Community Investment Cash Advance Programs

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932, 935, 936 and 970

[No. 98-48]

RIN 3069-AA75

Community Investment Cash Advance Programs

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

a final rule establishing a general framework under which the Federal

Home Loan Banks (Banks) may offer Community Investment Cash Advance

(CICA) programs in addition to their Affordable Housing Programs (AHP)

and Community Investment Programs (CIP). CICA programs other than AHP

and CIP are entirely optional on the part of the Banks. The final rule

is intended to provide the Banks with an array of specific standards

for projects, targeted beneficiaries and targeted income levels that

the Finance Board has determined support community lending under all

CICA programs, including CIP. The final rule, however, does not apply

to a Bank's AHP, which is governed specifically by part 960 of the

Finance Board's regulations. A Bank may offer CICA programs, called

Rural Development Advance (RDA) and Urban Development Advance (UDA)

programs, for community lending using the specified standards for

targeted beneficiaries or targeted income levels, without prior Finance

Board approval. A Bank also may offer other CICA programs for projects,

targeted beneficiaries and targeted income levels established by the

Bank with prior Finance Board approval.

EFFECTIVE DATE: December 28, 1998.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Deputy Director,

Market Research, (202) 408-2537, Stanley Newman, Associate Director,

Market Research, (202) 408-2812, or Diane E. Dorius, Associate

Director, Program Development, (202) 408-2576, Office of Policy; or Roy

S. Turner, Jr., Attorney-Advisor, (202) 408-2512, Sharon B. Like,

Senior Attorney-Advisor, (202) 408-2930, or Deborah F. Silberman,

General Counsel, (202) 408-2570, Office of General Counsel, Federal

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

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

The Banks currently have broad authority under section 10(a) of the

Federal Home Loan Bank Act (Bank Act) and part 935 of the Finance

Board's regulations to make advances in support of housing finance,

including housing for very low-, low- and moderate-income families. See

12 U.S.C. 1430(a); 12 CFR part 935. In the Financial Institutions

Reform, Recovery and Enforcement Act of 1989 (FIRREA), Congress

required the Banks to offer two programs, the AHP and the CIP, to

provide advances in support of unmet housing finance and economic

development credit needs. See Pub. L. 101-73, Sec. 721, 103 Stat. 183

(Aug. 9, 1989).

The AHP is a subsidy program through which the Banks support the

finance of affordable owner-occupied and rental housing. See 12 U.S.C.

1430(j). The Finance Board first issued implementing regulations for

the AHP in 1990. See 12 CFR part 960.

The CIP is a program through which the Banks provide advances to

members at cost to support the financing of housing benefiting families

with incomes at or below 115 percent of the area median income, and

economic development activities benefiting families with incomes at or

below 80 percent of the area median income. See 12 U.S.C. 1430(i)(2).

The Finance Board previously has not promulgated regulations

implementing the CIP.

Section 10(j)(10) of the Bank Act authorizes the Banks to establish

CICA programs in addition to the CIP and the AHP to support ``community

investment.'' See id. section 1430(j)(10). The Finance Board has not

previously promulgated regulations or other specific guidance on what

kinds of Bank lending are permitted under this authority.

Since the enactment of the Banks' statutory authority to make

advances for community investment under FIRREA, the Banks have provided

relatively less long-term credit for economic development projects than

for housing, and all of the verifiable targeted economic development

lending by the Banks has been done under their CIP authority, as

opposed to their authority to establish other CICA programs. In the

past eight years, the Banks have provided $18.1 billion in CIP advances

to finance 368,359 housing units. Only 25 percent of those units have

been rental units that often provide housing for lower-income families

and are usually more difficult to finance than single-family owner-

occupied housing. In addition, only $751 million or 4 percent of CIP

advances have financed economic development projects. Furthermore, CIP

advances are not available to the Banks' nonmember borrowers. See id.

section 1430(i)(1).

