Advances to Nonmembers

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 97-18]

Advances to Nonmembers

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

(Finance Board) is amending its regulation on Federal Home Loan Bank

(FHLBank) advances to nonmembers. The rule establishes uniform

eligibility requirements and review criteria for determining whether an

entity may be certified as a nonmember mortgagee eligible to receive

FHLBank advances and devolves responsibility for making that

determination from the Finance Board to the FHLBanks. The Finance Board

also is revising the definition of the term ``state housing finance

agency'' (SHFA) to include all tribally designated housing entities

(TDHEs). The rule is part of the Finance Board's continuing effort to

devolve management and governance responsibilities to the FHLBanks and

is consistent with the goals of the National Homeownership Strategy and

the Regulatory Reinvention Initiative of the National Performance

Review.

EFFECTIVE DATE: The final rule will become effective April 14, 1997.

FOR FURTHER INFORMATION CONTACT: Christine M. Freidel, Associate

Director, Financial Management Division, Office of Policy, 202/408-

2976; Laura K. St. Claire, Financial Analyst, Financial Management

Division, Office of Policy, 202/408-2811; or, Janice A. Kaye, Attorney-

Advisor, Office of General Counsel, 202/408-2505, Federal Housing

Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Section 10b of the Federal Home Loan Bank Act (Bank Act)

establishes the requirements for access by nonmember mortgagees to

FHLBank advances. See 12 U.S.C. 1430b. In order to be certified as a

nonmember mortgagee, an entity must: (1) Be approved by the Department

of Housing and Urban Development (HUD) as a ``mortgagee'' under title

II of the National Housing Act; (2) be chartered under law and have

succession; (3) be subject to the inspection and supervision of a

governmental agency; and (4) lend its own funds as its principal

activity in the mortgage field. Id. 1430b(a).

Under section 10b(a) of the Bank Act, advances to nonmember

mortgagees are not subject to the general collateral requirements of

section 10(a) of the Bank Act. Id. Instead, a FHLBank may make advances

to nonmember mortgagees only upon the security of mortgages insured by

the Federal Housing Administration (FHA) of HUD under title II of the

National Housing Act. Id. The amount of any advance may not exceed 90

percent of the unpaid principal of the collateral pledged as security

for the advance. Id.

The Bank Act imposes less restrictive collateral requirements on

certain advances to nonmember mortgagees that are SHFAs. Id. 1430b(b).

Under section 10b(b) of the Bank Act, advances to SHFA nonmember

mortgagees that facilitate mortgage lending to low- or moderate-income

individuals and families (meeting the income requirements in section

142(d) or 143(f) of the Internal Revenue Code, generally up to 115

percent of the area median income) need not be secured by FHA-insured

mortgage loans if the advances otherwise meet the requirements of

section 10(a) of the Bank Act and any real estate collateral pledged to

secure the advances is comprised of single- or multi-family residential

mortgages. Id. 1430b(b), 1430(a); 26 U.S.C. 142(d), 143(f). Under

section 10(a), the four categories of collateral are eligible to secure

advances to members are: (1) Fully disbursed whole first mortgage loans

on improved residential real property that are not more than 90 days

delinquent or securities representing a whole interest in such

mortgages; (2) securities issued, insured, or guaranteed by the United

States government or any agency thereof; (3) deposits of a FHLBank; and

(4) other real estate related collateral if such collateral has a

readily ascertainable value and the FHLBank can perfect its interest

therein.\1\

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\1\ See 12 U.S.C. 1430(a)(1)-(4). Other acceptable real estate

related collateral includes, but is not limited to: privately issued

mortgage-backed securities other than those eligible under category

1; second mortgage loans, including home equity loans; commercial

real estate loans; and mortgage loan participations. See 12 CFR

935.9(a)(4)(ii). The aggregate amount of outstanding advances

secured by such collateral may not exceed 30 percent of a FHLBank

member's GAAP capital. See 12 U.S.C. 1430(a)(4); 12 CFR

935.9(a)(4)(iii).

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In October 1996, the Finance Board published for comment a proposed

rule that would transfer the authority to certify an entity as a

nonmember mortgagee eligible to receive FHLBank advances from the

Finance Board to the FHLBanks subject to uniform review criteria for

determining compliance with statutory and regulatory eligibility

requirements. See 61 FR 52727 (Oct. 8, 1996). The 60-day public comment

period closed on December 9, 1996. See id. The Finance Board received a

total of 12 comments in response to the proposed rule, 6 from FHLBanks,

4 from trade associations, and 1 each from a certified SHFA nonmember

mortgagee and a federal agency. All of the commenters generally

supported the Finance Board's proposal. Specific comments are discussed

in Part II of the Supplementary Information.

II. Analysis of Public Comments and the Final Rule

A. Definitions

The final rule amends the definition of the term ``state housing

finance agency'' that appears in Sec. 935.1 to include TDHEs \2\

established under both tribal and state law as SHFAs. This will permit

every TDHE nonmember mortgagee that makes mortgage loans to low- and

moderate-income members of the Indian community to take advantage of

the more flexible collateral requirements for securing advances to SHFA

nonmember mortgagees. See supra part I; 12 U.S.C. 1430b(b). Each of the

eight commenters addressing this issue expressly supported inclusion of

all TDHEs in the definition and it is being adopted as proposed. A

trade association commenter suggested that entities other than SHFAs

should not be

[[Page 12074]]

eligible for certification as nonmember mortgagees. However, because

section 10b of the Bank Act clearly sets forth two classes of nonmember

mortgagees, one composed of SHFAs and one composed of non-SHFAs, see 12

U.S.C. 1430b, the suggestion would be contrary to the Bank Act and the

Finance Board has not adopted it in the final rule.

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\2\ Congress enacted the Native American Housing Assistance and

Self Determination Act of 1996 in October 1996. See Pub. L. 104-330,

101 Stat. 4016 (Oct. 26, 1996). The Act authorizes Indian tribes to

establish TDHEs to run their housing programs. See id. sec.

102(c)(4)(K), 110 Stat. 4025. TDHEs include all existing Indian

Housing Authorities as well as other entities created by Indian

tribes to provide assistance for affordable housing for tribal

members. See id. sec. 4(21), 110 Stat 4021.

