Eligibility for Membership and Advances

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 933 and 935

[No. 97-60]

RIN 3069-AA69

Eligibility for Membership and Advances

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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

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

to amend certain of its regulations relating to combination business or

farm properties on which a residence is located. The amendments would

eliminate the requirement that at least 50 percent of the value of such

properties be attributable to the residential portion of the property

(50 percent test). The amendments are intended to assist smaller

depository institutions, particularly those located in rural areas, to

qualify for Federal Home Loan Bank (Bank) membership and, once

admitted, to provide the collateral necessary to obtain advances.

DATES: The Finance Board will accept comments on this proposed rule in

writing on or before November 13, 1997.

ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington DC

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT: Julie Paller, Senior Financial

Analyst, Office of Policy, (202) 408-2842, or Neil R. Crowley,

Associate General Counsel, Office of General Counsel, (202) 408-2990,

Federal Housing Finance Board, 1777 F Street, N.W., Washington DC

20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Section 4(a) of the Federal Home Loan Bank Act (Bank Act), 12

U.S.C. 1424(a), establishes the eligibility criteria for depository

institutions to become members of the Federal Home Loan Bank System

(Bank System). Section 10(a) of the Bank Act, id. 1430(a), authorizes a

Bank to make secured advances to its members and specifies the types of

collateral that a Bank may accept when originating or renewing an

advance. With respect to both membership criteria and eligible

collateral, the regulations of the Finance Board permit the use of

loans that are secured by business or farm properties on which there is

a residence, but only if the value of the residential portion equals or

exceeds 50 percent of the value of the entire parcel. The Finance Board

is concerned that those regulations may be overly restrictive and

therefore is proposing to amend them, as described below.

A. Membership

Section 4(a)(2) of the Bank Act requires, in part, that an insured

depository institution have ``at least 10 percent of its total assets

in residential mortgage loans'' in order to be eligible for membership.

Id. 1424(a)(2). The Finance Board has defined ``residential mortgage

loan'' to include, among other things, a ``home mortgage loan.'' 12 CFR

933.1(bb). The Finance Board has defined ``home mortgage loan'' to

include, in part, a loan secured by a first lien on ``combination

business or farm property where at least 50 percent of the total

appraised value of the combined property is attributable to the

residential portion of the property.'' Id. Sec. 933.1(n)(1)(iii). The

term ``combination business or farm property'' means real property for

which the value is attributable to residential, and business or farm

uses. Id. Sec. 933.1(i).

B. Collateral for Advances

Section 10(a)(1) of the Bank Act requires a Bank making or renewing

an advance to its members to maintain a security interest in certain

specified types of collateral, among which are ``first mortgages on

improved residential property.'' 12 U.S.C. 1430(a)(1). The Finance

Board has defined ``improved residential real property'' to mean

``residential real property excluding real property to be improved, or

in the process of being improved, by the construction of dwelling

units.'' 12 CFR 935.1. The Finance Board has defined ``residential real

property'' to include, among other things, ``combination business or

farm property, provided that at least 50 percent of the total appraised

value of the combined property is attributable to the residential

portion of the property.'' Id. The term ``combination business or farm

property'' means ``real property for which the total appraised value is

attributable to the combination of residential, and business or farm

uses.'' Id.

II. Analysis of the Proposed Rule

The Finance Board believes that community depository institutions,

particularly those located in rural areas, often are essential to the

housing finance activities and the broader economic well-being of the

communities they serve. Such institutions may have less demand for

conventional single and multi-family mortgage credit and their service

areas may be characterized by low population density and a low level of

economic activity. In such circumstances, those institutions may not be

able to originate a substantial number of residential first mortgage

loans. Moreover, many loans originated by rural banks may be made on

the security of family farms, which

[[Page 53252]]

are in part residential but which often cannot meet the 50 percent

test.

