar a

member, project sponsor, or project owner from participation in the

Program if such party shows a pattern of noncompliance, or engages in a

single instance of flagrant noncompliance, with the requirements of 12

U.S.C. 1430(j), part 960, or the obligations committed to in AHP

applications. Under the existing regulation, each AHP application must

include a general statement of the project sponsor's qualifications.

See 12 CFR 960.4(c)(4). However, the existing regulation does not

expressly require those members, project sponsors, and project owners

that previously have received AHP subsidies to be in compliance with

AHP requirements in order to receive additional AHP subsidies. Proposed

Sec. 960.8(e) expressly allows the Banks and the Finance Board to use

their experience with a member's or project sponsor's or owner's

compliance with AHP requirements on an ongoing basis to bar those

participants with a pattern of noncompliance, or who have committed a

single instance of flagrant noncompliance, from future participation in

the Program.

Under proposed Sec. 960.14(f), without limitation on other

remedies, the Finance Board, upon determining that a Bank has engaged

in mismanagement of its Program, may designate another Bank to

administer all or a portion of the first Bank's annual AHP

contribution, for the benefit of the first Bank's members, under such

terms and conditions as the Finance Board may prescribe. The Finance

Board has broad powers under the Act to issue remedial orders directing

a Bank to take action in response to a situation that the Finance Board

considers mismanagement of the Bank's Program. See 12 U.S.C.

1422b(a)(1). Proposed Sec. 960.14(f) describes one of several actions

the Finance Board could take in response to a Bank's mismanagement of

its Program, depending on the relevant facts and circumstances.

O. Required Annual AHP Contributions--Sec. 960.15

Proposed Sec. 960.15 revises Sec. 960.10 of the existing

regulation, which provides for the Banks' annual contributions to their

Program, to delete obsolete language regarding required contributions

for 1990 through 1994. See 12 CFR 960.10. Proposed Sec. 960.1 revises

the definition of the term ``net earnings of a Bank'' in the existing

regulation, to conform it to the definition of that term in the Act.

See 12 U.S.C. 1430(j)(8); 12 CFR 960.1(j).

P. Temporary Suspension of AHP Contributions--Sec. 960.16

Proposed Sec. 960.16 sets forth the provisions governing temporary

suspensions by Banks of their required annual AHP contributions. A

number of revisions have been made to the provisions in the existing

regulation in order to more accurately track the language in section

10(j)(6) of the Act and to provide greater clarity. See 12 U.S.C.

1430(j)(6); 12 CFR 960.11.

1. Application for Temporary Suspension

Proposed Sec. 960.16(a)(1) provides that if a Bank finds that the

contributions required pursuant to proposed Sec. 960.15 are

contributing to the financial instability of the Bank, the Bank shall

notify the Finance Board promptly, and may apply in writing to the

Finance Board for a temporary suspension of such contributions.

Proposed Sec. 960.16(a)(2) provides that a Bank's application for a

temporary suspension of contributions shall include: (1) the period of

time for which the Bank seeks a suspension; (2) the grounds for a

suspension; (3) a plan for returning the Bank to a financially stable

position; and (4) the Bank's annual financial report for the preceding

year, if available, and the Bank's most recent quarterly and monthly

financial statements and any other financial data the Bank wishes the

Finance Board to consider.

The requirement in proposed Sec. 960.16(a)(2)(ii) to include the

grounds for a suspension is not explicitly required in the existing

regulation. See 12 CFR 960.11(a).

The provision in proposed Sec. 960.16(a)(2)(iv) that a Bank may

include any other financial data it wishes the Finance Board to

consider is not required in the existing regulation.

2. Finance Board Review of Application for Temporary Suspension

a. Grounds for approval of application. Proposed Sec. 960.16(b)(1)

provides that, in determining the financial instability of a Bank, the

Finance Board shall consider such factors as: (1) whether the Bank's

earnings are severely depressed; (2) whether there has been a

substantial decline in the Bank's membership capital; and (3) whether

there has been a substantial reduction in the Bank's advances

outstanding.

b. Limitations on grounds for approval of application. Proposed

Sec. 960.16(b)(2) provides that the Finance

[[Page 57818]]

Board shall disapprove an application for a temporary suspension if it

determines that the Bank's reduction in earnings is a result of: (1) a

change in the terms of advances to members which is not justified by

market conditions; (2) inordinate operating and administrative

expenses; or (3) mismanagement.