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The Finance Board received two responses to a specific request for

comments regarding the inclusion of other groups in the definition of

SHFA. One commenter noted its belief that the definition as written is

sufficiently broad to cover the Department of Hawaiian Homelands, a

Hawaii state agency with responsibility for administering the Hawaiian

Homes Commission Act on behalf of Native Hawaiians. Without additional

detailed information, the Finance Board cannot determine whether a

particular entity meets the requirements of the SHFA definition. Under

the final rule, the Banks would make this determination at the time an

entity applies for certification as a nonmember mortgagee. The other

commenter suggested including certain nonprofit community development

financial institutions (CDFIs) in the SHFA definition. The Finance

Board based its definition of SHFA on the meaning given that term for

purposes of other provisions in the Bank Act. As defined elsewhere in

the Bank Act, the term SHFA requires the entity to be a government

instrumentality. See id. 1441a(c)(9)(P), 1441a-1(1). Accordingly, the

Finance Board's definition of SHFA requires an entity to be a

government instrumentality. Since nonprofit CDFIs are not government

instrumentalities, they cannot be certified as SHFA nonmember

mortgagees. However, nonprofit CDFIs that meet the eligibility

requirements currently may be certified as nonmember mortgagees.

B. Advances to the Savings Association Insurance Fund

The Finance Board received no comments on Sec. 935.20 and is

adopting the section as proposed. Section 935.20, which implements

section 31(k) of the Bank Act, see id. 1431(k), provides that an

FHLBank may make advances to the Federal Deposit Insurance Corporation

for the use of the Savings Association Insurance Fund under certain

circumstances and subject to specific conditions.

C. Scope

Section 935.21 provides that advances to nonmember mortgagees

generally are subject to subpart A of part 935, which governs advances

to FHLBank members. See 12 CFR 935.1-935.19. A trade association

commenter suggested that the final rule prevent the FHLBanks from

applying requirements, terms, and conditions to nonmember mortgagees

that are not also applied to members. The Finance Board believes that

this provision should achieve that result. One exception to this

general requirement relates to the non-qualified thrift lender (non-

QTL) provisions of the Finance Board's advances regulation. See id.

Sec. 935.13. Since the statutory limit on aggregate FHLBank lending

applies only to advances to non-QTL members, see 12 U.S.C. 1430(e)(2)

(emphasis added), and nonmember mortgagees are not FHLBank members,

advances to nonmember mortgagees need not be included in the aggregate

limit on advances to non-QTLs. A trade association commenter strongly

supported this provision as offering assurance that nonmember

mortgagees would not limit non-QTL members' access to advances.

D. Nonmember Mortgagee Eligibility Requirements

1. Eligibility Criteria

Section 935.22(a) authorizes the FHLBanks to make advances to an

entity that is not a member of the FHLBank if the FHLBank certifies the

entity as a nonmember mortgagee. Section 935.22(b) sets forth the

eligibility requirements an entity must meet in order to be certified

as a nonmember mortgagee. In addition to the four statutory eligibility

criteria discussed in part 1 of the Supplementary Information, to

ensure the safety and soundness of the FHLBanks, the Finance Board has

incorporated a financial condition criterion that requires an

applicant's financial condition to be such that an FHLBank may safely

lend to it. This is the same financial condition criterion that applies

currently to applicants for membership in an FHLBank. See id.

1424(a)(2)(B); 12 CFR 933.6(a)(4). The Finance Board received no

comments on these provisions and is adopting them without change from

the proposal.

2. Review Criteria

Section 935.22(c) establishes uniform review criteria the FHLBanks

must apply to determine whether an applicant meets the eligibility

requirements for certification as a nonmember mortgagee. If an

applicant fulfills each criterion to the satisfaction of the FHLBank to

which it has applied, it will be deemed to meet the eligibility

requirements. Conversely, failure to fulfill each criterion to the

satisfaction of the FHLBank will render the applicant ineligible,

subject to appeal to the Finance Board, to be certified as a nonmember

mortgagee.

Under Sec. 935.22(c)(1), an applicant is deemed to meet the

requirement that it be approved under title II of the National Housing

Act if it submits a current HUD Yearly Verification Report or other

documentation issued by HUD stating that the applicant is an approved

FHA mortgagee.

Under Sec. 935.22(c)(2), an applicant is deemed to meet the

requirement that it be a chartered institution having succession if it

provides evidence satisfactory to the FHLBank that it is a government

agency, or is chartered under state, federal, local, tribal, or Alaska

Native village law as a corporation or other entity that has rights,

characteristics, and powers similar to those granted a corporation. An

FHLBank commenter noted that satisfactory evidence, such as statutory

and regulatory materials, is usually readily available to the FHLBanks,

and therefore suggested that the final rule require an applicant to

provide only a citation to, rather than copies of, appropriate

documents. For that reason, and to reduce the paperwork burden imposed

on nonmember mortgagee applicants, the Finance Board has deleted the

requirement that an applicant provide ``documentary'' evidence in the

final rule. Of course, if an FHLBank should require copies of statutes,

regulations, or other relevant documents, it has authority to require

their submission under Sec. 935.23(c)(1). See infra. In any case, an

FHLBank must include copies of all documents upon which it relied in

making its certification decision as part of the certification file

required under Sec. 935.23(c)(3). See infra.

Under Sec. 935.22(c)(3), an applicant is deemed to meet the

requirement that it be subject to the inspection and supervision of

some governmental agency if it provides evidence satisfactory to the

FHLBank that, pursuant to statute or regulation, it is subject to the

inspection and supervision of a federal, state, local, tribal, or

Alaska Native village governmental agency. Satisfactory evidence

generally consists of a citation to, or copies of, relevant statutory

and regulatory materials. For the same reasons as discussed above for

Sec. 935.22(c)(2), the Finance Board has deleted the requirement that

an applicant provide ``documentary'' evidence in the final rule.

In order to establish an appropriate standard for the FHLBanks to

determine whether an applicant meets the

[[Page 12075]]

inspection and supervision requirement, the Finance Board recast the

illustrative examples in the proposal as standards for meeting the

inspection and supervision requirements. The rule provides that an

applicant will be deemed to meet the subject to inspection by a

governmental agency requirement if there is a statutory or regulatory

requirement that the applicant's books and records be audited or

examined periodically by a governmental agency or an external auditor.

This audit factor was listed as an example of inspection by a

governmental agency in the proposed rule. The rule provides that an

applicant will be deemed to meet the supervision by a governmental

agency requirement if the governmental agency has statutory or

regulatory authority to remove an applicant's officers or directors for

malfeasance or misfeasance or otherwise exercise enforcement or

administrative control over actions of the applicant. This removal

factor was identified as an example of supervision by a governmental

agency in the proposed rule.

Three commenters addressed the inspection and supervision

requirement. A trade association commenter asked the Finance Board to

include expressly legislative audits to meet the inspection requirement

and removal by the governor to meet the supervision requirement. To

accomplish the same end, a FHLBank commenter suggested defining the

term ``governmental agency'' broadly to include the legislature and the

governor. In response to these comments and to afford greater

flexibility, the Finance Board has added a definition of the term

``governmental agency'' for purposes of this paragraph that includes

the governor, legislature, and any other component of a federal, state,

local, tribal, or Alaska Native village government with authority to

act for or on behalf of that government. The third commenter asked

whether a specific lender consortium that is examined jointly by

federal and state financial institution regulators satisfies the

supervision and inspection requirement. Without additional detailed

information, the Finance Board cannot determine whether a particular

entity meets the requirement. Under the final rule, the Banks would

make this determination at the time an entity applies for certification

as a nonmember mortgagee.

Under Sec. 935.22(c)(4), an applicant is deemed to meet the

mortgage activity requirement if it provides documentary evidence

satisfactory to the FHLBank that it lends its own funds as its

principal activity in the mortgage field. A financial statement that

includes mortgage loan assets and their funding liabilities generally

will provide adequate documentary evidence. Since this type of

financial information is not readily available to the FHLBanks, the

requirement for an applicant to submit documentation remains in the

final rule. For purposes of this requirement, the Finance Board

considers the purchase of whole mortgage loans tantamount to

``lending'' an applicant's funds. In the case of a federal, state,

local, tribal, or Alaska Native village government agency, the Finance

Board considers appropriated funds to be an applicant's ``own funds.''

An applicant will be deemed to satisfy this requirement even though the

majority of its operations are unrelated to mortgage lending if its

mortgage activity conforms to the regulatory criteria. A trade

association commenter expressly supported the provision, stating that

an applicant that acts principally as a broker for others making

mortgage loans, or whose principal activity is to make mortgage loans

for the account of others, does not meet this requirement.

Under Sec. 935.22(c)(5), an applicant is deemed to meet the

financial condition requirement if the FHLBank determines that advances

may be extended safely to the applicant. In order to make that

determination, the final rule requires an applicant to submit its most

recent regulatory audit or examination report and external audit

report. The Finance Board added a requirement to submit these specific

financial documents in the final rule because a FHLBank commenter

pointed out that applicants for FHLBank membership generally must

submit such documents as part of their membership application, see 12

CFR 933.11, and that the information provided is often critical to

analysis of an applicant's financial condition. The Bank also can

require the applicant to submit additional documentary evidence, such

as financial or other information.

3. State Housing Finance Agencies

In addition to meeting the eligibility requirements in

Sec. 935.22(b), any applicant seeking to take advantage of the more

flexible collateral requirements for advances used to facilitate

residential or commercial mortgage lending to certain low- and

moderate-income families or individuals, must provide evidence

satisfactory to the FHLBank that it is a SHFA as defined in Sec. 935.1.

See supra part II(A). Under Sec. 935.22(d), satisfactory evidence

generally consists of a copy of, or a citation to, the statutory and/or

regulatory provisions outlining the applicant's structure and

responsibilities. For the same reasons as discussed above for

Sec. 935.22(c)(2), the Finance Board has deleted the requirement that

an applicant provide ``documentary'' evidence in the final rule.

E. Nonmember Mortgagee Applications

1. Devolution

As part of the Finance Board's continuing effort to devolve

management and governance responsibilities to the FHLBanks,

Sec. 935.23(a) authorizes the FHLBanks to approve or deny all

applications for certification as a nonmember mortgagee, subject to the

requirements of the Bank Act and Finance Board regulations. Although

all six commenters addressing this issue expressly supported devolution

of decision making authority to the FHLBanks, one trade association

commenter suggested delaying devolution until the FHLBanks have some

experience in administering the final rule. Since the basis for the

review criteria in the final rule is the standards previously applied

by the FHLBanks and the Finance Board, no delay in devolution is

required.

Four FHLBank commenters requested the authority to delegate

application approvals to a committee of the FHLBank's board of

directors, the FHLBank president, or a senior officer who reports

directly to the president other than an officer responsible for

business development. This would be consistent with the Finance Board's

membership regulation and such authority is included in the final rule.

See 12 CFR 933.3(a). Also consistent with the membership regulation,

the final rule requires that only the FHLBanks' board of directors may

deny certification as a nonmember mortgagee.

2. Application Process

The remainder of Sec. 935.23 sets forth the procedures for

submission and review of nonmember mortgagee applications. Section

935.23(b) requires an applicant to submit an application that satisfies

the requirements of the Bank Act and this subpart to the FHLBank of the

district in which the applicant's principal place of business, as

determined in accordance with 12 CFR 933.18, is located.

To ensure expeditious action on applications for certification as a

nonmember mortgagee, Sec. 935.23(c)(1) requires a FHLBank to act on an

application within 60 calendar days of the date the FHLBank deems the

application complete. To make certain that the time period provided for

review

[[Page 12076]]

is not unduly restrictive, an application is deemed complete, thus

triggering the 60-day time period, only after the FHLBank has obtained

all required information and any other information it considers

necessary to process the application. The rule permits the FHLBank to

stop the 60-day period if it determines during the review process that

additional information is necessary to process the application. The

FHLBank must restart the 60-day time period where it stopped upon

receiving the additional required information. The FHLBank must notify

applicants in writing when the 60-day time period begins, stops, and

starts again. One FHLBank commenter pointed out that under a parallel

provision in the Finance Board's membership regulation, written notices

are not required and requested similar treatment in this regulation.

See 12 CFR 933.3(c). Written notice is necessary in order to provide an

appropriate record for appellate and compliance review, therefore, the

Finance Board is adopting the written notice requirement as proposed.

Further, the Finance Board intends to clarify its membership regulation

by including a written notice requirement in any future amendment.

Section 935.23(c)(2) requires the board of directors of the

FHLBank, a duly delegated committee of the FHLBank's board of

directors, the FHLBank president, or a senior officer who reports

directly to the FHLBank president other than an officer with

responsibility for business development to approve, or the board of

directors of the FHLBank to deny, each application for certification as

a nonmember mortgagee by a written decision resolution that states the

grounds for the decision. In the proposed rule, the FHLBanks could not

delegate certification approvals. As stated above, see supra part

II(E)(1), the final rule prohibits delegation only of certification

denials. The FHLBank must provide a copy of the decision resolution to

the applicant and the Finance Board within three business days of the

date of the decision on an application.

In order to provide an appropriate record for consideration of

certification denial appeals and for determination by Finance Board

examiners of a FHLBank's compliance with statutory and regulatory

requirements, the Finance Board has added a new Sec. 935.23(c)(3) that

requires a FHLBank to maintain a certification file for each applicant.

At a minimum, the certification file must include all documents

submitted by the applicant or otherwise obtained or generated by the

FHLBank concerning the applicant, all documents the Bank relied upon in

making its certification determination, including copies of statutes

and regulations, and the decision resolution. The FHLBank must retain

the certification file for at least three years after the date of its

decision to approve or deny certification or the date the Finance Board

resolves any appeal, whichever is later. The Finance Board's membership

rule includes a similar recordkeeping requirement. See 12 CFR 933.2(c).

To ensure that the FHLBanks apply the nonmember mortgagee

eligibility requirements and review criteria uniformly and fairly and

treat similarly situated applicants in a consistent manner,

Sec. 935.23(c)(4) establishes a process by which applicants may appeal

FHLBank certification denials to the Finance Board. This provision

appeared at Sec. 935.23(c)(3) in the proposed rule. Within 90 calendar

days of the date of a FHLBank's certification denial, an applicant may

submit a written appeal to the Finance Board with a copy to the

FHLBank. The appeal must include the FHLBank's decision resolution and

a statement of the basis for the appeal with sufficient facts,

information, analysis, and explanation to support the applicant's

position. The FHLBank whose action has been appealed must submit to the

Finance Board a complete copy of the applicant's certification file as

well as any relevant new materials it receives while the appeal is

pending. The rule authorizes the Finance Board to request any

additional information or supporting arguments it may require to decide

the appeal. The Finance Board must make its decision within 90 calendar

days of the date the applicant files an appeal.

F. Advances to Nonmember Mortgagees

Section 935.24 establishes the terms and conditions under which a

FHLBank may make advances to a nonmember mortgagee. Under

Sec. 935.24(a), a FHLBank may lend only to a nonmember mortgagee whose

principal place of business is located in the FHLBank's district.

1. Collateral Requirements in General

Section 935.24(b) sets forth the collateral requirements for

advances to nonmember mortgagees. Pursuant to section 10b(a) of the

Bank Act, 12 U.S.C. 1430b(a), and Sec. 935.24(b)(1) of the final rule,

a FHLBank may make advances to any nonmember mortgagee upon the

security of FHA-insured mortgages, including securities representing a

whole interest in a pool of FHA-insured mortgages, if the nonmember

mortgagee provides evidence satisfactory to the FHLBank that the

securities are backed solely by qualifying mortgages.

2. SHFA Collateral Requirements

Section 935.24(b)(2) implements the less restrictive collateral

requirements applicable to advances to a SHFA nonmember mortgagee, the

proceeds of which will be used to facilitate mortgage lending that

benefits certain low- and moderate-income individuals or families. See

supra part I; 12 U.S.C. 1430b(b). Under Sec. 935.24(b)(2)(i), a FHLBank

may secure qualifying advances with: the collateral described in

Sec. 935.24(b)(1); collateral eligible under categories 1 or 2 of Bank

Act section 10(a), 12 U.S.C. 1430(a)(1)-(2), as described in 12 CFR

935.9(a)(1) or (2); or, collateral eligible under category 4 of Bank

Act section 10(a), 12 U.S.C. 1430(a)(4), as described in 12 CFR

935.9(a)(4), provided that such collateral is comprised of mortgage

loans on one-to-four or multi-family residential property and the

acceptance of such collateral will not increase the total amount of

advances outstanding to the SHFA secured by such collateral beyond 30

percent of its GAAP capital, as computed by the FHLBank. A FHLBank

commenter recommended that the rule specifically include as acceptable

collateral for SHFA advances, collateral pledged by a FHLBank member to

secure its obligations under a standby letter of credit issued for the

benefit of a FHLBank that makes a SHFA nonmember mortgagee advance. The

current Finance Board regulation concerning collateral for advances

does not address this type of collateral. See 12 CFR 935.9. The Finance

Board plans to consider this issue as part of a future rulemaking

concerning FHLBank advances.

The proposed rule asserted that SHFA nonmember mortgagees would not

have any Bank Act section 10(a) category 3 collateral available to

secure FHLBank advances since a FHLBank may accept deposits only from

FHLBank members, other FHLBanks, or other instrumentalities of the

United States. See 12 U.S.C. 1430(a)(3), 1431(e)(1); 61 FR 52731. Three

FHLBank commenters found this interpretation of the Bank Act overly

restrictive. For the following reasons, the Finance Board agrees.\3\

Section 10b(b) of the Bank Act

[[Page 12077]]

authorizes the FHLBanks to accept collateral that meets the

requirements of section 10(a) to secure qualifying advances to SHFA

nonmember mortgagees. See 12 U.S.C. 1430b(b). Section 10(a) of the Bank

Act includes specifically deposits in a FHLBank as acceptable

collateral. See id. 1430(a). The Finance Board believes that there is

statutory authority to allow SHFA nonmember mortgagees to secure

qualifying advances with cash collateral in the form of FHLBank

deposits. Accordingly, the Finance Board has added a new paragraph,

Sec. 935.24(b)(2)(B), authorizing the FHLBanks to accept deposits in a

FHLBank as security for SHFA nonmember mortgagee advances. Pursuant to

the FHLBanks' incidental authority to do all things necessary to carry

out the provisions of the Bank Act, see 12 U.S.C. 1431(a), (e)(1), and

to facilitate acceptance of such collateral, the rule permits the

FHLBanks to establish cash collateral accounts for SHFA nonmember

mortgagees. This interpretation is consistent with the restriction on

acceptance of deposits by the FHLBanks contained in section 11(e)(1) of

the Bank Act, see id. 1431(e)(1), since the SHFA nonmember mortgagee

will use the cash collateral account at the FHLBank only to secure

advances and not to take advantage of FHLBank deposit programs, i.e.,

SHFA nonmember mortgagees will not be able to use a FHLBank as a

substitute for a commercial bank.

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\3\ The statement in the preamble to the proposed rule regarding

acceptance of deposits from nonmember mortgagees was not meant to

preclude a FHLBank from accepting deposits under section 11(e)(2) of

the Bank Act for the purpose of providing correspondent banking

services, provided that the nonmember mortgagee is an institution

eligible to make application to become a FHLBank member. See 12

U.S.C. 1431(e)(2).

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If a SHFA nonmember mortgagee wishes to pledge other than FHA-

insured collateral, Sec. 935.24(b)(2)(ii) requires it to certify first

in writing to the FHLBank that it will use the proceeds of the advance

so secured to facilitate qualifying mortgage lending. The final rule

clarifies that qualifying mortgage lending includes both residential

and commercial mortgage lending. A trade association commenter

expressly supported this provision because it will allow SHFA nonmember

mortgagees to help small businesses and promote economic development

efforts.

3. Terms and Conditions for Advances

Section 935.24(c) outlines the terms and conditions for advances to

nonmember mortgagees. Under Sec. 935.24(c)(1), a FHLBank may exercise

its discretion to determine whether, and on what terms, it will make

advances to nonmember mortgagees. Section 935.24(c)(2) addresses

advance pricing. The provision in the proposed rule requiring the

FHLBanks to apply pricing criteria other than cost and credit risk to

nonmember mortgagee advances in the same manner as they apply those

criteria to member advances was intended to make clear that the

FHLBanks must treat all of their member and nonmember borrowers

equally. One commenter thought the rule should expressly require the

FHLBanks to price advances to SHFA nonmember mortgagees, given their

public purpose, at the same rate as member advances. To ensure equal

treatment, the final rule specifically applies the advance pricing

requirements applicable to member advances to nonmember mortgagee

advances. Accordingly, paragraph (c)(2)(i) requires a FHLBank to price

advances to nonmember mortgagees in accordance with the requirements of

Sec. 935.6(b), the advance pricing requirements for member advances. It

provides that the term ``member'' as used in Sec. 935.6(b), also means

``nonmember'' for purposes of this section. Paragraph (c)(2)(ii) of the

final rule requires a FHLBank to apply the pricing criteria that appear

in Sec. 935.6(b)(2), including credit and other risks of lending to a

particular borrower and other reasonable differential pricing criteria,

equally to all of its member and nonmember borrowers. The pricing

criteria that appeared in the proposed rule are included in

Sec. 935.6(b).

The Finance Board proposed deleting the current requirement that

nonmember mortgagee advances be priced to compensate a FHLBank for the

lack of a capital stock investment in the FHLBank by the nonmember

mortgagee. See 12 CFR 935.22(e)(2)(B)(ii); 61 FR 52731. The preamble to

the proposed rule stated that such compensation was unnecessary since

the additional earnings achieved through advances not supported by

capital should enhance a FHLBank's return on equity. Seven commenters

addressed this issue. Two commenters supported the proposal because the

compensation mark-up strongly discourages nonmember mortgagees from

using FHLBank advances. Four commenters recommended deletion of the

requirement and replacement with a provision giving the FHLBanks

discretion to adjust nonmember mortgagee advance prices by either

requiring a compensating balance or including compensation for the lack

of a capital stock investment as a reasonable pricing differential

criteria in Sec. 935.24(c)(3)(iii). One commenter believed that the

requirement should remain in the rule.

The comments advocating a special mark-up on nonmember mortgagee

advances generally highlighted three concerns. The first concern was

that the added leverage associated with nonmember mortgagee advances

creates additional risk for which members should be compensated. For

the following reasons, the Finance Board finds this argument to be

unpersuasive. In order for nonmember lending to have a material impact

on a FHLBank's leverage, the amount of advances outstanding to

nonmember mortgagees would have to increase significantly over current

levels. For example, advances to nonmember mortgagees at the FHLBank

with the largest volume of such advances outstanding at the end of 1996

represented 0.1 percent of the FHLBank's total assets and 2 percent of

its capital. In addition, fully secured nonmember mortgagee advances

involve minimal credit risk. Therefore, the mark-up necessary to

compensate members for any increased risk resulting from greater

leverage would almost certainly be de minimis.

The second concern expressed generally by commenters was that,

depending upon the relationship between the return paid on FHLBank

stock, a member's alternative investments, and the cost of debt, a

nonmember mortgagee might have a financial advantage from FHLBank

borrowings that would allow it to compete for mortgages with members.

For the following reasons, the Finance Board finds this argument to be

unpersuasive. On the basis of the strong growth in voluntary membership

since 1990, it appears that FHLBank dividend rates generally exceed the

alternative investment rates available to members. For example, the

average FHLBank dividend rate in 1996 was 120 basis points over the

average one-year Treasury security and, since fourth quarter 1989, only

two FHLBanks on eight occasions have paid a quarterly dividend rate

below the average federal funds rate. Accordingly, investing in FHLBank

stock typically should not put a member at a competitive disadvantage

relative to nonmember mortgagees.

The third concern advanced by commenters in support of a

compensation mark-up is that funding nonmember mortgagee advances may

be more expensive to the extent that the cost of debt is higher than

the mixture of debt and equity used to fund member advances. This

argument also is unpersuasive. With few exceptions, FHLBank debt has

been less expensive than equity, thus, advances funded solely with debt

should be less expensive than those funded with a mix of equity and

debt. In addition, under Sec. 935.24(c)(2)(i), the FHLBanks must price

a nonmember mortgagee advance to cover the funding, operating, and

[[Page 12078]]

administrative costs associated with making the advance.

After consideration of the comments, the Finance Board has

determined that, given the current financial operations of the

FHLBanks, there do not appear to be compelling economic circumstances

to justify an additional compensation mark-up on nonmember mortgagee

advances. Further, eliminating the mark-up should enhance the FHLBanks'

statutory housing finance mission by providing more attractively priced

funds to entities that specialize in affordable housing finance.

Accordingly, the lack of a capital stock investment in a FHLBank by a

nonmember borrower is not an acceptable other risk or differential

pricing factor. If a FHLBank is able to show in a particular case that

it will suffer financial hardship as a result of lending to a nonmember

mortgagee, and is able to quantify the harm, it may request a

regulatory waiver. See 61 FR 64613 (Dec. 6, 1996), codified at 12 CFR

902.6.

Two commenters asked the Finance Board to clarify whether a FHLBank

is required or has discretion to allow a nonmember mortgagee to

participate in a FHLBank's Community Investment Program (CIP). Both

commenters thought that the FHLBanks should grant SHFA nonmember

mortgagees access to advances at CIP rates. Section 10(i) of the Bank

Act requires each FHLBank to ``establish a program to provide funding

for members to undertake community-oriented mortgage lending.'' See id.

1430(i)(1) (emphasis added). Since the final rule gives the FHLBanks

discretion in pricing nonmember mortgagee advances, the FHLBanks could

make advances at CIP rates available to nonmember mortgagees. However,

because section 10(i)(1) requires establishment of a CIP only for

members, the FHLBanks are not required to do so. The Finance Board

plans to consider this issue as part of a future rulemaking concerning

CIP advance programs.

Section 935.24(c)(3) limits the principal amount of any advance

made to a nonmember mortgagee to 90 percent of the unpaid principal of

the mortgage loans or securities pledged as security for the advance.

This limit does not apply to advances made to SHFA nonmember mortgagees

for the purpose of facilitating qualifying low- and moderate-income

mortgage lending. A trade association commented that a principal reason

limiting nonmember borrowing is that most FHLBanks value nonmember

mortgagee collateral at levels below the 90 percent limit. The Finance

Board believes that the FHLBanks should develop the technical capacity

to evaluate more precisely the risks of multi-family mortgages. This

potentially will lower the over-collateralization factor assigned to

such collateral.

4. Transaction Accounts

A FHLBank commenter suggested that the rule be revised to include

authority for the FHLBanks to establish transaction accounts with

nonmember mortgagees in order to facilitate the funding of advances.

Since the FHLBanks have incidental authority to establish limited

purposes deposit accounts, see supra part II(F)(2), the Finance Board

has added a new paragraph Sec. 935.24(d) to provide the suggested

authorization.

5. Ineligibility

Under certain circumstances certified nonmember mortgagees may

become ineligible to receive FHLBank advances. Section 935.24(e)(1)

requires a nonmember mortgagee that applies for an advance to agree

first in writing that it will promptly notify the FHLBank of any change

in its status as a nonmember mortgagee. Section 935.24(e)(2) permits a

FHLBank, from time to time, to require a nonmember mortgagee to provide

evidence that it continues to satisfy all of the statutory and

regulatory eligibility requirements. If the FHLBank determines that the

nonmember mortgagee no longer meets the eligibility requirements,

Sec. 935.24(e)(3) prohibits the FHLBank from extending a new advance or

renewing an existing advance until the entity provides evidence

satisfactory to the FHLBank that it is in compliance with such

requirements. The Finance Board received no comments regarding these

provisions and is adopting them without change from the proposal.

III. Regulatory Flexibility Act

The rule largely implements statutory requirements binding on all

FHLBanks, nonmember mortgagee applicants, and certified nonmember

mortgagees. The Finance Board is not at liberty to make adjustments in

the requirements to accommodate small entities. The Finance Board has

not imposed any additional regulatory requirements that will have a

disproportionate impact on small entities. Thus, in accordance with the

provisions of the Regulatory Flexibility Act, the Board of Directors of

the Finance Board hereby certifies that this 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

As part of the notice of proposed rulemaking, the Finance Board

published a request for comments concerning the collection of

information contained in Secs. 935.22 through 935.24 of the proposed

rule. See 61 FR 52731. The Finance Board received no comments regarding

the collection of information. The Finance Board also submitted an

analysis of the information collection to the Office of Management and

Budget (OMB) for review in accordance with section 3507(d) of the

Paperwork Reduction Act of 1995. See 44 U.S.C. 3507(d). OMB assigned a

control number, 3069-0005, and approved the information collection

without conditions with an expiration date of November 30, 1999.

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 the OMB. See id. 3512(a).

The final rule does not substantively or materially modify the approved

information collection. The title, description of need and use, and a

description of the information collection requirements in the final

rule are discussed in parts I and II of the Supplementary Information.

The following table discloses the estimated annual reporting and

recordkeeping burden:

The estimated annual reporting and recordkeeping hour burden

is:

a. Number of respondents..................................... 10

b. Total annual responses.................................... 10

Percentage collected electronically...................... 0

c. Total annual hours requested.............................. 100

d. Current OMB inventory..................................... 100

e. Difference................................................ 0

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........................... 6,250

d. Current OMB inventory..................................... 6,250

e. Difference................................................ 0

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.

[[Page 12079]]

List of Subjects in 12 CFR Part 935

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

Accordingly, the Board of Directors of the Federal Housing Finance

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

Federal Regulations, as follows:

PART 935--ADVANCES

1. The authority citation for part 935 is revised to read as

follows:

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

1430b, and 1431.

2. Section 935.1 is amended by revising the definition of ``State

housing finance agency'' to read as follows:

Sec. 935.1 Definitions.

* * * * *

State housing finance agency or SHFA means:

(1) A public agency, authority, or publicly sponsored corporation

that serves as an instrumentality of any state or political subdivision

of any state, and functions as a source of residential mortgage loan

financing in that state; or

(2) A legally established agency, authority, corporation, or

organization that serves as an instrumentality of any Indian tribe,

band, group, nation, community, or Alaska Native village recognized by

the United States or any state, and functions as a source of

residential mortgage loan financing for the Indian or Alaska Native

community.

* * * * *

3. Subpart B is revised to read as follows:

Subpart B--Advances to Nonmembers

Sec.

935.20 Advances to the Savings Association Insurance Fund.

935.21 Scope.

935.22 Nonmember mortgagee eligibility requirements.

935.23 Nonmember mortgagee application process.

935.24 Advances to nonmember mortgagees.

Subpart B--Advances to Nonmembers

Sec. 935.20 Advances to the Savings Association Insurance Fund.

(a) Authority. Upon receipt of a written request from the FDIC, a

Bank may make advances to the FDIC for the use of the

SavingsAssociation Insurance Fund. The Bank shall provide a copy of

such request to the Board.

(b) Requirements. Advances to the FDIC for the use of the Savings

Association Insurance Fund shall:

(1) Bear a rate of interest not less than the Bank's marginal cost

of funds, taking into account the maturities involved and reasonable

administrative costs;

(2) Have a maturity acceptable to the Bank;

(3) Be subject to any prepayment, commitment, or other appropriate

fees of the Bank; and

(4) Be adequately secured by collateral acceptable to the Bank.

Sec. 935.21 Scope.

With the exception of Sec. 935.13, and except as otherwise provided

in Sec. 935.20 and Sec. 935.24, the requirements of subpart A of this

part apply to this subpart.

Sec. 935.22 Nonmember mortgagee eligibility requirements.

(a) Authority. Subject to the provisions of the Act and this

subpart, a Bank may make advances to an entity that is not a member of

the Bank if the Bank has certified the entity as a nonmember mortgagee.

(b) Eligibility requirements. A Bank may certify as a nonmember

mortgagee any applicant that meets the following requirements:

(1) The applicant is approved under title II of the National

Housing Act (12 U.S.C. 1707, et seq.);

(2) The applicant is a chartered institution having succession;

(3) The applicant is subject to the inspection and supervision of

some governmental agency;

(4) The principal activity of the applicant in the mortgage field

consists of lending its own funds; and

(5) The financial condition of the applicant is such that advances

may be safely made to it.

(c) Satisfaction of eligibility requirements--(1) HUD approval

requirement. An applicant shall be deemed to meet the requirement in

section 10b(a) of the Act and paragraph (b)(1) of this section that it

be approved under title II of the National Housing Act if it submits a

current HUD Yearly Verification Report or other documentation issued by

HUD stating that the Federal Housing Administration of HUD has approved

the applicant as a mortgagee.

(2) Charter requirement. An applicant shall be deemed to meet the

requirement in section 10b(a) of the Act and paragraph (b)(2) of this

section that it be a chartered institution having succession if it

provides evidence satisfactory to the Bank, such as a copy of, or a

citation to, the statutes and/or regulations under which the applicant

was created, that:

(i) The applicant is a government agency; or

(ii) The applicant is chartered under state, federal, local,

tribal, or Alaska Native village law as a corporation or other entity

that has rights, characteristics, and powers under applicable law

similar to those granted a corporation.

(3) Inspection and supervision requirement. An applicant shall be

deemed to meet the inspection and supervision requirement in section

10b(a) of the Act and paragraph (b)(3) of this section if it provides

evidence satisfactory to the Bank, such as a copy of, or a citation to,

relevant statutes and/or regulations, that, pursuant to statute or

regulation, the applicant is subject to the inspection and supervision

of a federal, state, local, tribal, or Alaska native village

governmental agency. An applicant shall be deemed to meet the

inspection requirement if there is a statutory or regulatory

requirement that the applicant be audited or examined periodically by a

governmental agency or by an external auditor. An applicant shall be

deemed to meet the supervision requirement if the governmental agency

has statutory or regulatory authority to remove an applicant's officers

or directors for cause or otherwise exercise enforcement or

administrative control over actions of the applicant. For purposes of

this paragraph (c)(3), the term ``governmental agency'' includes the

governor, legislature, and any other component of a federal, state,

local, tribal, or Alaska native village government with authority to

act for or on behalf of that government.

(4) Mortgage activity requirement. An applicant shall be deemed to

meet the mortgage activity requirement in section 10b(a) of the Act and

paragraph (b)(4) of this section if it provides documentary evidence

satisfactory to the Bank, such as a financial statement or other

financial documents that include the applicant's mortgage loan assets

and their funding liabilities, that it lends its own funds as its

principal activity in the mortgage field. Lending funds includes, but

is not limited to, the purchase of whole mortgage loans. In the case of

a federal, state, local, tribal, or Alaska Native village government

agency, appropriated funds shall be considered an applicant's own

funds. An applicant shall be deemed to satisfy this requirement

notwithstanding that the majority of its operations are unrelated to

mortgage lending if its mortgage activity conforms to this requirement.

An applicant that acts principally as a broker for others making

mortgage loans, or whose principal activity is to make mortgage loans

for the account of others, does not meet this requirement.

(5) Financial condition requirement. An applicant shall be deemed

to meet the financial condition requirement in

[[Page 12080]]

paragraph (b)(5) of this section if the Bank determines that advances

may be safely made to the applicant. The applicant shall submit to the

Bank copies of its most recent regulatory audit or examination report,

or external audit report, and any other documentary evidence, such as

financial or other information, that the Bank may require to make the

determination.

(d) State housing finance agencies. In addition to meeting the

requirements in paragraph (b) of this section, any applicant seeking

access to advances as a SHFA pursuant to Sec. 935.24(b)(2) shall

provide evidence satisfactory to the Bank, such as a copy of, or a

citation to, the statutes and/or regulations describing the applicant's

structure and responsibilities, that the applicant is a state housing

finance agency as defined in Sec. 935.1.

(e) Ineligibility. Except as otherwise provided in this subpart, if

an applicant does not satisfy the requirements of this subpart, the

applicant is ineligible to be certified as a nonmember mortgagee.

(The Office of Management and Budget approved the information

collection requirements contained in this section and assigned

control number 3069-0005 with an expiration date of November 30,

1999)

Sec. 935.23 Nonmember mortgagee application process.

(a) Authority. The Banks are authorized to approve or deny all

applications for certification as a nonmember mortgagee, subject to the

requirements of the Act and this subpart. A Bank may delegate the

authority to approve applications for certification as a nonmember

mortgagee only to a committee of the Bank's board of directors, the

Bank president, or a senior officer who reports directly to the Bank

president other than an officer with responsibility for business

development.

(b) Application requirements. An applicant for certification as a

nonmember mortgagee shall submit an application that satisfies the

requirements of the Act and this subpart to the Bank of the district in

which the applicant's principal place of business, as determined in

accordance with part 933 of this chapter, is located.

(c) Application process--(1) Action on applications. A Bank shall

approve or deny an application for certification as a nonmember

mortgagee within 60 calendar days of the date the Bank deems the

application to be complete. A Bank shall deem an application complete,

and so notify the applicant in writing, when it has obtained all of the

information required by this subpart and any other information it deems

necessary to process the application. If a Bank determines during the

review process that additional information is necessary to process the

application, the Bank may deem the application incomplete and stop the

60-day time period by providing written notice to the applicant. When

the Bank receives the additional information, it shall again deem the

application complete, so notify the applicant in writing, and resume

the 60-day time period where it stopped.

