Pilot Procedures and Pilot Proposal Initial Submission Guidelines

FEDERAL HOUSING FINANCE BOARD

[No: 97-70]

Pilot Procedures and Pilot Proposal Initial Submission Guidelines

Whereas, the Federal Housing Finance Board (Finance Board)

considers it appropriate to adopt a policy that provides procedures for

processing and analyzing pilot programs proposed by the Federal Home

Loan Banks;

Now therefore be it resolved that, the Finance Board hereby adopts

the Pilot Procedures and Pilot Proposal Initial Submission Guidelines

attached hereto.

Dated: November 12, 1997.

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

Bruce A. Morrison,

Chairman.

The text of the Pilot Procedures and Pilot Proposal Initial

Submission Guidelines follows:

Policy and Procedures For Pilot Proposals That Support Housing and

Community Investment

Purpose: To establish procedures to be followed by staff of the

Federal Housing Finance Board (Finance Board) in the processing and

analysis of proposed Federal Home Loan Bank (Bank) pilot programs

through which the Banks would make other investments that support

housing and community development. These procedures shall apply also to

the processing and analysis of proposed amendments to existing pilot

programs. In establishing these procedures, it is the Finance Board's

intent that the pilot review process proceed in an efficient,

expeditious fashion at all stages.

Introduction: The Federal Home Loan Bank Act (Bank Act) provides

that certain assets of each Bank not required for advances to members,

may be invested in certain specified securities and investments. The

Finance Board has implemented the investment provisions of the Bank Act

through its regulations and the Financial Management Policy (FMP).

Under Section 934.1 of the Finance Board's regulations and Section

II.B.12 of the FMP, certain Bank investments that support housing and

community development, and that are not specifically authorized under

the FMP or otherwise, may be submitted to the Finance Board for

approval. This policy establishes general procedures to be followed by

Finance Board staff in reviewing pilot proposals or pilot amendment

proposals (Proposal) for compliance with the statutory, regulatory, and

FMP requirements.

References: 12 U.S.C. Sections 1431(g), 1431(h), and 1436(a); 12

CFR Section 934.1, of the Finance Board regulations; and Section

II.B.12 of the FMP.

Procedures for Review of Proposals

I. Receipt of Proposal. Copies of a Proposal shall be distributed

to Finance Board Directors and appropriate Finance Board staff.

II. Review of Proposal. The Office of Policy and the Office of

General Counsel shall review the Proposal to ensure that it is complete

and to determine whether there is evidence of a market for the proposal

and whether it prima facie satisfies the FMP requirements (detailed

below) and responds to the Finance Board's Pilot Proposal Submission

Guidelines (Attachment).

III. FMP Requirements. Section II of the FMP specifies certain

types of assets as permissible investments to the extent they are

specifically authorized under 12 U.S.C. 1431(g), 1431(h), or 1436(a),

or to the extent a Bank has determined that they are securities in

which fiduciary or trust funds may be invested under the laws of the

State in which the Bank is located. Other investments that support

housing and community development are permitted, provided that the

Bank:

A. Ensures the appropriate levels of expertise, establishes

policies, procedures, and controls, and provides for any reserves

required to effectively limit and manage risk exposure and preserve the

Bank's and the Federal Home Loan Bank System's triple-A rating;

B. Ensures that the Bank's involvement in such investment activity

assists in providing housing and community development financing that

is not generally available, or that is available at lower levels or

under less attractive terms;

C. Ensures that such investment activity promotes (or at the very

least, does not detract from) the cooperative nature of the System;

D. Provides a complete description of the contemplated investment

activity (including a comprehensive analysis of how the above three

requirements are fulfilled) to the Finance Board; and

E. Receives written confirmation from the Finance Board, prior to

entering into such investments, that the above investment eligibility

standards and requirements have been satisfied.

IV. The Office of Policy and the Office of General Counsel shall

identify any policy or legal issues or questions, identify and discuss

with the Office of Supervision the management of any potential risks

involved in the Proposal, discuss the Proposal with other staff as

[[Page 63179]]

necessary, call Bank personnel to clarify any uncertain or unclear

aspects, and discuss issues or questions with the Director of the

Office of Policy and the General Counsel, as appropriate.

V. If the Office of Policy and the Office of General Counsel deem

the Proposal incomplete, staff shall contact the Bank and afford Bank

officials the opportunity to submit the necessary additional

information.

VI. If the Proposal is deemed complete by the Office of Policy and

the Office of General Counsel but is not believed to meet the

requirements of the FMP, the Director of the Office of Policy shall

notify the Bank, either formally or informally, and afford the Bank the

opportunity either to withdraw, modify, or insist upon the Proposal, as

structured, being published for comment.

VII. If the Office of Policy and the Office of General Counsel

determine that the Proposal is complete and appears to address the

requirements of the FMP and all issues or questions are satisfactorily

resolved, the Office of Policy and the Office of General Counsel shall

draft a Notice for publication in the Federal Register. The Notice

shall be a summary of the Proposal that is sufficiently detailed to

allow meaningful comments from interested parties through a comment

period. However, it need not contain the staff's analysis of whether or

how the proposal meets the FMP requirements. Publication of a Notice

does not imply any level of approval or support of the Proposal by the

Finance Board. The Board of Directors of the Finance Board will not

review and render a decision on the Proposal until after public

comments received on the Proposal are reviewed and analyzed by staff,

as is discussed below.

