Restrictions on Advances to Non-Qualified Thrift Lenders

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 97-62]

RIN 3069-AA60

Restrictions on Advances to Non-Qualified Thrift Lenders

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

its regulations on advances to members that are not qualified thrift

lenders. The amendments revise an interim rule and implement the

Economic Growth and Regulatory Paperwork Reduction Act of 1996

(EGRPRA), which broadened the types of assets that may be used to

satisfy the qualified thrift lender (QTL) requirement. The final rule

includes a safe harbor for ``loans to small businesses'' (i.e.,

commercial loans of $1,000,000 or less or farm loans of $500,000 or

less) and allows persons other than the chief executive officer (CEO)

to certify the accuracy of certain QTL information. The final rule also

changes the dates by which the Federal Home Loan Banks (Banks) must

determine the QTL status of their members, which conforms the annual

QTL determination to the date on which commercial loan data become

available.

EFFECTIVE DATE: The final rule will become effective October 3, 1997,

except for the amendments to 12 CFR

[[Page 52012]]

935.13(a)(3)(i), which take effect on December 30, 1997.

FOR FURTHER INFORMATION CONTACT: Gregory V. Goggans, Senior Financial

Analyst, Financial Analysis and Reporting Division, Office of Policy,

202/408-2878, or Neil R. Crowley, Associate General Counsel, Office of

General Counsel, 202/408-2990, Federal Housing Finance Board, 1777 F

Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

On February 27, 1997, the Finance Board published, and requested

public comments on, an interim rule that amended the regulations

relating to the QTL status of non-savings association members. 62 FR

8868 (Feb. 27, 1997). The interim rule required the Banks to use

financial information from the call reports of such members when

determining their QTL status, but also allowed the use of other

information if certified by the member's CEO. The interim rule

reflected changes made to the QTL test by EGRPRA, as well as by an

interim rule adopted by the Office of Thrift Supervision (OTS), which

administers the QTL statute. The Finance Board indicated that it would

monitor the OTS rulemaking proceeding and expected to incorporate any

material changes made by OTS into the advances regulation. OTS later

adopted a final rule that broadened the definition of the term ``loans

to small businesses'' as used in the QTL provisions. 62 FR 15819 (April

3, 1997). The Finance Board is now incorporating the substance of the

OTS definition of ``loans to small businesses'' and is shifting forward

by six months the period within which the Banks must determine the QTL

status of their non-savings association members. The final rule also

allows the CEO to delegate to the chief financial officer, chief

operating officer, or controller of such members the authority to

certify the accuracy of any QTL financial data that do not appear in

the member's call report.

In 1987, Congress established the QTL test, which required savings

associations to maintain 60 percent of their assets in instruments

related to domestic residential real estate or manufactured housing.

Competitive Equality Banking Act of 1987, Pub. L. 100-86, sec. 104(c),

101 Stat. 571-573 (August 10, 1987). The QTL test now requires savings

associations to maintain 65 percent or more of their assets in what are

characterized as ``qualified thrift investments.'' 12 U.S.C. 1467a(m).

The QTL test does not apply directly to commercial banks or credit

unions, but, in 1989, when Congress authorized commercial banks and

credit unions to become members of the Federal Home Loan Bank System

(System), it also limited their access to advances if they do not

comply with the QTL test. Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, sec. 704(a), 103

Stat. 415 (August 9, 1989), codified at 12 U.S.C. 1424(a).

Specifically, FIRREA required such members that do not meet the QTL

test to purchase greater amounts of Bank stock to support their

advances, and mandated that they could obtain advances only for housing

finance purposes. FIRREA also gave QTL members a priority over non-QTL

members on access to advances, and imposed a 30 percent System-wide

limit on the aggregate amount of advances that could be outstanding to

non-QTL members. 12 U.S.C. 1430(e).

