Membership Approval

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 98-29]

RIN 3069-AA67

Membership Approval

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

its regulation on membership in the Federal Home Loan Banks (Banks)

(Membership Regulation) to make certain technical and substantive

revisions to the regulation that would improve the operation of the

membership application process, as well as further streamline

application processing for certain types of applicants for Bank

membership.

EFFECTIVE DATE: August 26, 1998.

FOR FURTHER INFORMATION CONTACT: Richard Tucker, Deputy Director,

Compliance Assistance Division, Office of Policy, (202) 408-2848, or

Sharon B. Like, Senior Attorney-Adviser, Office of General Counsel,

(202) 408-2930, Federal Housing Finance Board, 1777 F Street, N.W.,

Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Under the Federal Home Loan Bank Act (Act), the Finance Board is

responsible for the supervision and regulation of the 12 Banks, which

provide advances and other financial services to their member

institutions. See 12 U.S.C. 1422a(a). Institutions may become members

of a Bank if they meet certain membership eligibility and minimum stock

purchase criteria set forth in the Act and the Finance Board's

implementing Membership Regulation. See id. sections 1424, 1426,

1430(e)(3); 12 CFR part 933.

On August 16, 1996, the Finance Board published a final rule

amending the Membership Regulation to authorize the 12 Banks, rather

than the Finance Board, to approve or deny all applications for Bank

membership, subject to certain criteria for determining compliance with

the statutory eligibility requirements for Bank membership formerly

contained in policy guidelines used by the Finance Board in approving

membership applications. See 61 FR 42531 (Aug. 16, 1996) (codified at

12 CFR part 933); Federal Home Loan Bank System Membership Application

Guidelines, Finance Board Res. No. 93-88 (Nov. 17, 1993) (Guidelines).

The final rule also provided for streamlined application processing for

certain types of membership applications. See 12 CFR part 933.

In the course of processing and approving membership applications

under the Membership Regulation, the Banks raised a number of technical

and substantive issues with the Regulation whose resolution would

improve operation of the membership application process and streamline

membership application processing for certain types of institutions. To

address these concerns, the Finance Board issued a proposed rule

revising various provisions of the Membership Regulation, which was

published in the Federal Register on February 19, 1998, with a 30-day

period for public comment. See 63 FR 8364 (Feb. 19, 1998). The Finance

Board received a total of four letters on the proposed rule. Commenters

included three Banks, and one Bank member thrift institution.

II. Analysis of the Final Rule

A. Definitions--Section 933.1

1. Definition of ``Primary Regulator''--Section 933.1(y)

Section 933.1(y) of the current Membership Regulation defines the

term ``primary regulator'' as the chartering authority for federally-

chartered applicants, the insuring authority for federally-insured

applicants that are not federally-chartered, or the appropriate state

regulator for all other applicants. See 12 CFR Sec. 933.1(y). This

definition does not include the Federal Reserve Board (FRB) for state-

chartered applicants that are members of the Federal Reserve System

(FRS). Under Sec. 933.11(a)(3), a Bank is required to obtain as part of

the membership application the applicant's most recent available

regulatory examination report prepared by its primary regulator or

appropriate state regulator. See id. Sec. 933.11(a)(3). Section

933.11(b)(1) provides that an applicant must have received a composite

regulatory examination rating from its primary regulator or appropriate

state regulator within two years preceding the date the Bank receives

the application for membership. See id. Sec. 933.11(b)(1).

One Bank identified a potential problem with meeting these

financial condition requirements where the FRB and a state financial

institution regulator alternate examinations of a state-chartered

applicant that is an FRS member. When the state financial institution

regulator performs the examination, it provides a copy of the

regulatory examination report to the FRB. According to the Bank,

certain state financial institution regulators in its district cannot

or will not release to the Bank copies of the regulatory examination

reports they have prepared, nor will the FRB release to the Bank copies

of the state regulatory examination reports. Thus, regulatory

examination reports prepared under such circumstances are not available

in order for the Bank to obtain a regulatory examination rating for the

applicant. Nor may the Bank obtain and rely on a copy of the regulatory

examination report and rating of the FRB when the FRB has examined the

applicant, because the definition of ``primary regulator'' in

Sec. 933.1(y) does not include the FRB. Thus, in such situations, the

Bank may not be able to obtain any examination report and rating for

the applicant and, therefore, the applicant cannot be deemed to satisfy

the financial condition requirements of Secs. 933.11(a)(3) and (b)(1).

The presumption of noncompliance with the financial condition

requirements would have to be rebutted under Sec. 933.17(d)(1) by

preparing a written justification providing substantial evidence

acceptable to the Bank that the applicant is in the financial condition

required by Sec. 933.6(a)(4), notwithstanding the lack of a regulatory

examination rating. See id. Sec. 933.17(d)(1).