VIII. Prior to publication, the Office of Policy shall provide the

Bank a copy of the section of the Notice that describes the Proposal

and solicit the Bank's comments on the accuracy and completeness of the

section.

IX. The Notice must be approved by the Director of the Office of

Policy and the Office of General Counsel, with copies provided to the

Directors of the Office of Supervision and the Office of Public

Affairs, prior to going to the Executive Secretariat and then to the

Managing Director for signature.

X. After publication of the Notice in the Federal Register, the

Office of Policy and the Office of General Counsel shall respond to

calls from the general public concerning the Proposal. The Office of

Policy may answer questions about the program but requests for written

information should be referred to the Office of General Counsel.

XI. The Office of Policy and the Office of General Counsel shall

analyze comments received and discuss them with other Finance Board

staff as necessary.

XII. To the extent necessary and appropriate, the Office of Policy

or the Office of General Counsel shall contact the Bank and request a

response to the issues or questions raised by commenters.

XIII. Following publication of the Notice, the Bank shall submit to

the Finance Board proposed policies and procedures to address risks

inherent in its proposed pilot program (e.g., credit risk, market risk,

interest rate risk, and other risks).

XIV. Prior to Finance Board consideration, the Office of Policy and

the Office of General Counsel shall review the proposed policies and

procedures submitted by the Bank; the Bank's identification of, and

plans for, managing risk; and the adequacy of expertise and number of

staff planned by the Bank for its proposed pilot program. If necessary,

staff may request additional information, clarification, etc.

XV. Following review and analysis of the Proposal, public comments

received, and the above three factors, the Office of Policy and the

Office of General Counsel, in consultation with the Office of

Supervision, shall make a determination as to whether to recommend

approval or disapproval to the Board of Directors of the Finance Board.

The following shall result from this determination:

A. A briefing shall be held for Finance Board Directors regarding

the Proposal and staff's recommendation.

B. A Board package shall be prepared for the Proposal and include

the staff's recommendation and a summary of public comments.

C. Finance Board staff shall present the Proposal and their

recommendation to the Board of Directors of the Finance Board.

XVI. The Board of Directors of the Finance Board will take action

on the Proposal. If approved, the Board resolution approving the

Proposal shall indicate that the approval is subject to the pilot

program passing a safety and soundness examination conducted by the

Office of Supervision.

XVII. The Office of Policy shall prepare a letter for signature by

the Chairman or Managing Director to inform the Bank of the Finance

Board's decision on the Proposal.

XVIII. If the Board of Directors has approved the Proposal, program

implementation shall be contingent upon confirmation by the Office of

Supervision that the appropriate program policies, procedures, and

controls have been implemented by the FHLBank.

Pilot Proposal Initial Submission Guidelines

The following criteria should be addressed and included in a Bank's

pilot proposal or pilot amendment proposal (Proposal) submitted to the

Finance Board for approval.

1. Board Resolution: A resolution from the Bank's board of

directors approving the Proposal and authorizing its submission to the

Finance Board.

2. Description of Proposal: A complete description and discussion

of the Proposal, including each of the following:

a. Overall goals and objectives

b. Pilot size and basis for determination

c. Pilot operations

d. Profitability goals and timeline

e. The marketplace: Potential competitors (size, sophistication,

typical staffing, expertise, etc.) typical margins, historical loss

experience, and whether marketplace is expanding or contracting and

why.

f. Discuss which components of the program the Bank will have to

create, hire, etc. This could include personnel, management,

policies, procedures, hardware, software, facilities, etc.

g. How the Proposal would benefit membership

h. Expected benefits for the end user of the pilot product

i. Identification and management of potential risks

j. Explanation/basis for loan loss or risk reserves anticipated

3. Compliance Authorization Criteria: Explanation of how the

Proposal meets the requirements of Section II B.12 of the Finance

Board's Financial Management Policy. Please provide specific responses

for each subpart. This should also include a legal opinion that the

proposed activity may be legally authorized by the Finance Board.

4. Pilot Documentation, Support and Reporting: Discussion of

anticipated program documentation, support, and reporting, including

each of the following:

a. Evidence of a market for the pilot product. This could include

letters of support from anticipated participants, market surveys, etc.,

and should include anticipated participants' estimates of the dollar

volume of their participation within the first three years of the

program.

b. Examples of required documentation between the Bank, members and

other related counterparties, as well as any legal agreements drafted

for the pilot.

[[Page 63180]]

c. The management structure for operating the pilot program.

Identify the management, staff and directors who will be assigned to

oversee and operate the pilot and discuss their expertise. Their

resumes should be included with the Proposal. Discuss what additional

personnel will need to be hired.

d. A listing, description, and examples of management reports

necessary to adequately monitor ongoing pilot activities.

5. Measurement of Pilot Success: A discussion of criteria the Bank

intends to utilize to measure the success of the program, such as:

a. When the Bank anticipates reviewing the program and making a

decision on whether to seek permanent or other status for the pilot.

b. The existence of a sunset provision.

c. The factors or conditions that might trigger a decision to

terminate the pilot.

[FR Doc. 97-30964 Filed 11-25-97; 8:45 am]

BILLING CODE 6725-01-P