The Banks are required to determine the QTL status of each non-

savings association member at least annually, between January 1 and

April 15, based on financial information as of December 31 of the prior

calendar year. To do so, they must calculate the ``actual thrift

investment percentage'' (ATIP) for each such member, which is obtained

by dividing the institution's ``qualified thrift investments'' by its

``portfolio assets.'' 12 CFR 935.13(a)(3). In EGRPRA, Pub. L. 104-208,

110 Stat. 3009 (Sept. 30, 1996), Congress amended the QTL test by

broadening the universe of assets that are considered to be ``qualified

thrift investments.'' Pursuant to those amendments, loans for

educational purposes, loans to small businesses, and loans made through

credit cards or credit card accounts, as well as an increased amount of

consumer loans, now may be included when determining the amount of an

institution's ``qualified thrift investments.'' Congress directed OTS

to define the term ``small business'' for purposes of the amended QTL

test, which OTS has done. 61 FR 60179 (Nov. 27, 1996) (interim rule);

62 FR 15819 (Apr. 3, 1997) (final rule), codified at 12 CFR 560.3.

As part of its interim rule, OTS defined ``small business loans''

narrowly, limiting the term to any loan made to a small business

concern or entity as defined by the Small Business Act, 15 U.S.C.

632(a), and the implementing regulations of the Small Business

Administration (SBA). The practical effect of relying solely on the SBA

regulations was to exclude from the QTL calculation any business loans

for which the lender did not possess the documentation required to

demonstrate that the loan in fact would satisfy the rather detailed

requirements of the SBA regulations. Because of the complexity of those

SBA provisions, and in response to public comments, the OTS final rule

revised the definition to add a ``safe harbor'' provision for ``small

business loans'' and ``loans to small businesses.'' Under the ``safe

harbor'' provision of the OTS final rule, a commercial loan also is

deemed to be a loan to small business for QTL purposes if the loan

meets the criteria for ``loans to small businesses and small farms''

set out in the instructions for the OTS Thrift Financial Report. 62 FR

15819, 15825 (Apr. 3, 1997), codified at 12 CFR 560.3. Under those

criteria, a ``loan to small business'' includes any business loan (or

any series of loans to the same borrower) in the original amount of

$1,000,000 or less, or any farm loan (or series of loans to the same

borrower) in the original amount of $500,000 or less.

The Finance Board issued its interim rule based on the provisions

of EGRPRA, as implemented by the OTS interim rule. Thus, the Finance

Board's interim rule directed the Banks to use the financial

information from their members' December 31 call reports as the primary

source for QTL determinations. 12 CFR 935.13(a)(3). The interim rule

recognized that certain items, such as business loans that meet the SBA

definition, are not separately identified on the call report.

Accordingly, the interim rule also included a certification procedure

under which a member could include in its QTL calculation items that do

not appear on the call report, provided the accuracy of the information

was certified by the CEO of the member. The Finance Board acknowledged

the practical difficulties associated with using the SBA definition of

small business loan and solicited comments on all aspects of the

interim rule.

II. Comments

The Finance Board received twelve comments on the interim rule. All

of the commenters who addressed the issue of certification endorsed the

concept as a practical method of providing information necessary for

the QTL calculation that does not appear in the call report. Most of

those also suggested that officers other than the CEO be allowed to

execute the certification. One commenter suggested that the involvement

of the CEO was necessary to ensure the accuracy of the information and

should not be delegated to any other officer. Of those addressing the

issue of loans to small businesses, all commenters favored the use of a

proxy (such as the call report data on

[[Page 52013]]

commercial loans to small businesses) in addition to, or in lieu of,

the SBA definition of small business loans.

III. Description of the Final Rule

One commenter questioned whether the interim rule was intended to

allow the Banks to rely on certifications from their members as an

alternative, rather than as a supplement, to the information obtained

from the call report. The intention of the Finance Board is that the

members' call reports, as that term is defined, are to be the principal

source of the financial information used to calculate the QTL status of

the members. The Finance Board recognizes that certain items that are

included as ``qualified thrift investments'' or ``portfolio assets''

under the QTL test are not separately identified on the call report. It

is with respect to those items that the Banks may accept a

certification from the member.

The Finance Board also recognizes that some Banks may, as a matter

of practice, first obtain uncertified information from their members

regarding their QTL assets and subsequently confirm the accuracy of

that information against the members' call report. The final rule would

not affect that practice, provided that the Bank uses the available

call report data when making the final QTL calculation. Any information

that is not derived from the call report may be used in the QTL

calculation only if a member provides the appropriate certification.