The existing regulations preclude a Bank from recognizing or

accepting a first mortgage loan on combination property unless the

value of the residential portion equals or exceeds 50 percent of the

total value of the property. That requirement may hinder the ability of

community depository institutions, particularly those in rural areas,

to become members of the Bank System or, for those that are able to

join, to take full advantage of the opportunity to obtain advances. The

Finance Board believes that the membership and advances regulations

should recognize the unique aspects of the lending practices of such

institutions, and has determined that it is appropriate to reconsider

whether to retain the 50 percent test in either the membership or

collateral regulation.

There is nothing in the Bank Act that mandates that the residential

portion of such combination properties constitute a specified

percentage of the property's total appraised value. With respect to

eligibility for membership, the only statutory mandate is that the loan

must be secured by real estate on which there is a residence. 12 U.S.C.

1422 (5), (6). With respect to the use of whole first mortgages as

collateral for advances, the only statutory mandate is that they attach

to real property that previously has been improved. Id. 1430(a)(1).

Subject to those requirements, the Finance Board has the authority to

determine what types of combination property may be considered to be

``residential'' for purposes of the ``residential mortgage loan''

aspect of the eligibility requirements and for the ``residential real

property'' aspect of the collateral requirements. Because the 50

percent test is more restrictive than the Bank Act requires, and may

well exclude from consideration a significant number of loans that are

secured, at least in part, by a home, the Finance Board is proposing to

eliminate the ``50 percent'' requirement in both regulations.

The proposed rule would amend the definition of ``home mortgage

loan'' in the membership regulations to allow a loan secured by a

combination property to be considered a ``home mortgage loan'' if a

permanent structure is located on the property and it actually is used

as a residence. See 12 CFR 933.1(n)(1)(iii). The proposed rule would

make the same changes to the definition of ``residential real

property'' in the collateral provisions of the advances regulation. See

id. Sec. 935.1. Eliminating the 50 percent requirement should allow a

greater number of loans secured by combined use assets to be considered

``residential mortgage loans'' or ``improved residential property,''

thus easing the membership eligibility and collateral requirements,

respectively. The definitions would exclude any farm or business

property that only occasionally is used for residential purposes, such

as temporary, migrant, or seasonal housing, because such properties

lack the characteristics of permanence and regular residential use

generally associated with typical combination properties, such as a

family farm or a family business.

The Finance Board believes that any additional risks that might

arise if such mortgage loans are used as collateral for advances should

be adequately managed in accordance with the current provisions of the

advances regulation. Among other things, the advances regulation

requires the Banks to establish written procedures for determining the

value of collateral, and to follow those procedures in ascertaining the

value of a particular asset offered as collateral. The regulation also

permits the Banks to require a member to support the valuation of any

collateral with an appraisal or other investigation of the collateral

as the Bank deems necessary. Id. Sec. 935.12. Rural lending often

requires collateral valuation practices that may differ significantly

from those typically employed in lending on the security of one-to-four

family homes. The Finance Board expects that if the proposed amendments

are adopted as a final rule each Bank will review its collateral

valuation procedures, and will amend them as necessary to reflect the

changes made by the amendments, before accepting as collateral any

newly authorized combination properties. The Finance Board also expects

that the Banks, as a matter of practice, will conduct careful review

and, if necessary, require an appraisal of such collateral, taking into

account the additional risks inherent in rural lending and each Bank's

own capability to evaluate those risks.

With respect to the advances regulation, the Finance Board requests

comments on whether elimination of the percentage requirement might

expose the Banks to any undue risk of loss should a Bank need to

liquidate the mortgage loans it holds as collateral. For example, the

value of a mortgage on a farm property, even one on which there is a

residence, may be more volatile than the value of a mortgage on a one-

to-four family home, reflecting the greater volatility of the value of

the underlying property. In addition, a mortgage on a combination

property may be less liquid than a mortgage on a one-to-four family

home. The Finance Board solicits comments on whether it should address

these issues through regulation, such as by retaining a percentage of

value requirement for collateral purposes, albeit at a level less than

the 50 percent test. The Finance Board also solicits comments on

whether there are apt to be any practical difficulties in implementing

the proposed definitions. For example, will a member's loan files for a

loan secured by farm property necessarily indicate whether the farm

property also includes a residential structure and, if so, whether it

actually is used as a residence?