The exclusion of the FRB from the definition of ``primary

regulator'' in Sec. 933.1(y) was an oversight. The Banks should be able

to rely on regulatory examination reports and examination ratings from

the FRB to determine an applicant's financial condition under

Sec. 933.11. An applicant should not have to go through the additional

burden of establishing its satisfactory financial condition through the

rebuttal process if an FRB regulatory examination report and rating are

available. Two Bank commenters specifically supported allowing the

Banks to rely on FRB regulatory examination reports and ratings. One

commenter stated that it believes the FRB examination is equivalent in

rigor and thoroughness to an examination by the Federal Deposit

Insurance Corporation (FDIC) or the Office of the Comptroller of the

Currency (OCC).

Accordingly, consistent with the proposed rule, the final rule

revises the definition of ``primary regulator'' in

[[Page 40019]]

Sec. 933.1(y), as further described below, to include the FRB.

Another limitation of the current definition of ``primary

regulator'' in Sec. 933.1(y) is that it requires a Bank to obtain the

regulatory examination report and rating only from the ``primary''

regulator listed, even though a regulatory examination report and

rating from an alternate regulator also may be available. For example,

many potential members are examined by more than one regulator.

However, under the regulation, the Bank is required to obtain the

regulatory examination report and rating prepared by the FDIC for a

state-chartered, FDIC-insured institution, even though there may be a

more recent state regulatory examination report and rating available

for such institution. A Bank should not be limited to using only the

``primary'' regulator's regulatory examination report and rating when

more current information is available.

Accordingly, consistent with the proposed rule, the final rule

amends Sec. 933.1(y) by changing the term ``primary regulator'' to the

broader term ``appropriate regulator,'' and defining it to mean a

regulatory entity listed in Sec. 933.8, as applicable. The regulatory

entities listed in Sec. 933.8 are: for depository institution

applicants, the FDIC, FRB, National Credit Union Administration, OCC,

Office of Thrift Supervision (OTS), or other appropriate state

regulator; and for insurance company applicants, an appropriate state

regulator accredited by the National Association of Insurance

Commissioners. See id. Sec. 933.8. The final rule replaces the terms

``primary regulator'' and ``primary regulator or appropriate state

regulator'' wherever they appear throughout the Membership Regulation

with the term ``appropriate regulator.''

2. Nonperforming Assets Performance Trend Criterion; Definitions of

``Nonperforming Loans, Leases and Securities;'' ``Performing Loans,

Leases and Securities''--Sections 933.11(b)(3)(i)(B); 933.1(u), (x)

Section 933.11(b)(3)(i)(B) of the current Membership Regulation

provides that if an applicant's most recent composite regulatory

examination rating within the past two years was ``2'' or ``3,'' the

applicant's nonperforming loans, leases and securities plus foreclosed

and repossessed real estate may not have exceeded 10 percent of its

performing loans, leases and securities plus foreclosed and repossessed

real estate, in the most recent calendar quarter. See id.

Sec. 933.11(b)(3)(i)(B). This nonperforming assets performance trend

criterion was intended to be the same criterion as that required in the

former Finance Board Guidelines, but was described incorrectly in the

Membership Regulation. The proposed rule revised the criterion to state

it correctly as provided in the Guidelines, and made conforming changes

to components of the criterion consistent with the Guidelines. One Bank

commenter specifically supported this proposed change.

Accordingly, consistent with the proposed rule, the final rule

revises Sec. 933.11(b)(3)(i)(B) to state the criterion correctly, as

follows: the applicant's nonperforming loans and leases plus other real

estate owned, did not exceed 10 percent of its total loans and leases

plus other real estate owned, in the most recent calendar quarter. The

final rule makes a conforming change to the definition of

``nonperforming loans, leases and securities'' in Sec. 933.1(u) by

deleting the references to securities. The final rule also makes a

conforming change to Sec. 933.1(x) by replacing the definition of

``performing loans, leases and securities'' with a new definition of

``other real estate owned.''

3. Definition of ``Consolidation''--Section 933.1(ee)

Sections 933.24 and 933.25 of the current Membership Regulation set

forth certain requirements and procedures in the event of the

``consolidation'' of members with other members or members with

nonmembers. See id. Secs. 933.24, 933.25. Questions were raised as to

whether the term ``consolidation'' applies only to transactions falling

within the narrow meaning of the term, i.e., combinations where a new

company is formed to acquire the net assets of the combining companies.

The term ``consolidation'' was not intended to apply solely to such

combinations of entities. The proposed rule clarified this issue by

adding a new definition of ``consolidation'' in Sec. 933.1(ee) to

include a consolidation, a merger, or a purchase of all of the assets

and assumption of all of the liabilities of an entity by another

entity. One Bank commenter specifically supported the proposed

definition.

Accordingly, the final rule adopts the proposed definition without

change.

