Restrictions on Advances to Non-Qualified Thrift Lenders

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 97-12]

Restrictions on Advances to Non-Qualified Thrift Lenders

AGENCY: Federal Housing Finance Board.

ACTION: Interim rule with request for comments.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board

(Finance Board) is amending its regulations on advances to members that

are not qualified thrift lenders to implement certain changes made by

the Economic Growth and Regulatory Paperwork Reduction Act of 1996

(EGRPRA). Among other things, the EGRPRA broadened the universe of

assets that a savings association may use in meeting its qualified

thrift lender (QTL) requirement. Non-savings association members are

not directly subject to the QTL requirement, although their ability to

obtain advances is restricted if they do not meet the QTL requirement.

The amendments should prove beneficial to many non-savings association

members by allowing them to report increases in their levels of

qualified thrift investments and, in some cases, satisfy the QTL

requirement. Because certain of the items authorized by EGRPRA to be

included in the QTL calculation are not separately identified on a non-

savings association member's published financial reports, such as a

call report, the Federal Home Loan Banks (Banks) have no readily

available source from which to obtain or verify that information. To

allow the Banks to include the newly authorized items when conducting

their annual QTL calculation of their non-savings association members,

the Finance Board has determined that the Banks may rely on a

certification from their members of any relevant QTL financial

information that is not available from published financial reports.

Because the Banks must complete the annual QTL calculations for

calendar year 1996 no later than April 15, 1997, the Finance Board is

issuing this rule as an interim final rule. As the certification

process raises a number of questions about how best the Banks can

determine the QTL status of their non-savings association members, and

because the Office of Thrift Supervision (OTS) is in the process of a

rulemaking relating to the EGRPRA amendments, the Finance Board has

determined to solicit comments on the interim final rule for a period

of 30 days.

DATES: The interim rule is effective on February 27, 1997. Comments

must be received by March 31, 1997.

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

Federal Housing Finance Board, 1777 F Street, NW., Washington, DC

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT: Steven P. Wojtaszek, Financial

Analyst, Financial Research Division, Office of Policy, (202) 408-2863,

or Neil R. Crowley, Senior Attorney, Office of General Counsel, (202)

408-2990, Federal Housing Finance Board, 1777 F Street, NW.,

Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

Historically, membership in the Federal Home Loan Bank System

(System) had been comprised predominantly of savings associations,

which tended to concentrate their investments in residential mortgage

loans. 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, Public Law 100-86,

section 104(c), 101 Stat. 571-573 (August 10, 1987). Among other

things, a savings association that failed the QTL test was limited in

the amount of advances that it could receive from its Bank. Id. section

105. In 1989, Congress authorized commercial banks and credit unions,

institutions that historically had not been so concentrated in

residential mortgage lending, to become members of the System.

Financial Institutions Reform, Recovery , and Enforcement Act of 1989

(FIRREA), Public Law 101-73, section 704(a), 103 Stat. 415 (August 9,

1989),

[[Page 8869]]

codified at 12 U.S.C. 1424(a). FIRREA also limited the amount of

advances that such non-savings association members could obtain from

their Bank, and imposed a 30 percent System-wide limit on the aggregate

amount of advances that could be outstanding to such non-QTL members.

12 U.S.C. 1430(e).

As a general matter, the QTL test now requires a savings

association to maintain 65 percent or more of its portfolio assets in

certain designated instruments, which are characterized as ``qualified

thrift investments.'' The QTL test requires one to determine an

institution's ``actual thrift investment percentage'' (ATIP), which is

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

by its ``portfolio assets.'' The QTL test applies directly only to

savings associations, and OTS, as the principal federal regulator of

savings associations, determines their QTL compliance. The QTL test

does not apply to commercial banks, credit unions, or insurance

companies, although if such institutions become members of the System

their ability to obtain advances is restricted if they do not meet the

QTL test. 12 U.S.C. 1430(e). The Banks are required to determine the

ATIP for 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. 12 CFR 935.13(a)(3).

In EGRPRA (Public Law 104-208, 110 Stat. 3009, September 30, 1996),

Congress made it easier for all members to achieve QTL compliance by

broadening the universe of ``qualified thrift investments'' that may be

included in calculating an institution's ATIP. Those changes could

benefit non-savings association members by allowing them to increase

their ATIP, possibly to the point of satisfying the QTL test. Even

those members that do not meet the QTL requirement should benefit from

the amendments because an increase in their ATIP should allow them to

obtain a greater amount of advances based on their existing level of

Bank stock. Under the amendments made by EGRPRA, a member now may

include without limit as ``qualified thrift investments'' the full

amount of its loans for educational purposes, loans to small

businesses, and loans made through credit cards or credit card

accounts. In addition, institutions may include an increased amount of

consumer loans, subject to certain aggregate limits. For purposes of

the EGRPRA amendments, the director of OTS is required to define the

terms ``small business,'' ``small business loans,'' and ``credit

card,'' which the OTS has done by means of an interim final rule. 61 FR

60179 (November 27, 1996), to be codified at, 12 CFR 560.3.

Although EGRPRA clearly specifies the types of additional assets

that may be included as qualified thrift investments (and OTS has

defined small business loans), the Banks cannot readily incorporate

those items into their annual QTL calculations because the call reports

of the commercial bank and credit union members, and the comparable

reports of insurance company members, do not separately identify those

items. The absence of these QTL items from the available regulatory

financial reports of the non-savings association members complicates

the Banks' annual task of determining the ATIP for those members. As a

consequence of the additional items added by EGRPRA, the number of

elements within the QTL calculation for which the Banks lack accurate

and readily available data has increased, which introduces a greater

element of uncertainty into the accuracy of the Banks' QTL

determinations. This is not so much of a concern with respect to

savings association members because OTS routinely examines the

associations for QTL compliance, and the Finance Board and the Banks

can rely on those OTS determinations. With respect to the non-savings

association members, however, the principal federal regulators do not

conduct examinations for QTL compliance and the Banks cannot look to

those regulators as a source for the required QTL information.

For example, a commercial bank's outstanding credit card loans are

separately stated on its Report of Condition and Income (Call Report),

but its education loans and small business loans (at least as defined

for QTL purposes) are not separately identified. Although the Call

Report includes information about small business loans, that

information does not correspond to the information that the Banks

require when making the annual QTL calculations for their non-savings

association members. The OTS regulation defines the term ``small

business loans'' by incorporating the definitions from the Small

Business Act and its implementing regulations promulgated by the Small

Business Administration (SBA). Thus, for QTL purposes, a small business

loan is one made to a ``small business.'' 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. By comparison, the Call Report defines a small business loan based

on the size of the loan, not the size of the borrowing entity. Thus,

the Banks' use of the ``small business loan'' information that is

available from the Call Report likely will overstate the amount of

``small business loans'' that are eligible to be used in deter mining a

commercial bank member's QTL status. The same problem exists with

respect to the reports submitted by credit union and insurance company

members, neither of which separately identify the amount of loans

meeting the SBA definition of small business loans.

This disparity between the statutory requirements of the QTL test

and the information that is readily available to the Banks is not

limited to the items added by EGRPRA. For example, the QTL test

includes within a member's ``portfolio assets'' certain government,

agency, and other debt securities with specified maturities (from two

to five years), none of which is separately identified by maturity on

the published financial statements. Similarly, the QTL test includes

within a member's ``qualified thrift investments'' certain construction

loans related to one-to four-family residential properties, 50 percent

of residential mortgage loans sold during a calendar quarter, 200

percent of affordable housing-related loans, and 200 percent of service

facility loans, none of which is separately identified on the available

reports.

The Finance Board believes that non-savings association members can

benefit from the newly authorized qualified thrift investments, and

that it is appropriate to allow the Banks to incorporate the new

classes of investments into their ATIP calculations for the calendar

year ending December 31, 1996. Of supervisory concern to the Finance

Board, however, is how best to ensure that the Banks conduct their

annual QTL determinations consistently with Section 10(e) of the

Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1430(e). The Finance

Board believes that it would be imprudent for the Banks to confer QTL

status on non-savings association members that cannot demonstrate that

their qualified thrift investments actually include the claimed amount

of the newly authorized investments.

One means of ensuring this result would be through an examination

process. The Finance Board believes that it has the authority, under

Sections 2A(a)(3), 2B(a), and 22, of the Bank Act, 12 U.S.C.

1422a(a)(3), 1422b(a), and 1442(a), to examine, or to require the Banks

to request an examination of, individual members if necessary to ensure

that the Banks operate in compliance with the law. The Finance

[[Page 8870]]

Board believes, however, that the more reasonable and efficient

approach is to allow the Banks to obtain that information from their

members. As a matter of practice, some Banks already obtain from their

members information regarding certain QTL items that are not separately

identified on the published financial reports. For example, some Banks

obtain all QTL-related financial data from the member and use the

published financial reports, such as a Call Report, to confirm the

general accuracy of the information. Other Banks calculate a member's

ATIP as a service to their members using the most recently published

financial reports and either obtain any additional data from the member

or estimate it from other known sources.

Accordingly, through this interim final rule the Finance Board will

allow the Banks to accept from their non-savings association members

supplemental QTL information that does not appear in the published

financial statements. The chief executive officer (CEO) of the member

must certify to the Bank that the information is accurate and complete

as of the date provided. The Finance Board believes that such an

arrangement strikes an appropriate balance between its need to ensure

that the Banks base their QTL calculations on accurate financial

information, and the practice of allowing the Banks to manage their own

business. To allow the Banks to make use of the newly authorized QTL

categories prior to the April 15, 1997, deadline for their QTL

calculations, the Finance Board has determined to issue this rule as an

interim final rule, but also is soliciting comments on the specific

provisions of the rule. The Finance Board appreciates that OTS may yet

revise the QTL definitions established through its recent interim rule,

and intends to monitor the OTS rulemaking proceeding. The Finance Board

anticipates that it will make corresponding changes to its advances

regulation should the OTS further amend the QTL regulation in any

material respect.

II. Description of the Interim Final Rule

The interim rule amends the definitions of ``actual thrift

investment percentage,'' ``Qualified Thrift Lender,'' and ``Qualified

Thrift Lender test,'' in the Finance Board's advances regulation, 12

CFR 935.1, to delete references to OTS regulations that no longer

exist. The interim rule also amends the Finance Board's advances

regulations, 12 CFR 935.13(a)(3), to direct the Banks to use the

financial information from the call report (which term is defined to

include the published financial reports submitted by credit union and

insurance company members) as the primary source for QTL

determinations. In those cases in which not all of the information

needed to perform an accurate QTL calculation is included in the call

report, the Bank may accept other information submitted by the member,

provided that the CEO of the member certifies in writing that the

information is accurate and complete as of the relevant date. As it

appears to have been the practice of some Banks to obtain the required

financial information for the QTL calculation from their members and

then compare that information to the call report, the rule allows the

Banks to continue to obtain information from their members as the first

step in the process, provided that any information not in the call

report must be subject to the same certification requirement. By

requiring the formality of a certification from the CEO the Finance

Board believes that the Banks will have sufficient assurance that the

information on which they conduct their determinations is accurate,

which is the minimum effort required to ensure compliance with the Bank

Act.

The Finance Board does not intend to require the Banks to obtain a

CEO certification from every non-savings association member as a matter

of course. Such a certification is necessary only when a member wishes

the Bank to include in its annual ATIP calculation qualified thrift

investments or portfolio assets that do not appear in its published

financial reports. If a member has no such investments or assets, then

the Bank need not require a certification from the member. Similarly,

if a member has a portfolio of small business loans or education loans,

but the inclusion of those items in the calculation would not

materially change the member's ATIP, then a member could elect not to

provide a certification. If a member were to have a substantial

portfolio of education loans, for example, but only minor investment in

small business loans, the member could opt to certify the number of

education loans and omit, or indicate a zero balance, for the category

of small business loans. The Finance Board specifically requests public

comment on the certification process, as well as the content and format

for the certification.

III. Regulatory Flexibility Act

Under the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq.,

the Banks are not ``small entities.'' Id. 601(6). As the interim final

rule would apply only to the Banks, it does not impose any additional

regulatory requirements on small entities of the type contemplated by

the RFA. Thus, in accordance with the provisions of the RFA, the Board

of Directors of the Finance Board hereby certifies that this interim

final rule will not have a significant economic impact on a substantial

number of small entities. Id. 605(b).

IV. Paperwork Reduction Act

The Finance Board has submitted to the Office of Management and

Budget (OMB) an analysis of the collection of information contained in

Sec. 935.13 of the interim rule, described more fully in the

SUPPLEMENTARY INFORMATION. The Banks will use the information

collection to determine whether a non-savings association member

satisfies the statutory QTL requirement. Only Bank members that meet

the QTL standards may maintain unrestricted access to long-term Bank

advances. See 12 U.S.C. 1430(e). Responses are required to obtain or

retain a benefit. See id. The Finance Board will maintain the

confidentiality of information obtained from respondents pursuant to

the collection of information as required by applicable statute,

regulation, and agency policy.

Likely respondents and/or recordkeepers will be non-savings

association members of a Bank. 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 44 U.S.C. 3512(a).

The estimated annual reporting and recordkeeping hour

burden is:

a. Number of respondents................................. 4,272

b. Total annual responses................................ 4,272

Percentage of these responses collected electronically..... 0

c. Total annual hours requested.......................... 3,930

d. Current OMB inventory................................. 0

e. Difference............................................ 3,930

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............................................ $126,000

The Finance Board has submitted the collection of information to

OMB for review in accordance with section 3507 of the Paperwork

Reduction Act of 1995. See 44 U.S.C. 3507. Comments regarding the

collection of information may be submitted in writing to the

[[Page 8871]]

Finance Board at the address above, and to the Office of Information

and Regulatory Affairs of OMB, Attention: Desk Officer for Federal

Housing Finance Board, Washington, DC 20503 by March 31, 1997.

V. Other Procedural Requirements

The interim final rule does not meet the criteria for a

``significant regulatory action'' under Executive Order 12866.

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 has determined that compliance with the

APA procedure in this instance would be impracticable, unnecessary, and

contrary to the public interest because it effectively would deny the

Banks the opportunity to incorporate the newly authorized QTL

investments into their annual QTL calculations for the current year. As

described in the SUPPLEMENTARY INFORMATION, the Banks must calculate

the QTL ratio of each non-savings association member between January 1

and April 15 of each year. If the Finance Board were to observe the

notice and comment procedures, it is unlikely that the Finance Board

could promulgate a final rule sufficiently in advance of the April 15

deadline for the Banks to incorporate its provisions into their current

QTL calculations. Nonetheless, because the Finance Board believes that

public comments aid in effective rulemaking, it will accept written

comments on the interim rule until March 31, 1997.

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. As with the APA notice and comment procedures,

described above, the Finance Board finds that there is good cause for

making the interim rule effective on February 27, 1997, because it will

allow the Banks to take advantage of the EGRPRA's amendments in

calculating the QTL ratios for the current year. Moreover, the absence

of accurate call report information about the categories of newly

authorized QTL assets impairs the ability of the Banks to implement the

EGRPRA's amendments, which problem is remedied by the interim rule. By

eliminating a practical impediment to the implementation of the QTL

amendments the interim rule relieves a restriction that might otherwise

prevent the Banks from realizing the benefits intended by Congress.

List of Subjects in 12 CFR Part 935

Credit, Federal home loan banks.

Accordingly, the Board of Directors of the Federal Housing Finance

Board hereby amends title 12, chapter IX, part 935 of the Code of

Federal Regulations, 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 935.1 is amended by republishing the introductory text

and revising the definitions for ``Actual thrift investment

percentage'', ``Qualified Thrift Lender'', and ``Qualified Thrift

Lender test'' to read as follows:

Sec. 935.1 Definitions

As used in this part:

* * * * *

Actual thrift investment percentage or ATIP has the same meaning as

used in section 10(m)(4) of the Home Owners' Loan Act (12 U.S.C.

1467a(m)(4)), except that the ATIP will be calculated and applied for

purposes of this part to all members of the Banks, whether or not they

are savings associations.

* * * * *

Qualified Thrift Lender or QTL means the term as defined in section

10(m)(1) of the Home Owners' Loan Act (12 U.S.C. 1467a(m)(1)). A non-

savings association member which meets the QTL test as applied by the

Banks will be treated as a QTL for purposes of this part.

Qualified Thrift Lender test or QTL test means the asset test

described in section 10(m) of the Home Owners' Loan Act (12 U.S.C.

1467a(m)), except that the QTL test will be applied for purposes of

this part to all members of the Banks, whether or not they are savings

associations.

* * * * *

3. In Sec. 935.13, paragraph (a)(3) is revised 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 January 1 and April 15, based upon

financial data as of December 31 of the prior 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 December

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

determinations more frequently than annually shall use the member's

most recent 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 as to the dollar amount and composition of those other assets

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

``portfolio assets.'' Notwithstanding the preceding two sentences, a

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

association member as to the dollar amount and composition of all

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

``portfolio assets.'' 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 be in writing and signed by the chief executive

officer of the member.

(iii) As used in 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.

* * * * *

Dated: February 6, 1997.

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

Bruce A. Morrison,

Chairperson.

[FR Doc. 97-4795 Filed 2-26-97; 8:45 am]

BILLING CODE 6725-01-U