The intent in creating the certification provision is to provide a

means by which non-savings association members may include within the

QTL calculation any eligible assets that are not available from the

call report, at the option of the member; such certifications are not

mandated.

The Finance Board believes that the commenters' contention that the

CEO need not be the only officer authorized to certify the accuracy of

a member's non-call report financial data presents a legitimate issue.

Accordingly, the final rule allows the CEO to delegate his or her

authority to sign the certification to the chief financial officer,

chief operating officer, or controller of a non-savings association

member. As noted in the interim rule, in requiring a certification the

Finance Board has attempted to strike a balance between its need to

ensure that the Banks base their QTL calculations on accurate financial

information and the desire of the Banks to manage their affairs with

their members.

The Finance Board does not believe that it would be prudent to

allow more junior officers to execute the QTL certifications because

the Banks, and the Finance Board, have no independent means of

verifying that information. The Finance Board does not examine the

members of the Banks; such examinations are conducted by the principal

federal or state regulators. With respect to the non-savings

association members, the principal regulators do not examine their

subjects for compliance with the QTL test. Without an independent

examination of QTL status, the Finance Board needs some other means of

ensuring that the information used by the Banks is accurate. By

requiring the formality of a written certification from a senior

officer, the Finance Board believes that the Banks will have sufficient

assurance that the matter has received careful consideration by the

member. Allowing the CEO to delegate signature authority to additional

senior officers should address the commenters' concerns that CEO not be

burdened with this task, while maintaining accountability at the CEO

level. As a point of clarification, the certification provision does

not require, as some commenters apparently believe, that the senior

officers must personally determine the amount and composition of QTL

assets that do not appear separately on the call report. The

certification provisions require only that the CEO or, if the CEO

delegates that authority, one of the senior officers specified by the

rule, sign and date the certification. As with other corporate matters,

it is assumed that senior management will assign to the appropriate

employees the task of compiling the information.

As was noted in the interim rule, the use of the SBA definition of

small business loans for QTL purposes was problematic because it would

exclude from the QTL calculation of ``qualified thrift investments''

any small business loans that did not meet the detailed requirements

for SBA loans. Under the SBA regulations, a ``small business'' is an

entity the gross receipts of which (or the number of its employees)

fall below certain thresholds specified by SBA, which may vary

depending on the type of business in which the entity is engaged.

Unless a member had made a loan in connection with a SBA program, it

would be unlikely to have obtained such information for its loan files.

OTS addressed this issue in its final rule by including a ``safe

harbor'' provision, which defines ``small business loans'' and ``loans

to small businesses'' to include any other business loan in the

original amount of $1,000,000 or less and any farm loan in the original

amount of $500,000 or less.

The Finance Board endorses the concept of a safe harbor for loans

to small businesses and small farms and is adopting the same approach

for its advances regulation. The Finance Board, however, is defining

the term ``loans to small businesses'' expressly, rather than by

incorporating by reference the OTS regulations. The OTS regulation

defines ``loans to small business'' by reference to the term ``loans to

small businesses and small farms,'' which, in turn, is located within

the definitions portion of the instructions for the OTS ``Thrift

Financial Report.'' Because the non-savings association members of the

Banks do not submit the Thrift Financial Report, and may not be

familiar with its instructions, the Finance Board believes that a bare

cross-reference to the OTS regulation or to the Thrift Financial Report

instructions would not provide the specificity that the Banks and their

non-savings association members require. Accordingly, the final rule

provides that for QTL purposes the term ``loans to small businesses''

shall include any business or commercial loans (including a series of

loans to the same borrower) in an original amount of $1,000,000 or

less, and any farm loans (including a series of loans to the same

borrower) of $500,000 or less, as well as any loan to an entity that

satisfies the SBA definition of a ``small business.''