The ``reduction in earnings'' language replaces the term

``financial instability'' used in the existing regulation, because the

former is the term used in the Act. See 12 U.S.C. 1430(j)(6); 12 CFR

960.11(c).

In addition, the requirement in Sec. 960.11(c)(5) of the existing

regulation that the Finance Board shall disapprove an application if

for any other reason the temporary suspension is not warranted, is

deleted in the proposed rule because it is not required by the Act. See

12 U.S.C. 1430(j)(6); 12 CFR 960.11(c)(5).

3. Finance Board Decision

Proposed Sec. 960.16(c) provides that the Finance Board's decision

shall be in writing and shall be accompanied by specific findings and

reasons for its action. If the Finance Board approves a Bank's

application for a temporary suspension, the Finance Board's written

decision shall specify the period of time such suspension shall remain

in effect. The proposed rule removes the 30-day requirement for Finance

Board action in the existing regulation, which is not required by the

Act. See 12 U.S.C. 1430(j)(6)(C); 12 CFR 960.11(d).

4. Monitoring

Proposed Sec. 960.16(d) provides that during the term of a

temporary suspension approved by the Finance Board, the affected Bank

shall provide to the Finance Board such financial reports as the

Finance Board shall require to monitor the financial condition of the

Bank.

5. Termination of Suspension

Proposed Sec. 960.16(e) provides that if, prior to the conclusion

of the temporary suspension period, the Finance Board determines that

the Bank has returned to a position of financial stability, the Finance

Board may, upon written notice to the Bank, terminate the temporary

suspension.

6. Application for Extension of Temporary Suspension Period

Proposed Sec. 960.16(f) provides that if a Bank's board of

directors determines that the Bank has not returned to, or is not

likely to return to, a position of financial stability at the

conclusion of the temporary suspension period, the Bank may apply in

writing for an extension of the temporary suspension period, stating

the grounds for such extension. The proposed rule removes the 30-day

requirement for Finance Board action in the existing regulation, which

is not required by the Act. See 12 U.S.C. 1430(j)(6); 12 CFR 960.11(f).

The proposed rule deletes the provisions in the existing regulation

on Finance Board notice to Congress, which are governed by the Act and

need not be included in the regulation. See 12 U.S.C. 1430(j)(6)(F); 12

CFR 960.11(f), (g).

Q. Affordable Housing Reserve Fund--Sec. 960.17

Consistent with the existing regulation and the Act, proposed

Sec. 960.17(a) provides that if a Bank fails to use or commit the full

amount of its required annual contribution to the Program, 90 percent

of the amount that has not been used or committed in that year shall be

deposited by the Bank in an Affordable Housing Reserve Fund established

and administered by the Finance Board. See 12 U.S.C. 1430(j)(7); 12 CFR

960.12(a). The remaining 10 percent of the unused and uncommitted

amount retained by the Bank should be fully used or committed by the

Bank during the following year, and any remaining portion must be

deposited in the Affordable Housing Reserve Fund. See id. Approval of

AHP applications sufficient to exhaust the amount a Bank is required to

contribute pursuant to proposed Sec. 960.15 shall constitute use or

commitment of funds.

Proposed Sec. 960.17(b) provides that by January 15 of each year,

each Bank shall provide to the Finance Board a statement indicating the

amount of unused and uncommitted funds from the prior year, if any,

which will be deposited in the Affordable Housing Reserve Fund.

Proposed Sec. 960.17(c) provides that by January 31 of each year,

the Finance Board will notify the Banks of the total amount of funds,

if any, available in the Affordable Housing Reserve Fund.

Section 960.12(d) of the existing regulation governing how funds in

an Affordable Housing Reserve Fund would be made available to the

Banks, is deleted in the proposed rule. See 12 CFR 960.12(d). The Act

states that such provisions would be determined pursuant to regulations

issued by the Finance Board. See 12 U.S.C. 1430(j)(7). Since there

currently are no such funds and it is not anticipated that there will

be any such funds in the near future, it is not necessary at this time

to include provisions in the proposed rule dealing with this issue. The

Finance Board can issue regulations on this issue at a future date if

such eventuality should arise.

R. Advisory Councils--Sec. 960.18

Proposed Sec. 960.18 implements section 10(j)(11) of the Act

governing the appointment and operations of Bank Advisory Councils. See

12 U.S.C. 1430(j)(11). Proposed Sec. 960.18(a) requires each Bank to

appoint an Advisory Council of 7 to 15 persons, who reside in the

Bank's District and are drawn from community and not-for-profit

organizations actively involved in providing or promoting low- and

moderate-income housing in the District.

Proposed Sec. 960.18(b) continues the existing regulatory

requirement that each Bank shall solicit nominations for membership on

the Advisory Council from community and not-for-profit organizations

pursuant to a nomination process that is as broad and as participatory

as possible, allowing sufficient lead time for responses. See 12 CFR

960.14(d). The Bank shall appoint Advisory Council members giving

consideration to the size of the District and the diversity of low- and

moderate-income housing needs and activities within the District. See

id. Sec. 960.14(b).

Under Sec. 960.14(c) of the existing regulation, state and local

housing officials are considered to qualify as persons drawn from

``community and nonprofit organizations,'' and, therefore, are

permitted to serve on Advisory Councils, provided such officials do not

constitute an ``undue proportion'' of any Advisory Council's

membership. See id. Sec. 960.14(c). Proposed Sec. 960.14(c) broadens

the ``undue proportion requirement'' to apply to all groups represented

on an Advisory Council and adds an affirmative requirement that the

membership of Advisory Councils include persons drawn from a diverse

range of organizations. While the Finance Board does not believe that

there should be absolute limits on the membership of any one group on

the Advisory Councils, the Finance Board wishes to ensure a diversity

of viewpoints so that no one group consistently has a dominant voice on

an Advisory Council. In appointing Advisory Council members, the Banks

are to draw from a diverse range of organizations, provided that

representatives of no one group shall constitute an undue proportion of

the membership of an Advisory Council.

Proposed Sec. 960.18(d) provides that Advisory Council members

shall serve for terms of three years, and such terms shall be staggered

to provide continuity

[[Page 57819]]

in experience and service to theAdvisory Council. This is a change from

the two-year terms required under the existing regulation. See id.

Sec. 960.14(f). The Finance Board believes that extending Advisory

Council members' terms by a year will allow the Banks to benefit from

the experience and familiarity with the Program that Advisory Council

members develop the longer they serve on an Advisory Council.

Proposed Sec. 960.18(d) also provides that an Advisory Council

member may not serve for more than two consecutive terms. This

provision is intended to ensure that the membership of the Advisory

Councils reflects the diverse and changing viewpoints of private sector

community and not-for-profit organizations on the housing and community

development programs and needs of the Bank Districts.

Proposed Sec. 960.18(e) provides that each Advisory Council may

elect from among its members a chairperson, a vice chairperson, and any

other officers the Advisory Council deems appropriate. The Finance

Board believes that allowing the Advisory Council members to elect

their own officers, rather than having their officers appointed by each

Bank, will enhance each Advisory Council's ability to assess

independently the Bank's low- and moderate-income housing and community

development activity.

Proposed Sec. 960.18(f)(1) carries forward the requirement in the

existing regulation that representatives of the board of directors of

the Bank shall meet with the Advisory Council at least quarterly to

obtain the Advisory Council's advice on the low- and moderate-income

housing programs and needs in the Bank's District, and expands the

Advisory Council's role to include providing advice on ways in which

the Bank can better carry out its housing finance mission, including

the utilization of AHP subsidies, Bank advances, and other Bank credit

products for community development programs and needs. The Finance

Board expects that the Advisory Councils will assume a central role in

advising the Banks on carrying out their overall housing finance

mission, in addition to their specific focus on affordable housing and

community development. Further, nothing in the proposed rule precludes

Advisory Councils from meeting with representatives of the board of

directors of the Bank more frequently than quarterly.

Proposed Sec. 960.14(f)(2) adds a new requirement that a Bank shall

comply with requests from the Advisory Council for summary information

regarding AHP applications from prior funding periods. Upon the request

of the Advisory Council, the Bank shall allow Advisory Council members

to examine, on the Bank's premises, any AHP applications from prior

funding periods. The Finance Board believes that this will aid the

Advisory Council members in evaluating how the AHP application scoring

guidelines adopted by the Bank affect the allocation of AHP subsidies

among different types of housing projects. Due to cost considerations,

the Banks are not required to distribute copies of the applications to

the Advisory Councils, but may do so, at their discretion. In making

AHP applications available for inspection, the Banks are subject to any

confidentiality requirements of other laws that may apply. The Banks

should take adequate precautions to maintain confidentiality and avoid

conflicts of interest. Such precautions may include redacting portions

of the AHP applications, as well as requiring Advisory Council members

to agree not to disclose information from AHP applications.

Proposed Sec. 960.14(f)(3) carries forward the annual reporting

requirement in Sec. 960.14(j) of the existing regulation, see id.

Sec. 960.14(j), but moves back the date of submission to the Finance

Board from January 31 to March 1, and requires that the Advisory

Council's report include an analysis of the community development

activity of its Bank, in addition to its low- and moderate-income

housing activity. The change in the reporting date is intended to give

the Advisory Councils sufficient time after the end of the year to

compile and evaluate year-end data in order to prepare their reports to

the Finance Board.

Proposed Sec. 960.18(g) continues the existing regulatory

requirement that the Bank shall pay Advisory Council members travel

expenses, including transportation and subsistence, for each day

devoted to attending meetings with representatives of the board of

directors of the Bank. Nothing in the proposed rule precludes the Banks

from paying fees to Advisory Council members for attending meetings

with representatives of the Banks' boards of directors. The Banks may

do so at their discretion. Advisory Council members often are employed

by organizations that make a financial sacrifice to lend housing and

community development expertise to a Bank. Therefore, individual Banks

should consider payment of fees to Advisory Council members.

Proposed Sec. 960.18(h) adds a new requirement that an Advisory

Council member who has a personal interest in, or who is a director,

officer or employee of an organization involved in a project that is

the subject of a pending or approved AHP application, may not

participate in or attempt to influence the evaluation, approval,

funding, monitoring, or any remedial process for such project under the

Program. Each Bank's board of directors shall adopt a written policy

applicable to the Bank's Advisory Council members to prevent actual or

apparent conflicts of interest under the Program.

The Finance Board specifically requests comments on the role,

selection, compensation, and all other aspects of Advisory Councils.

III. Regulatory Flexibility Act

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

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

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

with section 605(b) of the RFA, see id. section 605(b), the Finance

Board hereby certifies that this proposed rule, if promulgated as a

final rule, will not have a significant economic impact on a

substantial number of small entities.

IV. Paperwork Reduction Act

The current information collection has been approved by the Office

of Management and Budget (OMB) and assigned OMB control number 3096-

0006. The Finance Board has submitted to OMB for its approval an

analysis of the proposed changes to the collection of information

resulting from the proposed rule. The collection of information, as

proposed to be revised, is described more fully in part II of the

SUPPLEMENTARY INFORMATION. The information collection is necessary to

enable the Banks and, where appropriate, the Finance Board, to

determine: (1) whether AHP applications satisfy the statutory and

regulatory requirements for the award of AHP subsidies; and (2) whether

the use of AHP subsidies awarded to members is consistent with

applicable requirements. See 12 U.S.C. 1430(j).

Likely respondents and/or recordkeepers will be financial

institutions that are members of a Bank, housing developers, and owners

of multifamily housing projects. Respondents are required to meet the

collection and recordkeeping requirements in order to obtain and retain

a benefit. Confidentiality of information obtained from respondents

pursuant to this proposed revision of the currently approved

information collection will be maintained by the Finance Board as

required by applicable

[[Page 57820]]

statute, regulation, and agency policy.Potential respondents are not

required to respond to the collection of information unless the

regulation collecting the information displays a currently valid

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

The estimated annual reporting and recordkeeping hour burden is:

a. Number of respondents--7462

b. Total annual responses--9949

Percentage of these responses collected electronically--0%

c. Total annual hours requested--64,274

d. Current OMB inventory--33,067

e. Difference--31,207

The estimated annual reporting and recordkeeping cost burden is:

a. Total annualized capital/startup costs--0

b. Total annual costs (O&M)--0

c. Total annualized cost requested--$2,117,450.00

d. Current OMB inventory--0

e. Difference--$2,117,450.00

The current OMB inventory for the estimated annual reporting and

recordkeeping hour burden is based on the information collection

contained in the proposed amendments to the AHP regulation that were

issued by the Finance Board on January 10, 1994, but were never

finalized. See 59 FR 1323 (Jan. 10, 1994). Comments concerning the

accuracy of the burden estimates and suggestions for reducing the

burden may be submitted to the Finance Board in writing at the address

listed above.

The collections of information have been submitted to OMB for

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

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

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

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

Federal Housing Finance Board, Washington, DC 20503, by February 6,

1996.

List of Subjects in 12 CFR Part 960

Credit, Federal home loan banks, Housing, Reporting and

recordkeeping requirements. Accordingly, the Finance Board hereby

proposes to revise title 12, chapter IX, part 960, Code of Federal

Regulations, to read as follows:

PART 960--AFFORDABLE HOUSING PROGRAM

Sec.

960.1 Definitions.

960.2 Operation of Program and adoption of AHP implementation plan.

960.3 Eligible costs.

960.4 Retention of AHP-assisted housing.

960.5 Timing of household income qualification.

960.6 Funding periods.

960.7 Application requirements.

960.8 Application scoring and approvals.

960.9 Disbursement of AHP subsidies.

960.10 Modifications of approved AHP applications.

960.11 Avoidance of actual or apparent conflicts of interest.

960.12 Homeownership assistance programs.

960.13 Monitoring requirements.

960.14 Corrective and remedial actions for noncompliance.

960.15 Required annual AHP contributions.

960.16 Temporary suspension of AHP contributions.

960.17 Affordable Housing Reserve Fund.

960.18 Advisory Councils.

Authority: 12 U.S.C. 1430(j).

Sec. 960.1 Definitions.

As used in this part:

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

1421 et seq.).

Advance means a loan to a member from a Bank that is:

(1) Provided pursuant to a written agreement;

(2) Supported by a note or other written evidence of the borrower's

obligation; and

(3) Fully secured by collateral in accordance with the Act and part

935 of this chapter.

Affordable means, for purposes of an AHP-assisted rental unit, that

the monthly housing costs charged to a household for such unit not

exceed 30 percent of the income of a household of the maximum income

and size expected, under the commitment made in the approved AHP

application, to occupy the unit (assuming occupancy of 1.5 persons per

bedroom or 1.0 person per unit without a separate bedroom).

AHP or Program means the Affordable Housing Program established

pursuant to 12 U.S.C. 1430(j) and this part.

Area has the same meaning as that used by the Department of Housing

and Urban Development for purposes of determining its annually

published area median income limits.

Bank means a Federal Home Loan Bank established under the authority

of the Act.

CIP means a Bank's Community Investment Program established under

section 10(i) of the Act (12 U.S.C. 1430(i)).

Cost of funds means, for purposes of a subsidized advance, the

estimated cost of issuing Bank System consolidated obligations with

maturities comparable to that of the subsidized advance.

Direct subsidy means an AHP subsidy in the form of a direct cash

payment.

Finance Board means the agency established as the Federal Housing

Finance Board.

Homeless means an individual, other than an individual imprisoned

or otherwise detained pursuant to state or federal law, who:

(1) Lacks a fixed, regular, and adequate nighttime residence; or

(2) Has a primary nighttime residence that is:

(i) A supervised publicly or privately operated shelter designed to

provide temporary living accommodations (including welfare hotels,

congregate shelters, and transitional housing for the mentally ill);

(ii) An institution that provides a temporary residence for

individuals intended to be institutionalized; or

(iii) A public or private place not designed for, or ordinarily

used as, a regular sleeping accommodation for human beings.

Housing credit agency means a state or local government agency

authorized to allocate federal Low-Income Housing Tax Credits under 26

U.S.C. 42.

Low-or moderate-income household means a household which has an

income of 80 percent or less of the median income for the area,

adjusted for family size, as published annually by the U.S. Department

of Housing and Urban Development.

Low-or moderate-income neighborhood means any neighborhood in which

51 percent or more of the households are low-or moderate-income

households.

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 and 933.24 of this chapter.

Monthly housing costs means:

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

principal and interest payments, real property taxes, homeowners'

insurance, a reasonable estimate of utility costs excluding telephone

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

mutual housing or other housing projects involving common ownership,

those portions of any regular operating assessment or fee allocated for

principal and interest payments, taxes, insurance and a reasonable

estimate of utilities attributable to the household's share of the

common area and/or the individual unit; and

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

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

estimate of utility costs, excluding telephone service.

Net earnings of a Bank means the net earnings of a Bank for a

calendar year after deducting the Bank's pro rata share

[[Page 57821]]

of the annual contribution to the Resolution Funding Corporation

required under sections 21A or 21B of the Act (12 U.S.C. 1441a, 1441b),

and before declaring any dividend under section 16 of the Act (12

U.S.C. 1436).

Owner-occupied project means a project involving the purchase,

construction, or rehabilitation of owner-occupied housing.

Permanent or transitional housing means housing with six-month

minimum occupancy, but excluding overnight shelters.

Pre-development expenses means expenses for the purpose of

determining the feasibility of a proposed project.

Project modification means any change in the project prior to the

project's completion, full occupancy and closing of permanent

financing, that materially affects the facts under which the project's

AHP application was originally scored under Sec. 960.8 and approved.

Rental project means a project involving the purchase,

construction, or rehabilitation of rental housing.

Retention period means the period during which the sponsor or owner

of an AHP-assisted project commits to comply with the requirements of

12 U.S.C. 1430(j), this part, and the terms of the approved AHP

application. The minimum retention period for an owner-occupied unit is

5 years, and for a rental unit is 15 years from the date of project

completion.

Sponsor means a not-for-profit or for-profit organization or public

entity that is:

(1) An owner of a rental project; or

(2) Integrally involved in an owner-occupied project, such as by

exercising control over the planning, development, or management of the

project, or by qualifying borrowers and providing or arranging

financing for the owners of the housing units.

State means a state of the United States, the District of Columbia,

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

Subsidized advance means an advance to a member at an interest rate

reduced below the Bank's cost of funds, by use of a subsidy.

Subsidy means:

(1) A direct subsidy, provided that if a direct subsidy is used to

write down the interest rate on a loan extended by a member, sponsor,

or other party to a project, the subsidy shall equal the net present

value of the interest foregone from making the loan below the lender's

market interest rate (calculated as of the date the AHP application is

submitted to the Bank, and subject to adjustment under

Sec. 960.9(c)(1)); or

(2) The net present value of the interest revenue foregone from

making a subsidized advance at a rate below the Bank's cost of funds,

determined as of the date of disbursement of the subsidized advance or

the date prior to disbursement on which the Bank first manages the

funding to support the subsidized advance through its asset/liability

management system, or otherwise.

Very low-income household means a household which has an income of

50 percent or less of the median income for the area, adjusted for

family size, as published annually

This text is long and has been trimmed here. Open the source document for the complete record.