(2) Decision on applications. The Bank or a duly delegated

committee of the Bank's board of directors, the Bank president, or a

senior officer who reports directly to the Bank president other than an

officer with responsibility for business development shall approve, or

the board of directors of a Bank shall deny, each application for

certification as a nonmember mortgagee by a written decision resolution

stating the grounds for the decision. Within three business days of a

Bank's decision on an application, the Bank shall provide the applicant

and the Board with a copy of the Bank's decision resolution.

(3) File. The Bank shall maintain a certification file for each

applicant for at least three years after the date the Bank decides

whether to approve or deny certification or the date the Board resolves

any appeal, whichever is later. At a minimum, the certification file

shall include all documents submitted by the applicant or otherwise

obtained or generated by the Bank concerning the applicant, all

documents the Bank relied upon in making its determination regarding

certification, including copies of statutes and regulations, and the

decision resolution.

(4) Appeals. Within 90 calendar days of the date of a Bank's

decision to deny an application for certification as a nonmember

mortgagee, the applicant may submit a written appeal to the Board that

includes the Bank's decision resolution and a statement of the basis

for the appeal with sufficient facts, information, analysis, and

explanation to support the applicant's position. Appeals shall be sent

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

D.C. 20006, with a copy to the Bank.

(i) Record for appeal. Upon receiving a copy of an appeal, the Bank

whose action has been appealed shall provide to the Board a complete

copy of the applicant's certification file maintained by the Bank under

paragraph (c)(3) of this section. Until the Board resolves the appeal,

the Bank shall promptly provide to the Board any relevant new materials

it receives. The Board may request additional information or further

supporting arguments from the applicant, the Bank, or any other party

that the Board deems appropriate.

(ii) Deciding appeals. Within 90 calendar days of the date an

applicant files an appeal with the Board, the Board shall consider the

record for appeal described in paragraph (c)(4)(i) of this section and

resolve the appeal based on the requirements of the Act and this

subpart.

(The Office of Management and Budget approved the information

collection requirements contained in this section and assigned

control number 3069-0005 with an expiration date of November 30,

1999)

Sec. 935.24 Advances to nonmember mortgagees.

(a) Authority. Subject to the provisions of the Act and this

subpart, a Bank may make advances only to a nonmember mortgagee whose

principal place of business, as determined in accordance with part 933

of this chapter, is located in the Bank's district.

(b) Collateral requirements--(1) Advances to nonmember mortgagees.

A Bank may make an advance to any nonmember mortgagee upon the security

of the following collateral:

(i) Mortgage loans insured by the Federal Housing Administration of

HUD under title II of the National Housing Act; or

(ii) Securities representing a whole interest in the principal and

interest payments due on a pool of mortgage loans insured by the

Federal Housing Administration of HUD under title II of the National

Housing Act. A Bank may only accept as collateral the securities

described in this paragraph (b)(1)(ii) if the nonmember mortgagee

provides evidence that such securities are backed solely by mortgages

of the type described in paragraph (b)(1)(i) of this section.

(2) Certain advances to SHFAs. (i) In addition to the collateral

described in paragraph (b)(1) of this section, a Bank may make an

advance to a nonmember mortgagee that has satisfied the requirements of

Sec. 935.22(d) for the purpose of facilitating residential or

commercial mortgage lending that benefits individuals or families

meeting the income requirements in section 142(d) or 143(f) of the

Internal Revenue Code (26 U.S.C. 142(d) or 143(f)) upon the security of

the following collateral:

(A) The collateral described in Sec. 935.9(a)(1) or (2).

(B) The collateral described in Sec. 935.9(a)(3). Solely for the

purpose of facilitating acceptance of such collateral, a Bank may

establish a cash collateral account for a nonmember

[[Page 12081]]

mortgagee that has satisfied the requirements of Sec. 935.22(d).

(C) The real estate related collateral described in

Sec. 935.9(a)(4), provided that such collateral is comprised of

mortgage loans on one-to-four family or multifamily residential

property and the acceptance of such collateral will not increase the

total amount of advances outstanding to the SHFA secured by such

collateral beyond 30 percent of its GAAP capital, as computed by the

Bank.

(ii) Prior to making an advance pursuant to this paragraph (b)(2),

a Bank shall obtain a written certification from the nonmember

mortgagee that it shall use the proceeds of the advance for the

purposes described in paragraph (b)(2)(i) of this section.

(c) Terms and conditions--(1) General. Subject to the provisions of

this paragraph (c), a Bank, in its discretion, shall determine whether,

and on what terms, it will make advances to a nonmember mortgagee.

(2) Advance pricing. (i) A Bank shall price advances to nonmember

mortgagees in accordance with the requirements for pricing advances to

members set forth in Sec. 935.6(b). Wherever the term ``member''

appears in Sec. 935.6(b), the term shall be construed also to mean

``nonmember mortgagee.''

(ii) A Bank shall apply the pricing criteria identified in

Sec. 936.5(b)(2) equally to all of its member and nonmember mortgagee

borrowers.

(3) Limit on advances. The principal amount of any advance made to

a nonmember mortgagee may not exceed 90 percent of the unpaid principal

of the mortgage loans or securities pledged as security for the

advance. This limit does not apply to an advance made to a nonmember

mortgagee under paragraph (b)(2) of this section.

(d) Transaction accounts. Solely for the purpose of facilitating

the making of advances to a nonmember mortgagee, a Bank may establish a

transaction account for each nonmember mortgagee.

(e) Loss of eligibility--(1) Notification of status changes. A Bank

shall require a nonmember mortgagee that applies for an advance to

agree in writing that it will promptly inform the Bank of any change in

its status as a nonmember mortgagee.

(2) Verification of eligibility. A Bank may, from time to time,

require a nonmember mortgagee to provide evidence that it continues to

satisfy all of the eligibility requirements of the Act and this

subpart.

(3) Loss of eligibility. A Bank shall not extend a new advance or

renew an existing advance to a nonmember mortgagee that no longer meets

the eligibility requirements of the Act and this subpart until the

entity has provided evidence satisfactory to the Bank that it is in

compliance with such requirements.

(The Office of Management and Budget approved the information

collection requirements contained in this section and assigned

control number 3069-0005 with an expiration date of November 30,

1999)

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

Dated: February 19, 1997.

Bruce A. Morrison,

Chairperson.

[FR Doc. 97-6260 Filed 3-13-97; 8:45 am]

BILLING CODE 6725-01-P