One reason why OTS adopted, and why the commenters suggested that

the Finance Board adopt, the $1,000,000 and $500,000 thresholds for

loans to small businesses and small farms is that the information is

readily available from existing sources. The federal banking agencies

require the depository institutions that they supervise to submit

periodic information about the composition of their loan portfolios as

part of their quarterly call reports. The call report that is to be

filed as of June 30 includes a schedule for loans to small businesses

and small farms, on which the institutions must report the number and

amount currently outstanding as of June 30 of business loans with

original amounts of $1,000,000 or less and farm loans of $500,000 or

less. Using that information to determine the amount of the ``loans to

small businesses'' for purposes of the QTL calculation, as OTS has

done, also is consistent with the provisions of the Finance Board's

interim rule that require the Banks to use the call report as the

principal source of financial information for the QTL test. Moreover,

the use of existing call report data would not entail any additional

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recordkeeping by the Banks or their non-savings association members.

The one complicating factor associated with using the commercial

loan schedule to the call reports as the source for information on

loans to small businesses is that the depository institutions submit

the detailed data on their commercial loan portfolios only with their

June 30 call report. That arrangement conflicts with the existing time

period within which the Banks conduct their annual QTL determinations,

which must be done between January 1 and April 15 and must be based on

information as of December 31 of the prior calendar year. Because the

category of loans to small businesses is apt to be a significant

portion of the ``qualified thrift investments'' of the non-savings

association members, most of which are commercial banks, the Finance

Board believes that it would be a better practice for the annual QTL

determination to be performed soon after that information on loans to

small businesses becomes available. Accordingly, the final rule shifts

the QTL calculation period forward by six months. The Finance Board

informally solicited the views of the Banks on the use of the June 30

call reports, and all but two of the Banks favored using that source.

Because the Banks may obtain the call report data from commercial

providers, some of which may not become available in final form until

early October, the Finance Board has extended the end of the period to

October 31, which should give all Banks ample time to conduct their QTL

calculations.

The Finance Board considered retaining the current January-to-April

QTL period and allowing the Banks to use the December 31 data for all

items but for loans to small businesses, for which the source would be

the prior June 30 call report. Using financial data derived from

reports that are six months apart, however, could lead to inaccurate

QTL calculations and would prevent the Finance Board, and the Banks,

from having an accurate QTL determination as of a particular date. The

Finance Board believes that it is important for all of the Banks to

conduct their required annual QTL determinations as of the same date so

that there be some uniformity within the System and the Finance Board

will have accurate System-wide QTL data should the 30 percent cap on

the aggregate amount of advances to non-QTL members become an issue.

The use of the June 30 call report data should enable a

substantially greater number of non-savings association members to

increase their ATIP and come into compliance with the QTL requirement.

Because the final rule would ease compliance with the QTL test, the

Finance Board has decided to make the portion of the rule allowing the

use of the June 30 call report data effective on publication in the

Federal Register. In that way the Banks will be able immediately to

recalculate the QTL status of its non-savings association members based

on the June 30, 1997 commercial loan data. Under the existing Finance

Board regulations regarding the annual QTL determination, which would

remain in effect until year-end, the Banks may calculate the QTL status

of any non-savings association member at any time other than the

mandatory January-to-April annual calculation period, provided that

when doing so they use the data from the most recent call report. 12

CFR 935.13(a)(3)(i).

Because the Banks have completed the required 1997 annual QTL

determinations earlier this year, the Finance Board has decided not to

impose the mandatory July-to-October annual QTL calculation on the

Banks for 1997. Accordingly, that provision of the final rule will not

take effect until December 30, 1997, which means that the annual

mandatory QTL calculation for 1998 will occur between July and October

1998, and will be based on call report data as of June 30, 1998. The

combination of the different effective dates is intended to allow the

Banks the flexibility to determine when to apply the revised QTL

provisions to their members. Thus, the Banks may take advantage of the

new safe harbor provision for loans to small business immediately,

should they choose to do so, but the final rule does not mandate that

they do so again for this year. If a Bank has determined earlier this

year that a non-savings association member met the QTL test, it need

not recalculate that member's QTL status until the 1998 annual

calculation.