B. Action on Applications--Section 933.3(c)

Section 933.3(c) of the current Membership Regulation requires a

Bank to notify an applicant when its application is deemed by the Bank

to be complete. See id. Sec. 933.3(c). Section 933.3(c) also requires a

Bank to notify an applicant if the 60-day period for acting on a

membership application is stopped, and when the period for acting on

the application is resumed. See id. The proposed rule required the Bank

to provide such notices to the applicant in writing. The intent was to

ensure that there is a written record of the Banks' actions during the

application processing period, which may be relevant in the event of an

appeal of a Bank's denial of an application for membership.

No commenters opposed the proposed requirement that the Banks

provide written notice to an applicant when its application is deemed

complete, which starts the 60-day processing clock. Accordingly, this

requirement is retained in the final rule.

Two Bank commenters specifically opposed requiring the Banks to

provide written notice to an applicant when the 60-day processing

period is stopped or resumed. They stated that telephone notification

to the applicant, with a written log of such notification maintained in

the application files at the Bank, should be sufficient. The commenters

viewed the notice requirement merely as ``bureaucratic paperwork'' that

would provide no additional information to the applicant, which would

already have received verbal notice from the Bank, while increasing the

workload for Bank staff. One commenter also noted that the processing

clock often is stopped only for short periods of time in order to get

additional information from the applicant, and the Bank probably will

have received the requested information from the applicant before it

has had time to generate the notice letter.

The Finance Board believes there is merit in the commenters'

arguments. A written record can be ensured, for purposes of reviewing

any appeal of a Bank's denial of a membership application, by requiring

the Banks to maintain a written log in their application files of

notices provided to applicants when the processing clock is stopped or

resumed. Written notice to the applicants in such circumstances does

not appear to be necessary. The final rule is revised accordingly.

C. Automatic Membership Approval For Certain Consolidations--Section

933.4(d)

Sections 933.4(a) and (b) of the current Membership Regulation

provide for automatic Bank membership approval for institutions

required by law to become Bank members, and for institutions that have

undergone certain charter conversions, respectively. See id.

Secs. 933.4(a), (b). Several Banks

[[Page 40020]]

suggested that the Regulation also should allow for automatic Bank

membership approval where a member consolidates with a nonmember, the

nonmember is the surviving entity, and a significant percentage of the

surviving entity's total assets are derived from the assets of the

disappearing member. Where the surviving entity has substantially the

same assets as the disappearing member, the surviving entity arguably

should not have to go through the membership application process. The

proposed rule authorized such automatic membership approval where 90

percent or more of the total assets of the surviving entity are derived

from the assets of the disappearing member, and where the surviving

entity provides written notice to the Bank that it desires to be a

member of the Bank. The Finance Board requested comment on the

arguments for or against this proposal, including whether the 90

percent calculation or some other number or approach was an appropriate

method for determining the similarity of the disappearing and surviving

entities. In response to a Bank suggestion, the Finance Board also

requested comment on whether the chief executive officer of the

surviving entity should be required to submit a letter or certification

stating that the surviving entity continues to meet the membership

eligibility requirements.

1. 90 Percent Test

One Bank commenter specifically supported the proposed 90 percent

test. Two Bank commenters recommended reducing the percentage

requirement to 75 percent or 50 percent, which also was supported by

the Bank endorsing the 90 percent test. Two of these commenters

recommended that the surviving entity in such consolidations be

required to provide a letter or certification stating that it continues

to meet the membership eligibility requirements. The other commenter

stated that such a letter or certification is not necessary since the

preponderance of the assets is derived from the disappearing member,

and it is highly unlikely that the surviving entity would not meet the

membership eligibility requirements. The commenters stated that

lowering the percentage requirement would further streamline the

membership process, while posing little financial risk to the Banks.

Otherwise, there would be an interruption in membership status while

the surviving entity applied for membership, which could result in lost

business for the Bank as well as the surviving entity. The thrift

member commenter opposed the proposed amendment, stating that any

efficiencies that may be gained by allowing automatic membership

approval for the small number of institutions that would be eligible

for such treatment are outweighed by the risks of not maintaining

appropriate vigilance over Bank membership.

After consideration of the comments, the Finance Board has decided

to retain in the final rule the proposed 90 percent test, but to make

its application discretionary with the Banks. The final rule also

clarifies that a consolidated institution that is approved for

automatic membership by a Bank may become a member of the Bank only

upon the purchase of its minimum stock purchase requirement pursuant to

the requirements of Sec. 933.20.

The intent of the 90 percent test is to permit automatic membership

approval for consolidated institutions where substantially all of the

institution's assets are derived from the assets of the disappearing

member, making satisfaction of the membership eligibility requirements

essentially automatic. The Finance Board is comfortable that the 90

percent test generally represents a satisfactory proxy for this

eligibility determination and that there are not significant risks that

would affect the integrity of the membership process. However, the

Finance Board recognizes that there may be special circumstances where

relying solely on the 90 percent proxy test is not sufficient, and that

warrant obtaining additional information about the consolidated

institution in order to verify its satisfaction of the membership

eligibility requirements. In such cases, a Bank may want to conduct

additional due diligence of the consolidated institution's financial

condition or other eligibility factors, pursuant to the normal

membership application process, in order to verify the institution's

compliance with the eligibility requirements. Thus, rather than

requiring automatic membership approval for all consolidated

institutions meeting the 90 percent test, the final rule authorizes the

Banks, in their discretion, to approve automatic membership for

consolidated institutions meeting the 90 percent test.

A percentage requirement below 90 percent does not ensure automatic

satisfaction of the membership eligibility requirements, as

substantially all of the surviving institution's assets cannot be said

to be derived from the assets of the disappearing member. An

independent determination that the surviving institution continues to

meet the eligibility requirements would be necessary. This goes beyond

the intent of the proposed rule, which was to streamline the membership

process for consolidated institutions that can be deemed to

automatically satisfy the membership eligibility requirements. Relying

on a self-certification of eligibility from the surviving institution

is no longer an automatic membership process, and may not achieve the

desired effect of streamlining the process. The surviving institution

still would have to work through the data from its regulatory financial

report and determine whether it satisfies the eligibility requirements

before it could certify its eligibility, and the Bank presumably would

need to conduct some sort of informal analysis of the institution's

data in order to ensure that it is comfortable with relying on the

certification. Moreover, it may not be advisable for a Bank to rely on

an institution's self-certification of eligibility, in light of the

fact that the Banks often are required to work extensively with

membership applicants to get all of the information needed to conduct

an adequate eligibility review. In addition, it is not clear how the

rebuttable presumption process under the current Regulation should work

under a certification process. The Regulation currently allows an

applicant to rebut a presumption of noncompliance with eligibility

requirements, as determined in the discretion of the Bank. It may not

make sense to allow an institution to make its own discretionary

certification that it has rebutted a presumption of noncompliance.

In view of all these factors, the final rule does not adopt the

commenters' suggestions, which go beyond the intended scope of the

proposed rule.

2. Post-Consolidation Notice Requirement

Two Bank commenters recommended that the surviving entity be

required to notify the Bank of its desire for membership within 60 days

after the effective date of the consolidation, consistent with the 60-

day notice requirement for consolidations involving nonmembers that do

not satisfy the 90 percent test, which must apply for membership under

Sec. 933.25(b) of the current Regulation. See id. Sec. 933.25(b). There

appears to be no reason why consolidated institutions meeting the 90

percent test should be treated differently, for membership notice

purposes, from consolidated institutions that do not meet the 90

percent test and must apply for membership. Sixty days appears to be a

reasonable amount of time for consolidated institutions meeting the 90

[[Page 40021]]

percent test to make a decision regarding whether they want to be

members. Accordingly, the final rule adopts a 60-day post-consolidation

notice requirement for automatic consolidations.

3. Treatment of Acquired Advances and Stock During Notice Period

Since the final rule allows for a 60-day post-consolidation notice

period, the rule also must clarify how any outstanding Bank advances

and Bank stock acquired from the disappearing member will be treated

during that period before the consolidated institution has announced

its intention whether to accept membership. The final rule treats such

advances and stock consistent with the treatment for consolidated

institutions not meeting the 90 percent test, under

Secs. 933.25(d)(1)(i), (e) and (f) of the current regulation, i.e.,

during the 60-day notice period, the consolidated institution's Bank

may permit the institution to continue to hold any outstanding Bank

advances and stock, and the institution shall have the limited rights

associated with such stock in accordance with Secs. 933.25(e) and (f).

See id. Secs. 933.25(d)(1)(i), (e), (f).\1\ Of course, if the

consolidated institution ultimately decides not to accept membership,

then the liquidation of any outstanding indebtedness owed to the

disappearing institution's Bank and redemption of stock of such Bank

would be carried out in accordance with the requirements of Sec. 933.29

of the current Regulation. See 12 CFR 933.29.

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\1\Section 933.25(f) of the current Membership Regulation

provides that the consolidated institution may not vote the Bank

stock acquired in the consolidation from the disappearing member

unless and until the consolidated institution is a Bank member. See

id. Sec. 933.25(f). Under the Finance Board's proposed amendments to

its regulations governing the election of Bank directors,

Sec. 933.25(f) would be removed. See 63 FR 26532, 26544 (May 13,

1998). The proposed election regulation would provide that the

consolidated institution may vote the Bank stock acquired from the

disappearing member that was held by such member on the record date

(December 31 of the calendar year immediately preceding the election

year). See proposed Secs. 932.1 (definition of ``record date''),

932.5(b), 63 FR 26539-40.

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4. Multiple Members Merging Into a Nonmember; ``Same District''

Requirement

A Bank commenter also recommended that automatic membership be

allowed for multiple members merging into a single nonmember, but only

if the principal places of business of the multiple members are located

in the same Bank district as the principal place of business of the

surviving nonmember, consistent with the ``same district'' requirement

in Sec. 933.25(b) of the current Regulation. The final rule allows for

automatic membership for multiple members merging into a single

nonmember, where 90 percent of more of the total assets of the

consolidated institution are derived from the total assets of the

disappearing members. The final rule also applies to consolidations

meeting the 90 percent test the ``same district'' requirement, which

was inadvertently omitted from the proposed rule.

D. Allowance For Loan and Lease Losses Performance Trend Criterion--

Section 933.11(b)(3)(i)(C)

Section 933.11(b)(3)(i)(C) of the current Membership Regulation

provides that if an applicant's most recent composite regulatory

examination rating within the past two years was ``2'' or ``3,'' the

applicant's ratio of its allowance for loan and lease losses to

nonperforming loans, leases and securities must have been 60 percent or

greater during 4 of the 6 most recent calendar quarters. This allowance

for loan and lease losses performance trend criterion was intended to

be the same criterion as that required in the former Finance Board

Guidelines, but was described incorrectly in the Membership Regulation.

The proposed rule revised the criterion to state it correctly as

provided in the Guidelines. One Bank commenter specifically supported

this proposed change.

Accordingly, consistent with the proposed rule, the final rule

revises Sec. 933.11(b)(3)(i)(C) to state the criterion correctly, as

follows: the applicant's ratio of its allowance for loan and lease

losses plus the allocated transfer risk reserve to nonperforming loans

and leases was 60 percent or greater during 4 of the 6 most recent

calendar quarters.

One Bank commenter recommended that the minimum 60 percent ratio be

reduced to 40 percent, arguing that 60 percent is too high a threshold

that too often triggers the need for rebutting a presumption of

noncompliance with this criterion for applicants that are in a strong

financial condition. The Bank also suggested an alternative measure of

compliance through reliance on a determination by the applicant's

primary regulator of satisfactory performance of the criterion, based

on the primary regulator's own definition of the criterion.

The substantive issue of what amount should be the required ratio

for this performance criterion was not specifically raised for comment

in the proposed rule, which was intended merely to correct, consistent

with the Guidelines, an incorrect statement of the ratio in the current

regulation. No other commenter recommended lowering the ratio from 60

percent. This issue, therefore, does not appear to be ripe for review

at this time. However, if additional information is brought to the

Finance Board's attention at a future time that suggests that the 60

percent figure should be reconsidered, the Finance Board will act

accordingly.

E. De Novo Insured Depository Institution Applicants--Section 933.14

Section 933.14 of the current Membership Regulation sets forth the

requirements for processing and approving membership applications from

de novo insured depository institution applicants. See id. Sec. 933.14.

Section 933.14(a) provides for streamlined processing for newly-

chartered applicants that have not yet commenced operations, which are

deemed to meet the duly organized, inspection and regulation, financial

condition, and character of management eligibility requirements. See

id. Sec. 933.14(a)(1). Section 933.14(b) requires newly-chartered

applicants that have commenced operations to meet all of the

eligibility requirements, subject to certain exceptions provided in

paragraph (b). In particular, if such applicants have not yet filed

regulatory financial reports for the last six calendar quarters

preceding the date the Bank receives the membership application, the

applicant need not meet the performance trend criteria in

Sec. 933.11(b)(3)(i)(A) through (C) if the applicant has filed

regulatory financial reports for at least three calendar quarters of

operation. See id. Sec. 933.14(b)(2)(iii)(A).

A number of Banks stated that the requirement for having filed

three calendar quarters of regulatory financial reports should not be

necessary for institutions that have recently commenced operations. The

financial condition and character of management of such institutions

already will have been recently reviewed and approved by their

chartering and insuring regulators (see, e.g., 12 U.S.C. 1816, 12 CFR

303.7(d)(ii) (FDIC); 12 U.S.C. 26, 12 CFR 5.20 (OCC)), will have been

based on a forward looking business plan, and should not have changed

significantly since the commencement of operations. The Banks should

not have to duplicate the review performed by the prospective member's

appropriate regulator. Further, de novo insured depository institution

applicants should be treated similarly to mandatory de novo thrift

institutions, which do not have to satisfy any specific Bank membership

[[Page 40022]]

eligibility requirements since they are required by law to be Bank

members.

Based on these arguments, proposed Sec. 933.14(a)(1) extended the

streamlined application processing currently applicable to newly-

chartered insured depository institutions that have not yet commenced

operations to newly-chartered insured depository institutions that have

commenced operations. Such applicants would be deemed to meet the duly

organized, inspection and regulation, financial condition, and

character of management eligibility requirements. In order to be

considered newly-chartered and subject to the streamlined application

processing procedures of Sec. 933.14(a)(1), applicants would have to

have been chartered within three years prior to the date the Bank

receives the application for membership. Three years is consistent with

the time period for de novo treatment applied by other financial

institution regulators. See, e.g., 12 CFR 543.3(a) (OTS).

The Finance Board requested comment on the arguments for or against

this proposal. Three Bank commenters specifically supported the

proposal, while the thrift member commenter opposed it. The supporting

commenters cited the reasons expressed in the proposed rule for

streamlining the process. One commenter also noted that the de novo

applicant's other regulators closely scrutinize the financial condition

of the institution during its first three years of operations, which

should provide additional comfort regarding the safety and soundness of

the institution. The commenter also pointed out that after approving a

de novo institution for membership, the Bank would closely monitor its

financial soundness before providing any advances to the institution.

In addition, the commenter noted that streamlining membership approval

for such institutions will enable them to more quickly access long-term

Bank advances for the purpose of originating long-term housing and

community and economic development loans.

The thrift member stated that the efficiencies to be gained by the

proposal appeared small compared to the risks being assumed by the Bank

System. The commenter indicated that a de novo applicant's first three

quarterly reports should be reviewed to compare its actual performance

with its business plan, thereby preserving the possibility of early

identification and avoidance of financial risks to the Bank System.

However, as discussed above, streamlined membership processing for de

novos should not increase the financial risks to the Bank System, given

the extensive financial scrutiny of the institution already performed

by its other regulators, as well as the close monitoring that the Banks

will conduct before making advances to such an institution.

Accordingly, the final rule retains the proposed provisions, with a

clarification that the charter date to be used in determining the

three-year period for de novo status is the date the charter was

approved. One commenter suggested that the charter date be the date the

letter approving the charter is issued to the applicant by its

regulator. This seems unnecessary as the date of charter approval

should be easily verifiable.

F. Recent Merger or Acquisition Applicants--Section 933.15

Sections 933.9 and 933.10 of the current Membership Regulation

require applicants to show satisfaction of the ``makes long-term home

mortgage loans'' and ``10 percent residential mortgage loans''

requirements, respectively, based on the applicant's most recent

regulatory financial report. See id. Secs. 933.9, 933.10. An applicant

that recently has merged with or acquired another institution prior to

applying for Bank membership must show satisfaction of these

eligibility requirements based on the most recent regulatory financial

report filed by the consolidated entity. See id. However, a newly

consolidated entity may not be able to show compliance with these

requirements as it may be several months before the next quarterly

regulatory financial report is due to be filed with the appropriate

regulator.

One Bank suggested that in order to allow the applicant to be

approved for membership promptly, the applicant should be allowed to

demonstrate satisfaction of Secs. 933.9 and 933.10 by providing the

combined pro forma financial statement that the combined entity filed

with the regulator that approved its merger or acquisition. Another

suggestion was that the applicant should be allowed to provide the most

recent regulatory financial report filed prior to the merger or

acquisition by each of the institutions that entered into the merger or

acquisition. The Bank then would consolidate the relevant data from

both reports for purposes of determining compliance with Secs. 933.9

and 933.10. The proposed rule allowed reliance on such regulatory

financial reports, provided that in the case of showing satisfaction of

the 10 percent residential mortgage loans requirement, the Bank

obtained a certification from the applicant that there was no material

decrease in the ratio of consolidated residential mortgage loans to

consolidated total assets derived from the reports since the reports

were filed with the appropriate regulator.

One Bank commenter specifically supported this proposal. However,

upon further consideration of the issue, the Finance Board is concerned

that simply consolidating the mortgage loan data contained in the

regulatory financial reports filed by the entities before the merger or

acquisition does not accurately reflect a true valuation of the asset

composition of the combined entity. The proposed rule also created a

potential difficulty in defining what constitutes a ``material''

decrease in the ratio of consolidated residential mortgage loans to

consolidated total assets. The Finance Board believes that the combined

pro forma financial statement filed with the regulator that approved

the merger or acquisition represents a more accurate picture of the

combined institution's asset composition. Moreover, Sec. 933.15(a)(ii)

of the current Regulation already allows such applicants to provide

combined pro forma financial statements to show satisfaction of the

performance trend criteria in Secs. 933.11(b)(3)(i)(A) to (C) where

combined regulatory financial reports are not available. See id.

Sec. 933.15(a)(ii). Accordingly, the final rule provides that, for

purposes of determining compliance with Secs. 933.9 and 933.10, a Bank

may, in its discretion, permit a recent merger or acquisition applicant

that has not yet filed the required consolidated regulatory financial

report as a combined entity with its appropriate regulator, to provide

the combined pro forma financial statement for the combined entity

filed with the regulator that approved the merger or acquisition.

III. Regulatory Flexibility Act

The final rule implements statutory requirements binding on all

Banks and on all applicants for Bank membership, regardless of their

size. The Finance Board is not at liberty to make adjustments to those

requirements to accommodate small entities. The final rule does not

impose any additional regulatory requirements that will have a

disproportionate impact on small entities. Therefore, in accordance

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

605(b), the Finance Board hereby certifies that this final rule will

not have a significant economic impact on a substantial number of small

entities.

IV. Paperwork Reduction Act

As part of the proposed rulemaking, the Finance Board published a

request

[[Page 40023]]

for comments concerning proposed changes to the collection of

information in the current Membership Regulation, see 63 FR 8364, 8367

(Feb. 19, 1998), which previously was approved by the Office of

Management and Budget (OMB) and assigned OMB control number 3069-0004.

The Finance Board also submitted to OMB an analysis of the proposed

changes to the collection of information contained in Sec. 933.15 of

the proposed rule, in accordance with section 3507(d) of the Paperwork

Reduction Act of 1995, 44 U.S.C. 3507(d). No comments were received by

the Finance Board on the proposed changes to the collection of

information. OMB approved the information collection without conditions

with an expiration date of April 30, 2001. The final rule does not

substantively or materially modify the approved information collection.

The Banks and, where appropriate, the Finance Board, will use the

information collection under Sec. 933.15(c) of the final rule to

determine whether a recent merger or acquisition applicant meets

certain membership eligibility requirements. See 12 U.S.C.

1424(a)(1)(C), (a)(2)(A); 12 CFR 933.9, 933.10. Only applicants meeting

such requirements may become Bank members. See id.; id. Responses are

required to obtain or retain a benefit. See 12 U.S.C. 1424. The Finance

Board and the Banks will maintain the confidentiality of information

obtained from respondents pursuant to the collection of information as

required by applicable statute, regulation, and agency policy. Books or

records relating to this collection of information must be retained as

provided in the regulation.

Likely respondents and/or recordkeepers will be the Finance Board,

Banks, and financial institutions that have recently undergone a merger

or acquisition and are eligible to become Bank members under the Act,

see id. section 1424(a)(1), including any building and loan

association, savings and loan association, cooperative bank, homestead

association, insurance company, savings bank, or insured depository

institution. The title, description of need and use, and a description

of the information collection requirements in the final rule are

discussed further in part II. of the SUPPLEMENTARY INFORMATION.

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 changes to the information collection will not impose any

additional costs on the Finance Board or the Banks. The estimated

annual reporting and recordkeeping hour burden on respondents is:

a. Number of respondents--15

b. Total annual responses--15

Percentage of these responses collected electronically--0%

c. Total annual hours requested--60

d. Current OMB inventory--59,152

e. Difference--(59,092)

The estimated annual reporting and recordkeeping cost burden on

respondents is:

a. Total annualized capital/startup costs--$0

b. Total annual costs (O&M)--$0

c. Total annualized cost requested--$1,800

d. Current OMB inventory--$1,684,000

e. Difference--($1,682,200)

Any comments regarding the collection of information may be

submitted in writing to Elaine L. Baker, Executive Secretary, Federal

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

to 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.

List of Subjects in 12 CFR Part 933

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

Accordingly, the Finance Board hereby amends title 12, chapter IX,

part 933, Code of Federal Regulations, as follows:

PART 933--MEMBERS OF THE BANKS

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

follows:

Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430,

1442.

PART 933--[AMENDED]

2. Part 933 is amended by removing the term ``primary regulator or

appropriate state regulator'' wherever it appears and adding the term

``appropriate regulator'' in its place in the following locations:

a. Sec. 933.1(l);

b. Sec. 933.1(z);

c. Sec. 933.2(c)(2);

d. Sec. 933.11(a)(3);

e. Sec. 933.11(a)(4);

f. Sec. 933.11(b)(1);

g. Sec. 933.12(a);

h. Sec. 933.17(e)(1) introductory text;

i. Sec. 933.17(e)(1)(i);

j. Sec. 933.17(e)(2)(i); and

k. Sec. 933.17(e)(3)(i).

Sec. 933.11 [Amended]

3. Section 933.11(b)(3)(i) introductory text is amended by removing

the term ``primary regulatory or appropriate state regulator'' and

adding the term ``appropriate regulator'' in its place.

Secs. 933.11 and 933.17 [Amended]

4. Sections 933.11(a)(4) and 933.17(e)(1)(i) are amended by

removing the phrase ``, whichever is applicable,'' wherever it appears.

5. Part 933 is amended by removing the term ``primary regulator''

wherever it appears and adding the term ``appropriate regulator'' in

its place in the following locations:

a. Sec. 933.1(aa);

b. Sec. 933.9;

c. Sec. 933.10;

d. Sec. 933.11(a)(1);

e. Sec. 933.11(b)(2);

f. Sec. 933.11(b)(3)(i) introductory text;

g. Sec. 933.11(b)(3)(ii);

h. Sec. 933.15(a)(i);

i. Sec. 933.15(a)(ii);

j. Sec. 933.16; and

k. Sec. 933.17(f)(1).

6. Section 933.1 is amended by revising paragraphs (u), (x), and

(y), and adding paragraph (ee) to read as follows:

Sec. 933.1 Definitions.

* * * * *

(u) Nonperforming loans and leases means the sum of the following,

reported on a regulatory financial report: loans and leases that have

been past due for 90 days (60 days in the case of credit union

applicants) or longer but are still accruing; loans and leases on a

nonaccrual basis; and restructured loans and leases (not already

reported as nonperforming).

* * * * *

(x) Other real estate owned means all other real estate owned

(i.e., foreclosed and repossessed real estate), reported on a

regulatory financial report, and does not include direct and indirect

investments in real estate ventures.

(y) Appropriate regulator means a regulatory entity listed in

Sec. 933.8, as applicable.

* * * * *

(ee) Consolidation includes a consolidation, a merger, or a

purchase of all of the assets and assumption of all of the liabilities

of an entity by another entity.

7. Section 933.3 is amended by revising the fourth and fifth

sentences of paragraph (c) to read as follows:

Sec. 933.3 Decision on application.

* * * * *

(c) * * * The Bank shall notify an applicant in writing when its

[[Page 40024]]

application is deemed by the Bank to be complete, and shall maintain a

copy of such letter in the applicant's membership file. The Bank shall

notify an applicant if the 60-day clock is stopped, and when the clock

is resumed, and shall maintain a written record of such notifications

in the applicant's membership file. * * *

* * * * *

8. Section 933.4 is amended by adding paragraph (d) to read as

follows:

Sec. 933.4 Automatic membership.

* * * * *

(d) Automatic membership, in the Bank's discretion, for certain

consolidations. (1) If a member institution (or institutions) and a

nonmember institution are consolidated and the consolidated institution

has its principal place of business in a state in the same Bank

district as the disappearing institution (or institutions), and the

consolidated institution will operate under the charter of the

nonmember institution, on the effective date of the consolidation, the

consolidated institution may, in the discretion of the Bank of which

the disappearing institution (or institutions) was a member immediately

prior to the effective date of the consolidation, automatically become

a member of such Bank upon the purchase of stock in that Bank pursuant

to Sec. 933.20, provided that:

(i) 90 percent or more of the total assets of the consolidated

institution are derived from the total assets of the disappearing

member institution (or institutions); and

(ii) The consolidated institution provides written notice to such

Bank, within 60 calendar days after the effective date of the

consolidation, that it desires to be a member of the Bank.

(2) The provisions of Sec. 933.25(d)(1)(i) shall apply, and upon

approval of automatic membership by the Bank, the provisions of

Secs. 933.25(d)(2)(i), (e) and (f) shall apply.

9. Section 933.11 is amended by revising paragraphs (b)(3)(i)(B)

and (b)(3)(i)(C) to read as follows:

Sec. 933.11 Financial condition requirement for applicants other than

insurance companies.

* * * * *

(b) * * *

(3) * * *

(i) * * *

(B) Nonperforming assets. The applicant's nonperforming loans and

leases plus other real estate owned, did not exceed 10 percent of its

total loans and leases plus other real estate owned, in the most recent

calendar quarter; and

(C) Allowance for loan and lease losses. The applicant's ratio of

its allowance for loan and lease losses plus the allocated transfer

risk reserve to nonperforming loans and leases was 60 percent or

greater during 4 of the 6 most recent calendar quarters.

* * * * *

10. Section 933.14 is amended by removing the heading for paragraph

(a), revising paragraph (a)(1), and removing and reserving paragraph

(b), as follows:

Sec. 933.14 De novo insured depository institution applicants.

(a)(1) Duly organized, subject to inspection and regulation,

financial condition and character of management requirements. An

insured depository institution applicant whose date of charter approval

is within three years prior to the date the Bank receives the

applicant's application for membership in the Bank, is deemed to meet

the requirements of Secs. 933.7, 933.8, 933.11 and 933.12.

* * * * *

11. Section 933.15 is amended by adding new paragraph (c) to read

as follows:

Sec. 933.15 Recent merger or acquisition applicants.

* * * * *

(c) Makes long-term home mortgage loans requirement; 10 percent

requirement. For purposes of determining compliance with Secs. 933.9

and 933.10, a Bank may, in its discretion, permit an applicant that, as

a result of a merger or acquisition preceding the date the Bank

receives its application for membership, has not yet filed a

consolidated regulatory financial report as a combined entity with its

appropriate regulator, to provide the combined pro forma financial

statement for the combined entity filed with the regulator that

approved the merger or acquisition.

* * * * *

Sec. 933.20 [Amended]

12. Section 933.20 is amended by removing the citation

``Sec. 933.4(a)'' in paragraphs (b)(1) and (b)(2) and adding the

citation ``Sec. 933.4(a) or (d)'' in its place.

Dated: June 24, 1998.

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

Bruce A. Morrison,

Chairman.

[FR Doc. 98-19912 Filed 7-24-98; 8:45 am]

BILLING CODE 6725-01-P