The proposed rule also would amend Sec. 933.1(bb) by adding a new

paragraph (8) that would include as ``residential mortgage loans'' for

membership purposes any loans that, if made by a member, would satisfy

the statutory and regulatory requirements for loans made under the

Community Investment Program (CIP) or under the community investment

cash advance provisions of the Bank Act. The community investment cash

advance program is a cash advance program that may be established by

the Banks under section 10(j)(10) of the Bank Act, and includes the

CIP, a program of ``community-oriented mortgage lending'' required by

section 10(i) of the Bank Act. 12 U.S.C. 1430 (i), (j)(10).

``Community-oriented mortgage lending'' is defined as lending for

homeownership, multifamily housing and commercial and economic

development that benefits certain targeted populations or

neighborhoods. Id. 1430(i). Under this provision, if the purpose of a

loan were to meet the statutory standards, including any future

regulatory standards, for these loan programs, the loan could be

considered for purposes of the membership criteria. The amendment would

not require that the transaction also result in a loan that is eligible

for collateral under the advances regulation. The effect of this

provision would be to allow such assets to be considered as residential

mortgage loans for purposes of eligibility for membership, and would

conform the membership regulation more closely to the advances

regulation, which already includes loans financed by CIP advances

within the definition of ``residential housing finance assets.'' See 12

CFR 935.1.

III. Regulatory Flexibility Act

The proposed rule would not impose any additional reporting,

recordkeeping, or compliance requirements on prospective or current

Bank members.

[[Page 53253]]

Although the Finance Board anticipates that the proposed rule will be

of benefit primarily to small depository institutions, it will not have

a disproportionate impact on small entities. Therefore, in accordance

with the Regulatory Flexibility Act, 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. 5 U.S.C. 605(b).

IV. Paperwork Reduction Act

The proposed rule does not contain any collections of information,

as defined by the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501

et seq. Consequently, the Finance Board has not submitted any

information to the Office of Management and Budget for review.

List of Subjects

12 CFR Part 933

Federal home loan banks, Reporting and recordkeeping requirements.

12 CFR Part 935

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

Accordingly, the Federal Housing Finance Board hereby proposes to

amend title 12, chapter IX, parts 933 and 935 of the Code of Federal

Regulations as follows:

PART 933--MEMBERS OF THE BANKS

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

follows:

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

2. Amend Sec. 933.1 by revising paragraph (n)(1)(iii), removing

``or'' at the end of paragraph (bb)(6)(iii), removing the period at the

end of paragraph (bb)(7) and adding ``; or'' in its place, and adding

paragraph (bb)(8) to read as follows:

Sec. 933.1 Definitions.

* * * * *

(n) Home mortgage loan * * *

(1) * * *

(iii) Combination business or farm property, on which is located a

permanent structure actually used as a residence, other than for

temporary or seasonal housing; or

* * * * *

(bb) Residential mortgage loan * * *

(8) Loans that finance properties or activities that, if made by a

member, would satisfy the statutory requirements for the Community

Investment Program established under section 10(i) of the Bank Act, or

the regulatory requirements established for any community investment

cash advance program authorized by section 10(j)(10) of the Bank Act.

* * * * *

PART 935--ADVANCES

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

follows:

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430,

1430b, and 1431.

2. Amend Sec. 935.1 by revising paragraph (1)(v) in the definition

of ``Residential real property'' to read as follows:

Sec. 935.1 Definitions.

* * * * *

Residential real property * * *

(1) * * *

(v) Combination business or farm property, on which is located a

permanent structure actually used as a residence, other than for

temporary or seasonal housing.

* * * * *

Dated: September 10, 1997.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairperson.

[FR Doc. 97-26893 Filed 10-10-97; 8:45 am]

BILLING CODE 6725-01-U