As noted above, the Banks have the option of recalculating the QTL

status of their non-savings association at any time, should they choose

to do so. That provision is in the current rule and is retained in this

final rule, with one revision. When making QTL calculations at any time

other than the required annual calculation, the Banks still must use

the most recent call report available for the member, except for

information that is not included in any call report and is certified by

a senior officer. For purposes of determining a member's outstanding

commercial loans of $1,000,000 or less or its farm loans of $500,000 or

less, the ``most recent call report'' will always be the prior June 30

call report. Thus, it is permissible for a Bank that is making a QTL

determination at some time other than during the annual QTL

determination, to use data from two separate call reports. That would

be the case whether the QTL determination is being done for an existing

member, such as in response to a change in the composition of the

member's assets, or for a new member, for which the QTL test is being

done for the first time. For example, if a commercial bank were to

become a member of the System in December, the Bank could use the

financial information from the September 30 call report for all items

except for commercial loans of $1 million or less and farm loans of

$500,000 or less. The information about those commercial and farm loans

would be obtained from the June 30 call report. Any additional

information that is required for the QTL test, but that is not on

either of the call reports, could be submitted by certification, but

only if the member were to choose to do so.

IV. Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this rule,

the provisions of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601,

et seq., do not apply. The final rule implements statutory changes to

the QTL test and conforms the Finance Board regulations to EGRPRA.

Moreover, the final rule would not impose any additional regulatory

requirements on small entities of the type contemplated by the RFA, and

reduces the regulatory burdens on all non-savings association members.

V. Paperwork Reduction Act

As part of the interim final rulemaking, the Finance Board

published a request for comments concerning the collection of

information contained in Sec. 935.13 of the interim final rule. See 62

FR 8870 (Feb. 27, 1997). The Finance Board did not receive any

comments. The Finance Board submitted an analysis of the information

collection to the Office of Management and Budget (OMB) for review in

accordance with section 2507 of the Paperwork Reduction Act of 1995.

See 44 U.S.C. 3507. OMB assigned a control number, 3069-0057, and

approved the information collection without conditions with an

expiration date of April 30, 2000. 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 OMB. See id.

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3512(a). Although the final rule does not substantively or materially

modify the approved information collection, it reduces the reporting

and recordkeeping burden imposed on many respondents by permitting use

of ``loans to small businesses,'' as reported on June 30 call reports,

as a proxy for small business loans as defined by the SBA. The title,

description of need and use, and a description of the information

collection requirements in the final rule are discussed in parts I

through III of the Supplementary Information.

The following table discloses the estimated annual reporting and

recordkeeping burden approved by OMB:

The estimated annual reporting and recordkeeping hour burden is:

a. Number of respondents--4272

b. Total annual responses--4272

Percentage of these responses collected electronically--0%

c. Total annual hours requested--3930

d. Current OMB inventory--0

e. Difference--3930

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--$126,660

d. Current OMB inventory--0

e. Difference--$126,660

Any comments concerning the information collection should be submitted

to Elaine L. Baker, Executive Secretary, Federal Housing Finance Board,

1777 F Street, N.W., Washington, D.C. 20006, and the Office of

Information and Regulatory Affairs of the Office of Management and

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

Washington, D.C. 20503.

VI. Other Procedural Requirements

The Finance Board has determined that the notice and comment

procedure ordinarily required by the Administrative Procedure Act (APA)

is not required in this instance. The APA authorizes agencies to waive

the notice and comment procedures when the agency ``for good cause

finds * * * that notice and public procedure thereon are impracticable,

unnecessary, or contrary to the public interest.'' 5 U.S.C.

553(b)(3)(B). The Finance Board made such a determination with respect

to the interim rule, finding that a delay would deny the Banks the

opportunity to incorporate the newly expanded QTL provisions into the

required annual QTL determinations of their members. The final rule

does not differ substantially from the interim rule, except by

conforming the definition of loans to small businesses to the OTS rule

and by otherwise incorporating revisions suggested by the public

commenters.

The Finance Board also has determined that the 30-day delay of the

effectiveness provisions of the APA may be waived in these

circumstances. Section 553(d) of the APA permits waiver of the 30-day

delayed effective date requirement, among other things, where a

substantive rule relieves a restriction, or otherwise for good cause

found by the agency. The Finance Board finds that there is good cause

for making the final rule, with the exception of the amendments to 12

CFR 935.13(a)(3)(i), effective on October 3, 1997 because it will allow

the Banks to take advantage of the June 30 call report data as soon as

it becomes available, thereby relieving a regulatory burden on members

that will come into compliance with the QTL test as a result of these

amendments. The amendments to 12 CFR 935.13(a)(3)(i) will take effect

on December 30, 1997.

List of Subjects in 12 CFR Part 935

Credit, Federal home loan banks.

Accordingly, the Federal Housing Finance Board hereby amends title

12, chapter IX, part 935 of the Code of Federal Regulations, to read as

follows:

PART 935--ADVANCES

1. The authority citation for part 935 continues to read as

follows:

Authority: 12 U.S.C. 1422b(a)(1), 1426, 1429, 1430, 1430b, and

1431.

2. Section 935.13 is amended by revising paragraph (a)(3) and by

adding an OMB parenthetical sentence following the section to read as

follows:

Sec. 935.13 Restrictions on advances to members that are not qualified

thrift lenders.

(a) Restrictions on advances to non-QTL members. * * *

* * * * *

(3)(i) A Bank shall calculate each non-savings association member's

ATIP at least annually, between July 1 and October 31, based upon

financial data as of June 30 of that calendar year. The Bank may, in

its discretion, calculate a member's ATIP more frequently than

annually.

(ii) In determining a non-savings association member's annual ATIP,

a Bank shall use the financial information from the member's June 30

call report as the primary source of information. A Bank making ATIP

determinations other than as part of the annual QTL determination

(whether for existing members or new members) shall use the member's

most recent call report, except that in determining the amount of a

member's loans to small businesses a Bank may use the information for

such loans on the member's most recent June 30 call report. If any

information necessary for determining the member's ATIP is not

separately identified on a member's call report, the Bank may rely on a

written certification provided by the member that attests to the dollar

amount and composition of those other assets that meet the definitions

of ``qualified thrift investments'' or ``portfolio assets'' as of the

date of the call report. Notwithstanding the preceding two sentences, a

Bank may, at its option, accept from a non-savings association member

preliminary information as to the dollar amount and composition of

assets that meet the definitions of ``qualified thrift investments'' or

``portfolio assets,'' provided that the Bank thereafter verifies

against the most recent call report the accuracy of any items that also

are available from the call report. In any case in which a Bank relies

on a certification from a non-savings association member as to its

level of ``qualified thrift investments'' or ``portfolio assets,'' the

certification must recite that the information is accurate as of the

date specified, must be in writing and be signed and dated by the chief

executive officer of the member. The chief executive officer may

delegate authority to sign and date the certification to the chief

financial officer, chief operating officer, or controller of the

member.

(iii) For purposes of this section, the term ``call report'' shall

include:

(A) With respect to a commercial bank, the annual or quarterly

``Report of Condition and Income'' submitted to its appropriate Federal

banking agency;

(B) With respect to a credit union, the quarterly or semi-annual

call report submitted to the National Credit Union Administration; and

(C) With respect to an insurance company, its National Association

of Insurance Commissioners annual regulatory filing.

(iv) For purposes of this section, the amount of a member's ``loans

to small businesses'' shall include any commercial or business loan (or

series of loans to the same borrower) in the original amount of $1

million or less, any farm loan (or series of loans to the same

borrower) in the original amount of $500,000 or less, and any loan to a

``small business'' as that term is defined by section 3(a) of the Small

Business Act, 15 U.S.C. 632(a), and implemented by the Small Business

Administration at

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13 CFR part 121, or any successor provisions.

* * * * *

(The Office of Management and Budget approved the information

collection requirements contained in this section and assigned

control number 3069-0057 with an expiration date of April 30, 2000)

Dated: September 10, 1997.

By the Board of Directors of the Federal Housing Finance Board

Bruce A. Morrison,

Chairperson.

[FR Doc. 97-26290 Filed 10-3-97; 8:45 am]

BILLING CODE 6725-01-U