The Finance Board believes there is a need for long-term financing

for economic development that is not being met by the financial

community generally, nor by members using the CIP specifically. The

Banks can help to meet this need through the establishment of other

CICA programs to provide long-term financing for economic development.

In order to facilitate and encourage such community lending, the

Finance Board issued a proposed rule to establish uniform standards for

all CICA programs defining the kinds of housing and economic

development projects and activities, targeted beneficiaries and

targeted income levels that would constitute ``community investment''

eligible to be financed by advances under section 10(j)(10) of the Bank

Act. This proposed rule was published in the Federal Register on May 8,

1998, with a 90-day period for public comment that closed on August 6,

1998. See 63 FR 25718 (May 8, 1998).

[[Page 65537]]

The Finance Board received 31 comment letters on the proposed rule.

Commenters included: eleven Banks, a Bank board of directors, a Bank

member thrift, three Bank Advisory Councils, five government entities,

an organization representing government entities, five trade

associations, and an investment advisor.

In the proposed rule, the Finance Board requested comment on

whether it should establish CICA standards, in whole or in part, in the

form of a regulation or a policy statement or guidelines. See 63 FR

25718. The Finance Board asked whether a policy statement or guidelines

would be a more effective means of achieving the goal of promoting the

Bank's support of community investment financing. Commenters supporting

issuance of CICA standards via a regulation stated that the proposed

rule contained sufficient flexibility and discretion to enable the

Banks to promote community investment in response to the needs of their

individual districts. Commenters noted that the establishment of clear

and specific CICA standards would be more likely to increase economic

development activities in targeted communities, and would make CICA

programs easier to implement and monitor. The Finance Board agrees with

these commenters and has determined to issue a final rule.

Commenters preferring issuance of a policy statement or guidelines

stated that regulatory standards and reporting requirements would

increase the cost of implementing CICA programs and might discourage

members and others from participating in such programs. Commenters also

suggested that policy guidelines could be modified more quickly than a

regulation to respond to changing markets and project needs. There

appears to be little merit in these arguments. First, the standards and

reporting requirements would exist regardless of the form of the

guidance. This argument implies that such standards and requirements

could be more easily ignored if the guidance existed in the form of a

policy statement, since a policy statement is not legally enforceable

by the agency. Such arguments only serve to demonstrate why a

regulation is preferable to a policy statement. Second, changing a

policy statement requires action by the Board of Directors of the

Finance Board, as does changing a regulation. The only real difference

in timing is the public comment process required for a rulemaking

procedure. Once again, this only serves to demonstrate why the

regulatory route is preferable.

Under the Administrative Procedures Act (APA), regulations are

subject to a wide-ranging notice and public comment process, which

enables the regulatory agency to obtain the broadest possible input

from the regulated industry, program users, and the public in

developing the standards and other requirements to be incorporated into

such regulations. See 5 U.S.C. 553. In addition, as noted above, unlike

policy statements and guidelines which do not have the force of law and

therefore are not legally binding, regulations are legally enforceable

by the agency. In order to provide the most certainty for the agency,

the Banks and their members, the Finance Board has determined that it

is most appropriate to issue the CICA program standards in a regulation

rather than as a policy statement or guidelines.

II. Analysis of Final Rule

The final rule adds a new part 970 to the Finance Board's

regulations. Part 970 establishes a general framework whereby the Banks

may offer CICA programs to provide advances to members and nonmember

borrowers, who in turn can use the advances to provide financing for

housing and economic development projects or activities for targeted

beneficiaries with incomes at or below a targeted income level, to

address unmet economic development credit needs. Projects with unmet

credit needs are those for which financing is not generally available,

or is available at lower levels or under less attractive terms. The

final rule does not require a Bank to establish a CICA program (other

than AHP and CIP, which are required by statute). The final rule is

intended to provide the Banks with the parameters for what the Finance

Board has determined will meet the statutory requirement for

``community investment'' under section 10(j)(10). See 12 U.S.C.

1430(j)(10).

As further described below, the final rule has been substantially

reorganized from the proposed rule to provide greater clarity.

A. Scope--Sec. 970.1

Section 970.1 of the final rule states that part 970 establishes

requirements for all CICA programs offered by a Bank, except for a

Bank's AHP, which is governed specifically by part 960 of the Finance

Board's regulations (Affordable Housing Program Regulation, 12 CFR part

960).

B. Purpose--Sec. 970.2

Section 970.2 of the final rule states that the purpose of part 970

is to identify community lending projects or activities (as defined in

Sec. 970.3 and discussed further below) that the Banks may support

through the establishment of CICA programs. A Bank may offer the

following CICA programs in support of community lending: Rural

Development Advance (RDA) programs; Urban Development Advance (UDA)

programs; and any other CICA programs that meet the requirements of

part 970. In addition, a Bank is required to offer CICA programs under

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

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

C. Community Lending Plan--Sec. 970.4

Section 970.4 of the final rule requires each Bank to develop and

adopt an annual Community Lending Plan pursuant to Sec. 936.6 of the

Finance Board's Community Support Regulation (12 CFR 936.6). As further

discussed below, a Bank's Community Lending Plan shall contain

quantitative community lending performance goals, and the initiatives

and incentives the Bank intends to offer to promote community lending

and affordable housing finance by the Bank's borrowers.

1. Proposed Budget and Strategy Process

The final rule does not adopt the budget and strategy process for

establishing community lending goals that was set forth in the proposed

rule. Proposed Sec. 970.3 would have authorized the Banks to establish

an annual budget for the cumulative discount the Bank intended to make

available under its CIP and other CICA programs (excluding AHP) the

Bank established. The budget was to be based on the Bank's projected

annual totals of CIP advances and other CICA advances that the Bank

intended to make, and the extent to which the Bank intended to provide

a pricing discount, if any, for such other CICA advances. If a Bank

chose to establish a budget, the Bank was urged to establish standards

for allocating the discount among specific types of eligible community

lending activities. In the absence of such a budget, the Bank was

required to fund requests from qualified borrowers for any advances

that otherwise met the requirements of the Bank's CIP or any other CICA

program the Bank offered. The proposed rule also would have required

each Bank to establish a strategy, after consultation with the Bank's

Advisory Council and economic development organizations in the Bank's

district, for providing CIP advances to support financing for community

lending that is otherwise not generally available, or is available at

[[Page 65538]]

lower levels or under less attractive terms.

The proposal was meant to encourage the Banks to engage in a

deliberate decisionmaking process about how much community lending

credit they intended to make available each year, through their CIP and

other CICA programs, and the kinds of projects to which that credit

should be directed. As discussed above, the Banks' community lending

efforts to date have been through volume lending under the CIP in

support of home mortgage loans, to the relative exclusion of economic

development financing. The Banks' concentration on volume funding of

CIP-eligible home mortgage loans may have been encouraged by the CIP

target system established in the past by the Finance Board, which was

based on a Bank's average annual outstanding CIP advances. The Finance

Board wishes to reverse this trend and to shift the Banks' focus from

volume of CIP lending to maximizing the impact of individual advances.

The proposed rule made clear that each Bank had authority to determine

the appropriate amount of CIP credit to make available on an annual

basis. However, the Finance Board believed that the authority to limit

the amount of available CIP credit imposed an obligation for the Bank

to target how the opportunity cost associated with CIP advances is to

be used most effectively in relation to the kinds of CIP projects the

Bank funds.

One Bank commenter specifically supported the necessity of having a

Bank System-wide basis for determining the dollar value of the discount

for specific advances, in order to ensure that all of the Banks budget

their cumulative discounts consistently, regardless of the actual CICA

programs and discounts offered. The commenter stated that capital

limitations should be included as a factor which Banks could consider

in the cumulative discount budgeting process, since CIP and other CICA

advances must be funded under the statutory 20-to-1 capital leverage

limits, just as regular advances are funded. See id. section

1426(b)(2). One Bank commenter added that it should be clarified that

the Banks are dependent on lenders to decide whether to originate

specific types of loans and to finance them with Bank advances and,

therefore, the Banks should have flexibility to adjust their budgets in

response to changing market realities.

Other commenters stated that the budget dollar amount selected by

the Bank would be an inaccurate and unrelated measure of a Bank's

commitment to community lending and should not be used by the Finance

Board as a proxy for such lending. Commenters claimed that it would be

nearly impossible for the Banks to demonstrate that a CICA advance to

support projects is ``otherwise not generally available or is available

at lower levels or under less attractive terms.'' A Bank commenter

questioned how the Finance Board would treat Banks that do not

``spend'' all of their annual CICA budget, or spend more or budget less

than the Finance Board desires. Another commenter expressed concern

that the proposed annual budget requirement could result in a Bank

having to make all of its advances at cost, without any profit, which

would be burdensome and unworkable. One commenter also noted that the

proposed budget requirement could create uncertainty rather than a

stable source of discounted funding for eligible projects. For example,

if the volume of CICA advances were to decline, discounts offered near

the end of the budget period may be more significant that those offered

earlier in the year in order for the Banks to fulfill their volume or

discount quota under the proposed rule. Conversely, in order to meet

volume or discount quota, Banks may offer aggressive discounts early in

the year, to the detriment of worthy projects needing funding later in

the year that may not receive as favorable terms.

A Bank commenter recommended deletion of the proposed provision

that in determining projected annual totals for CIP and other CICA

program advances, a Bank should take into account its earnings, fearing

that this would become the primary measure for establishing a CICA

budget, rather than taking into account market conditions, product

demand, and other variables that typically are considered in developing

budget projections.

Several Bank commenters suggested that the proposed requirement

that the Bank must fund CICA advance requests in the absence of a CICA

budget adopted by the Bank be deleted as inconsistent with safe and

sound business practices, and contrary to the statutory language

granting the Banks' boards of directors discretionary authority to deny

or condition approval of an advance. See id. section 1429.

Several commenters suggested instead that each Bank's board of

directors, in consultation with its Advisory Council, should be

required to establish specific annual measurable goals or performance

standards for CIP and CICA advances, such as volume targets or dollar

targets, based on assessment of critical community lending needs in the

Bank's district. One Bank commenter suggested evaluating a Bank's CICA

performance taking into account its marketing efforts, technical

assistance activities and other information on CICA programs.

A commenter suggested that the Banks be encouraged to adopt one

CICA plan covering the AHP, CIP, Community Support and other CICA

programs, rather than separate plans for each program.

A commenter suggested clarification of the need for a CIP strategy

statement where the Bank will not be establishing a budget but intends

to fund all qualified requests for CIP advances. Several commenters

supported requiring consultation with economic development

organizations, in addition to Advisory Councils, in developing CIP

strategies. Other commenters suggested that consultation with such

organizations should be encouraged but not required, as the Advisory

Councils are very capable of providing input in the development of CICA

programs, and representatives of such organizations often are members

of the Advisory Councils.

The Finance Board believes that many of these comments have merit,

and has sought in the final rule to address the concerns expressed by

the commenters while maintaining the essence of the proposal in a less

burdensome manner. Accordingly, the budget and strategy provisions of

proposed Sec. 970.3 have not been adopted in the final rule. Instead, a

number of the comments have been incorporated into the final rule

through amendment of Sec. 936.6 of the Finance Board's Community

Support Regulation, as further discussed below.

2. Community Lending Plan

There is already established in the Finance Board's Community

Support Regulation (12 CFR 936) a requirement that the Banks provide

technical assistance and engage in outreach to their members for

affordable housing and certain community lending. See id. Sec. 936.6.

The final rule amends Sec. 936.6 to require the Banks to expand the

scope of the existing marketing activities required under their

Community Support Programs to encourage community lending by their

borrowers, and include in their Community Support Programs an annual

Community Lending Plan containing quantitative community lending

performance goals. As further discussed below, ``community lending'' is

defined in the final rule as ``providing financing for economic

development projects for targeted beneficiaries.'' See Sec. 970.3.

Specifically, the final rule amends Sec. Sec. 936.6(a) and (b) of

the Community Support Regulation (to be codified in

[[Page 65539]]

Sec. 936.6(a)), to provide that a Bank's Community Support Program

should:

(1) Promote and expand affordable housing finance;

(2) Encourage members to increase their community lending and

affordable housing finance activities by providing incentives, as

provided therein;

(3) Include an annual Community Lending Plan, approved by the

Bank's board of directors and subject to modification, which shall

require the Bank to:

(i) Conduct market research in the Bank's district;

(ii) Describe how the Bank will address the identified credit needs

and market opportunities in the Bank's district for community lending;

(iii) Consult with its Advisory Council and with members, nonmember

borrowers, and public and private economic development organizations in

the Bank's district in developing and implementing its Community

Lending Plan; and

(iv) Establish quantitative community lending performance goals.

The Community Lending Plan is intended not as a burden, but as a

tool to assist the Banks in identifying credit needs and business

opportunities within the Bank's district and in crafting viable

business responses to those needs and opportunities. Market research is

the methodology through which the Banks may discover the opportunities

available and thereby may develop an informed Community Lending Plan.

No formal methodology is required by the final rule; each Bank,

therefore, is responsible for determining what market research activity

will be sufficient to enable the Bank to identify the community lending

credit needs and market opportunities in its district and develop

programs to address those needs and opportunities.

3. CICA Program Information Dissemination

In the proposed rule, the Finance Board requested comment on how

information about a Bank's CIP and other CICA programs could best be

disseminated to Bank members and nonmember borrowers, as well as to

other interested members of the public. See 63 FR 25719. Several

commenters stated that existing Bank information dissemination

procedures under the Banks' other affordable housing and community

lending programs are adequate for CICA purposes. The Finance Board

agrees with these commenters and has included in the final rule a CICA

information dissemination requirement as a part of the existing

Community Support information dissemination process. Specifically, the

final rule amends Sec. 936.6(c) of the Finance Board's Community

Support Regulation (to be codified in Sec. 936.6(b)) to require that

the Banks provide annually to each of their members a written notice:

(1) Identifying CICA programs and other Bank activities that may

provide opportunities for a member to meet the community support

requirements and to engage in community lending; and

(2) Summarizing community lending and affordable housing activities

undertaken by members, nonmember borrowers, nonprofit housing

developers, community groups, or other entities in the Bank's district,

that may provide opportunities for a member to meet the community

support requirements and to engage in community lending.

D. Community Investment Cash Advance Programs--Sec. 970.5

1. Types of CICA Programs

The final rule defines a ``CICA program'' as a Bank's AHP, CIP, RDA

or UDA program using any combination of the standards specified in

Sec. 970.3, and any other program for community lending offered by a

Bank using standards other than those specified in Sec. 970.3, with

prior Finance Board approval. See Sec. 970.3.

2. ``Community Lending''

Section 970.5 of the final rule provides that Bank advances offered

under CICA programs must be made for ``community lending'' and eligible

housing projects at the appropriate ``targeted income levels.'' See

also 12 CFR 935.1 (as amended by the final rule) (definition of

``community investment cash advance''). ``Community lending'' is a new

term in the final rule, which is defined as ``providing financing'' for

``economic development projects'' for ``targeted beneficiaries.'' See

Sec. 970.3.

In response to a commenter, the Finance Board wishes to clarify

that CICA loans may be used for affordable housing, but that only the

CIP and AHP CICA programs have targeting requirements for affordable

housing under CICA. The fact that CICA loans may be made for targeted

economic development financing does not negate the fact that CICA loans

also may be made for affordable housing. CICA loans also may be used

for mixed-use projects involving both community lending and affordable

housing, although only the community lending portion of the project

would be subject to targeting under CICA (except for CIP projects). See

Sec. 970.5(b). Nothing in this final rule diminishes the Banks'

authority to provide advances to fund loans for affordable housing

projects pursuant to their regular advances authority under section

10(a) of the Bank Act. See 12 U.S.C. 1430(a).

In the proposed rule, the Finance Board requested comment on

defining targeted income levels for CICA programs based upon area

median income data other than that published annually by HUD. See 63 FR

25720. A number of commenters favored allowing the Banks to choose

among the median income standards identified in the Finance Board's AHP

regulation (12 CFR 960.1). Accordingly, targeted income levels in the

final rule are based on the ``median income for the area,'' as defined

in Sec. 970.3, consistent with the definition in the AHP regulation,

which will provide uniformity between the AHP and other CICA programs.

In addition, in response to commenters, the median income for the area

may be adjusted for family size, rather than just for a family of four.

The final rule specifically defines the component terms of

``community lending,'' as further discussed below.

a. ``Providing financing''

``Providing financing'' means:

(1) Originating loans;

(2) Purchasing a participation interest, or providing financing to

participate, in a loan consortium for CICA-eligible housing or economic

development projects;

(3) Making loans to entities that, in turn, make loans for CICA-

eligible housing or economic development projects;

(4) Purchasing mortgage revenue bonds or mortgage-backed

securities, where all of the loans financed by such bonds and all of

the loans backing such securities, respectively, meet the eligibility

requirements of the CICA program under which the member or nonmember

borrower receives an advance;

(5) Creating or maintaining a secondary market for loans, where all

such loans are mortgage loans meeting the eligibility requirements of

the CICA program under which the member or nonmember borrower receives

an advance;

(6) Originating CICA-eligible loans within 3 months prior to

receiving the CICA advance; or

(7) purchasing low-income housing tax credits. See Sec. 970.3.

Bank commenters specifically supported the inclusion of purchasing

qualifying mortgage revenue bonds and mortgage-backed securities, and

creating

[[Page 65540]]

or maintaining a secondary market for qualifying loans. The financing

techniques listed in paragraphs (2), (3), (6) and (7) were added in

response to commenters' suggestions, in order to provide additional

flexibility for the Banks to use various financing strategies to

support community lending.

A Bank commenter recommended that the proposed list of eligible

financing techniques be revised to permit other appropriate activities

as determined by the Bank, which the Bank may submit to the Finance

Board for approval. The Finance Board believes that the list of

eligible activities in the final rule, which has been expanded to

include commenters' suggestions, is sufficiently inclusive to take into

account anticipated community lending financing.

b. ``Economic development projects''

``Economic development projects'' are:

(1) Commercial, industrial, manufacturing, social service, and

public facility projects and activities; and

(2) Public or private infrastructure projects, such as roads,

utilities, and sewers. See Sec. 970.3.

In response to a Bank comment, the final rule adds industrial

projects, which were not included in the proposed rule.

c. ``Targeted beneficiaries''

``Targeted beneficiaries'' are beneficiaries determined by the

geographical area in which a project is located (Geographically Defined

Beneficiaries), by the individuals who benefit from a project as

employees or service recipients (Individual Beneficiaries), or by the

nature of the project itself (Activity Beneficiaries). See Sec. 970.3.

A list of targeted beneficiaries appeared under the definition of

``benefit'' in Sec. 970.4 of the proposed rule. Targeted beneficiaries

as defined in the final rule are composed of three groups:

(1) Geographically Defined Beneficiaries:

(i) The project is located in a neighborhood with a median income

at or below the targeted income level. Thus, for CIP-funded projects,

the targeted income level must be 80 percent of area median income; for

RDA-funded projects (defined in Sec. 970.3), the targeted income level

is 115 percent of area median income; and for UDA-funded projects

(defined in Sec. 970.3), the targeted income level is 100 percent of

area median income;

(ii) The project is located in a rural Champion Community, or a

rural Empowerment Zone or rural Enterprise Community, as designated by

the Secretary of the U.S. Department of Agriculture (USDA);

(iii) The project is located in an urban Champion Community, or an

urban Empowerment Zone or urban Enterprise Community, as designated by

the Secretary of the Department of Housing and Urban Development (HUD);

(iv) The project is located in an Indian area, as defined by the

Native American Housing Assistance and Self-Determination Act of 1996

(25 U.S.C. 4101 et seq.), Alaskan Native Village, or Native Hawaiian

Home Land;

(v) The project is located in an area and involves a property

eligible for a Brownfield Tax Credit;

(vi) The project is located in an area affected by a military base

closing and is a ``community in the vicinity of the installation'' as

defined by the Department of Defense at 32 CFR part 176;

(vii) The project is located in a designated community under the

Community Adjustment and Investment Program as defined under 22 U.S.C.

290m-2;

(viii) The project is located in a Federally declared disaster

area; or (ix) the project is located in a state declared disaster area,

or qualifies for assistance under another Federal or state targeted

economic development program, approved by the Finance Board.

One Bank commenter suggested that projects located in state

declared disaster areas be included as eligible for CICA advances.

Another Bank commenter recommended including state-designated

Empowerment and Enterprise Zones in order to provide greater

flexibility in addressing local needs of the targeted income group.

Other commenters suggested allowing the Banks the discretion to select

other areas not listed in the rule that are designated for targeted

economic development. In response to these comments, paragraph (ix) was

added to enable the Banks to fund projects located in state declared

disaster areas, or qualifying for assistance under another Federal or

state targeted economic development program not specifically listed in

the final rule, with prior approval of the Finance Board. This will

enable the Finance Board to determine, on a case-by-case basis, whether

specific state declared disaster areas or economic development programs

are defined by specific standards and are sufficiently targeted to be

considered a CICA program.

(2) Individual Beneficiaries:

(i) The annual salaries for at least 51 percent of the permanent

full-and part-time jobs, computed on a full-time equivalent basis,

created or retained by the project, other than construction jobs, are

at or below the targeted income level (job creation or retention

project); or

(ii) At least 51 percent of the families who otherwise benefit from

(other than through employment), or are provided services by, the

project have incomes at or below the targeted income level.

The Finance Board requested comment in the proposed rule on whether

measuring the salaries of jobs created by a project is an effective way

to determine whether the project benefits families with incomes at or

below a targeted income level. See 63 FR 25720. Several Bank commenters

supported measuring such salaries as a reasonable method of determining

whether a project benefits households with incomes at or below a

targeted income level. A Bank commenter noted that jobs with modest

salaries are typically entry level or for people with limited job

skills, and are an important link in upward mobility of low-income

people. Other commenters stated that the proposed job salary measure

gives the appearance of promoting lower-paying jobs when it would be

preferable to promote an increase in the number and quality of

employment opportunities, and could prevent worthy projects that could

not meet the standard from being eligible for CICA funds.

Some commenters recommended lowering the target for eligible job

creation or retention projects from 75 percent in the proposed rule

(see 63 FR 25724 (definition of ``benefit'')) to 50 or 51 percent.

Commenters stated that projects meeting the lower standard still would

be creating or retaining a significant number of jobs in the community,

and would provide more career and income potential and may be more

viable, given the mix of incomes, than projects with a higher

percentage of the jobs at or below the targeted income level.

Commenters stated that a 50 percent standard would maintain consistency

with other targets in the proposed rule, as well as with targets used

by other Federal housing and economic development programs. One

commenter suggested changing the target to a ``significant number'' of

jobs created or retained by the project, with the threshold number

determined by each Bank in its community investment-affordable housing

plan. Another Bank commenter recommended that the Banks have the

discretion to set the target for the number of jobs created or retained

by the project, taking into account the individual needs of the Bank's

district.

[[Page 65541]]

The final rule retains the proposed measure of salaries of jobs

created or retained by a project which, as noted by a number of

commenters, should be an effective method to determine whether the

project benefits families with incomes at or below a targeted income

level. However, in response to the comments, the final rule changes the

target for job creation or retention projects in the proposed rule from

75 percent to 51 percent of the total number of jobs created or

retained. The 51 percent standard should ensure that projects eligible

for CICA funding have a substantial number of jobs at the targeted

salary level, while not excluding a large number of worthy projects in

credit needy areas. The 51 percent standard also is consistent with the

targeting requirements of other Federal housing and economic

development programs.

(3) Activity Beneficiaries:

Projects that qualify as small businesses, as defined in

Sec. 970.3.

(4) Other Targeted Beneficiaries:

A Bank may designate, with the prior approval of the Finance Board,

other targeted beneficiaries for its community lending.

A number of commenters were concerned that the list of CICA-

eligible projects in the definition of ``benefit'' in the proposed rule

was too limited and did not allow the Banks flexibility to fund other

types of worthy projects, thereby limiting innovation by the Banks. The

final rule addresses this concern by allowing the Banks, with the prior

approval of the Finance Board, to designate other types of projects as

eligible for CICA funding.

Section 970.3 of the final rule further provides that only targeted

beneficiaries identified in paragraphs (1)(i) through (iv), and (2)(i)

and (ii) are eligible for CIP advances. This is necessary in order to

ensure satisfaction of the statutory CIP targeting requirements. See 12

U.S.C. 1430(i)(2).

3. AHP

Section 970.5(a)(1) of the final rule reiterates the statutory

requirement that each Bank shall offer an AHP, in accordance with part

960 of the Finance Board's regulations. See 12 U.S.C. 1430(j); 12 CFR

part 960.

4. CIP

Section 970.5(a)(2) of the final rule provides that each Bank shall

offer a CIP, as required by statute (see 12 U.S.C. 1430(i)), to

``provide financing'' for ``housing projects'' and for eligible

``community lending'' at the appropriate ``targeted income levels.''

Under the statute, the Banks are required to provide funding for

members who, in turn, ``provide loans'' to finance CIP-eligible

activities. See id. Most of the Banks have implemented this statutory

requirement by providing advances to members to fund the origination of

loans financing CIP-eligible activities. Consistent with the proposed

rule, the final rule adopts a more expansive reading of the meaning of

the statutory language authorizing CIP advances to be used by members

to ``provide loans.'' See id. section 1430(i)(2). Specifically, the

final rule authorizes CIP advances and other CICA advances to be used

not only to fund CICA-eligible loan originations, but also for other

types of financing activities as set forth in the definition of

``providing financing'' in Sec. 970.3. The Finance Board believes that

these are additional means of providing loans for the financing of CIP-

and other CICA-eligible activities, in accordance with the intent of

the statute, because they create liquidity in the market for CIP- and

other CICA-eligible loans.

Section 970.3 of the final rule defines ``housing projects'' to

mean projects or activities that involve the purchase, construction or

rehabilitation of, or predevelopment financing for:

(1) Individual owner-occupied housing units, each of which is

purchased or owned by a family with an income at or below the targeted

income level;

(2) Projects involving multiple units of owner-occupied housing in

which at least 51 percent of the units are owned or are intended to be

purchased by families with incomes at or below the targeted income

level;

(3) Rental housing where at least 51 percent of the units in the

project are occupied by, or the rents are affordable to, families with

incomes at or below the targeted income level; or

(4) Manufactured housing parks where:

(i) At least 51 percent of the units in the project are occupied

by, or the rents are affordable to, families with incomes at or below

the targeted income level; or

(ii) The project is located in a neighborhood with a median income

at or below the targeted income level.

In response to comments, the final rule adds as eligible CIP

projects any projects involving rehabilitation of owner-occupied

housing units, construction of rental housing and manufactured housing

parks, or predevelopment financing for housing projects, which were

omitted from the proposed rule.

The final rule clarifies in paragraph (2) that projects involving

multiple units of owner-occupied housing, i.e., condominium,

cooperative and single-family detached housing projects, that meet the

51 percent test are eligible for CIP funding. Thus, single-family

detached owner-occupied housing projects with a mix of incomes, