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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

1 CFR Part 462

24 CFR Part 81

[Docket No. FR-4095-F-02]

RIN 2501-AC35

The Secretary of HUD's Regulation of the Federal National

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage

Corporation (Freddie Mac): Book-Entry Procedures

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule establishes final procedures that govern the

issuance, recordation, and transfer of Federal National Mortgage

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

(``Freddie Mac'') (collectively ``Government-Sponsored Enterprises'' or

``GSEs'') securities in the Book-entry System. The rule makes final,

with only minor changes, the interim rule published in the Federal

Register on December 2, 1996 (61 FR 63944).

EFFECTIVE DATE: June 30, 1997.

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

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

or, for legal questions, Kenneth A. Markison, Assistant General Counsel

for Government Sponsored Enterprises/RESPA, Office of the General

Counsel, Room 9262, telephone (202) 708-3137. The address for both of

these persons is: Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410. A telecommunications device

for deaf persons (``TTY'') is available at (202) 708-9300. (The

telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

Both Fannie Mae and Freddie Mac use the Book-entry System of the

Federal Reserve Banks to issue, record, and transfer ownership of

certain of their respective securities. Although the Book-entry System

was originally designed for Treasury securities, both GSEs have used

this system under separate sets of regulations dating back to the late

1970s. Treasury regulations govern the Book-entry System, known as the

commercial book-entry system, when it is used to issue, record,

transfer and maintain Treasury securities. Recently, Treasury

substantially modified its regulations governing Treasury securities

held in this system to reflect contemporary legal development of the

Uniform Commercial Code (``UCC''). Treasury's regulation was published

on August 23, 1996 (61 FR 43626).

On December 2, 1996, pursuant to its general regulatory authority

respecting the GSEs, HUD published in the Federal Register (61 FR

63944) an interim rule to revise the regulations governing the book-

entry of GSE securities. As explained in the preamble to the interim

rule, except as was necessary because of differences between the GSEs

and their securities and Treasury and Treasury securities, HUD's

revisions to its GSE book-entry regulations followed the revisions

Treasury made to its book-entry regulations. The preamble to HUD's

interim rule provided background information explaining HUD's process

in developing the interim rule, HUD's analysis of revisions to the

book-entry procedures, and a section-by-section comparison of the

interim rule with Treasury's model. Since the discussion in the

preamble to the interim rule remains applicable, HUD is not

republishing the discussion contained in the preamble to the proposed

rule.

II. Changes Contained in Today's Final Rule

HUD received only two public comments on the interim rule. Both of

those comments came from Fannie Mae. Fannie Mae suggested several

changes, all of which have been incorporated, in one form or another,

into the final rule.

1. Fannie Mae suggested inserting a definition of ``participant''

to clarify that a participant can include a GSE, rather than using the

definition of ``participant'' in Treasury's TRADES regulation. Using

the TRADES definition of participant would effectively exclude a GSE

from being a participant within the meaning in HUD's GSE book-entry

rule, since to be a participant under the TRADES definition, the entity

must be a ``person'' and under HUD's GSE book-entry rule a ``person''

does not include a GSE. The GSEs frequently hold GSE securities

directly through Federal Reserve Banks and act as participants. HUD has

added a definition of ``participant'' to section 81.2 which includes

the GSEs to clarify this point.

2. Fannie Mae suggested inserting a definition of ``entitlement

holder'' to clarify that an entitlement holder can include a GSE,

rather than using the definition of ``entitlement holder'' in

Treasury's TRADES regulation. Using the TRADES definition of

entitlement holder would effectively exclude a GSE from being an

entitlement holder within the meaning in HUD's GSE book-entry rule,

since to be an entitlement holder under the TRADES definition, the

entity must be a ``person'' and under HUD's GSE book-entry rule a

``person'' does not include a GSE. While the interim rule defined

``entitlement holder'' in Sec. 81.2, that definition did effectively

exclude a GSE. Since Fannie Mae and Freddie Mac frequently hold GSE

securities directly or indirectly through Federal Reserve Banks, they

could be entitlement holders just as they could be participants. HUD

agrees that the interim rule should be modified. HUD has revised the

definition of ``entitlement holder'' in Sec. 81.2 to include the GSEs

to clarify this point.

3. Fannie Mae suggested adding a sentence to the end of the

definition of ``Book-entry GSE Security'' to clarify that a book-entry

GSE Security also includes the separate interest and principal

components of a Book-entry GSE Security if such security has been

designated by the GSE as eligible for division into such components and

the components are maintained separately on the books of one or more

Federal Reserve Banks.

Fannie Mae requested that this language be inserted to ensure that

interest or principal ``strips'' relating to Fannie Mae securities are

accorded the same treatment as Fannie Mae securities if they are also

maintained on the books

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of a Federal Reserve Bank. Fannie Mae noted that the final rule

published by the Thrift Depositor Protection Oversight Board governing

book-entry Resolution Funding Corporation (``RFC'') securities included

similar language. See Thrift Depositor Protection Oversight Board

regulation governing book-entry RFC securities, Final rule,

Secs. 1511.1 (definition of ``Book-entry Funding Corporation

Security'') (61 FR 66874, December 19, 1996).

HUD agrees that such a clarification is appropriate and has

inserted language into the definition of ``Book-entry GSE Security''

addressing this point. HUD notes that the language in the final rule

departs from the language in the regulation governing book-entry RFC

securities because while the Securities Documentation for book-entry

RFC securities specifically addresses whether the division of the

separate interest and principal components is authorized, the

Securities Documentation for Book-entry GSE Securities does not address

this matter.

4. Fannie Mae suggested clarifying in Sec. 81.92(a) that any choice

of law provision in the Securities Documentation would be given effect

only to the extent it is not inconsistent with HUD's regulation. HUD

agrees with the comment. To the extent that the choice of law

provisions in the Securities Documentation conflict with HUD's book-

entry regulations, HUD's book-entry regulations would take precedence.

Thus, the parenthetical in Sec. 81.92(a) has been revised. This

revision makes this provision in HUD's regulation more similar to the

comparable provision in Treasury regulations applicable to Student Loan

Marketing Association (``Sallie Mae'') securities. See the Bureau of

the Public Debt, Fiscal Service, Treasury regulation governing book-

entry Sallie Mae securities, Final rule, Secs. 354.2(a) (62 FR 621,

623, January 6, 1997).

5. Fannie Mae also suggested several editorial changes, all which

have been incorporated into the final rule. These changes included

clarifying the definition of ``Eligible Book-entry GSE Security'' in a

manner consistent with the definition used by the Farm Credit

Administration in its book-entry rule. See Farm Credit Administration

regulation governing book-entry Farm Credit securities, Interim rule,

Sec. 615.5450 (definition of ``Eligible book-entry security'') (61 FR

67188, 67192, December 20, 1996).

In addition to these comments from Fannie Mae, during the comment

period, HUD continued to consult with Treasury on the development of a

final rule. Treasury suggested one change to the rule which HUD has

incorporated into this final rule.

The change suggested by Treasury is to delete the reference to

``the United States'' in the following four occurrences in the interim

rule:

1. Section 81.92(a)(1), which specified that the rights and

obligations of the United States with respect to a Book-entry GSE

Security or Security Entitlement and the operation of the Book-entry

System as it applies to GSE Securities are governed by the Book-entry

regulations contained in this subpart H, the Securities Documentation

(but not including any choice of law provisions in such documentation),

and Federal Reserve Bank Operating Circulars.

2. Section 81.92(a)(2), which specified that the rights of the

United States with respect to a Book-entry GSE Security or Security

Entitlement and the operation of the Book-entry System applicable to

GSE Securities are governed by the Book-entry regulations contained in

this subpart H, the Securities Documentation (but not including any

choice of law provisions in such documentation), and Federal Reserve

Bank Operating Circulars.

3. Section 81.93(c)(1), which specified that the United states has

no obligation to agree to act on behalf of any Person or to recognize

the interest of any transferee of a security interest or other limited

interest in favor of any Person except to the extent of any specific

requirement of Federal law or regulation or to the extent set forth in

any specific agreement with the Federal Reserve bank on whose books the

interest of the Participant is recorded.

4. Section 81.94(a), which specified that the United States is not

liable to a Person asserting or having an adverse claim to a Security

Entitlement or to a Book-entry GSE Security in a Participant's

Securities Account, including any such claim arising as a result of the

transfer or disposition of a Book-entry GSE Security by a Federal

Reserve Bank pursuant to a Transfer Message that the Federal Reserve

Bank reasonably believes to be genuine.

The reason for eliminating the references to the United States in

these four provisions is to avoid any unintended suggestion that there

is an express or implied United States guarantee of GSE securities.

Notwithstanding that the GSEs enjoy the financial market's assumption

that the Federal Government and, ultimately, the American taxpayer

would stand behind the obligations of the GSEs, the GSEs' obligations

explicitly are not guaranteed by the United States. See, e.g., section

1302(4), 1381(f) and 1382(n) of the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992 (Title XIII of the Housing

and Community Development Act of 1992 (Pub. L. 102-550, approved

October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641)

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

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

States.'')).

This change to these four provisions conforms HUD's rule to the

book-entry rules published by other agencies with oversight of other

Government Sponsored Enterprises. See Federal Housing Finance Board

regulation governing book-entry Federal Home Loan Bank securities,

Interim rule, Secs. 912.2(a), 912.4(c)(1), 912.5(a) (61 FR 64021-64027,

December 3, 1996); Thrift Depositor Protection Oversight Board

regulation governing book-entry RFC securities, Final rule,

Secs. 1511.2(a)(1), 1511.2(a)(2), 1511.4(c)(1), 1511.5(a) (61 FR 66875-

66878, December 19, 1996); Bureau of the Public Debt, Fiscal Service,

Treasury regulation governing book-entry Sallie Mae securities, Final

rule, Secs. 354.2(a)(1), 354.2(a)(2), 354.4(c)(1), 354.5(a) (62 FR 621-

625, January 6, 1997); and Tennessee Valley Authority (``TVA'')

regulation governing book-entry TVA Power securities, Final rule,

Secs. 1314.4(a)(1), 1314.4(a)(2), 1314.5(c), 1314.6(a) (62 FR 920-923,

January 7, 1997).

Findings and Certifications

Public Reporting Burden

This rule contains no new information collection requirements that

would require review by the Office of Management and Budget under the

Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this interim rule, and in so

doing certifies that this rule will not have a significant economic

impact on a substantial number of small entities. This rule affects the

operation of two entities, Fannie Mae and Freddie Mac, neither of which

is a small entity.

Environmental Impact

This rule is exempt from the requirement for an environmental

assessment under section 102(2)(C) of the National Environmental Policy

Act of 1969 (42 U.S.C. 4332), in accordance with HUD regulations at 24

CFR 50.19(c)(1), as revised by a final rule on September 27, 1996 (61

FR 50919). In

[[Page 28977]]

accordance with 24 CFR 50.19(a), other Federal environmental laws, as

described in 24 CFR 50.4, are not applicable to this rule.

Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that this rule's

preemption of State law to the extent that it applies the newly revised

Article 8 of the Uniform Commercial Code has sufficient effect on

States to require consideration of the impact of the rule under the

Order. The General Counsel has assessed this preemption in light of the

principles, criteria, and requirements of the Executive Order and

determined that it is not inconsistent with them. The policy does not

impose additional costs or burdens on the States and it does not affect

the States' ability to discharge traditional State governmental

functions.

This rule makes explicit the preemption applicable to the rights

and obligations of the Federal Reserve Banks and the GSEs that was

implicit under the prior rule. The rule continues to accommodate State

law, to the maximum extent possible, given market methodologies.

Ultimately, as States proceed to adopt the revised Article 8, the rule

will provide no greater preemption of State law than under the prior

rule.

The rule is justified, despite the preemption it effects, by the

fact that the preemption is no greater than necessary to accommodate

the nationwide application of the rule and the nationwide market for

the GSE Securities, as was the preemption under the book-entry rules

this rule replaces. It should be noted that section 304(d) of the

Fannie Mae Charter Act (12 U.S.C. 1719(d)) and section 306(g) of the

Freddie Mac Act (12 U.S.C. 1455(f)) specifically provide for the

exemption of GSE securities from State securities registration

requirements (as well as the registration requirements of the

Securities and Exchange Commission). See also 15 U.S.C. 77r-1.

Unfunded Mandates Reform Act

The Secretary, in accordance with the Unfunded Mandates Reform Act

of 1995, 2 U.S.C. 1532, has reviewed this rule before publication and

by approving it certifies that this rule does not impose a Federal

mandate that will result in the expenditure by State, local, and tribal

governments, in the aggregate, or by the private sector, of $100

million or more in any one year.

Catalog

There is no Catalog of Federal Domestic Assistance number for the

program affected by this rule.

List of Subjects

1 CFR Part 462

Accounting, Banks, Banking, Securities.

24 CFR Part 81

Accounting, Federal Reserve System, Mortgages, Reporting and

recordkeeping requirements, Securities.

Accordingly, for the reasons set out in the preamble, under the

authority of 42 U.S.C. 3535(d), the amendments to part 462 of title 1

of the Code of Federal Regulations and part 81 of title 24 of the Code

of Federal Regulations published in the interim rule on December 2,

1996 are adopted as final with the following additional amendments:

TITLE 24--DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL

MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN

MORTGAGE CORPORATION (FREDDIE MAC)

1. The authority citation for Part 81 continues to read as follows:

Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42

U.S.C. 3535(d) and 3601-3619.

2. In Sec. 81.2(b), the definitions of ``Book-entry GSE Security'',

``Eligible Book-entry GSE Security'', ``Entitlement Holder'', and

``Securities documentation'' are revised and a new definition of

``Participant'' is added, in appropriate alphabetical order location,

to read as follows:

Sec. 81.2 Definitions.

* * * * *

Book-entry GSE Security means a GSE Security issued or maintained

in the Book-entry System. Book-entry GSE Security also means the

separate interest and principal components of a Book-entry GSE Security

if such security has been designated by the GSE as eligible for

division into such components and the components are maintained

separately on the books of one or more Federal Reserve Banks.

* * * * *

Eligible Book-entry GSE Security means a Book-entry GSE Security

issued or maintained in the Book-entry System which by the terms of its

Security Documentation is eligible to be converted from book-entry form

into definitive form.

Entitlement Holder means a Person or a GSE to whose account an

interest in a Book-entry GSE Security is credited on the records of a

Securities Intermediary.

* * * * *

Participant means a Person or GSE that maintains a Participant's

Securities Account with a Federal Reserve Bank.

* * * * *

Securities Documentation means the applicable statement of terms,

trust indenture, securities agreement or other documents establishing

the terms of a Book-entry GSE Security.

* * * * *

3. In Sec. 81.92, paragraph (a) is revised to read as follows:

Sec. 81.92 Law governing rights and obligations of Federal Reserve

Banks and GSEs; rights of any Person against Federal Reserve Banks and

GSEs; Law governing other interests.

(a) Except as provided in paragraph (b) of this section, the

following rights and obligations are governed solely by the book-entry

regulations contained in this subpart H, the Securities Documentation,

and Federal Reserve Bank Operating Circulars (but not including any

choice of law provisions in the Security Documentation to the extent

such provisions conflict with the Book-entry regulations contained in

this subpart H):

(1) The rights and obligations of a GSE and the Federal Reserve

Banks with respect to:

(i) A Book-entry GSE Security or Security Entitlement; and

(ii) The operation of the Book-entry System as it applies to GSE

Securities; and

(2) The rights of any Person, including a Participant, against a

GSE and the Federal Reserve Banks with respect to:

(i) A Book-entry GSE Security or Security Entitlement; and

(ii) The operation of the Book-entry System as it applies to GSE

Securities;

* * * * *

Sec. 81.93 [Amended]

4. In Sec. 81.93, paragraph (c)(1) is amended by removing the

phrase ``, the United States,''.

Sec. 81.94 [Amended]

5. In Sec. 81.94, paragraph (a) is amended by removing the phrase

``, the United States,''; and paragraph (b)(2) is amended by removing

the words ``principal and interest'' and by adding the words

``redemption proceeds'' in their place.

Sec. 81.96 [Amended]

6. In Sec. 81.96, paragraph (d) is amended by removing the words

``offering circular'' and by adding in their place the words

``Securities Documentation''.

[[Page 28978]]

Dated: May 20, 1997.

Andrew Cuomo,

Secretary.

[FR Doc. 97-14028 Filed 5-28-97; 8:45 am]

BILLING CODE 4210-32-P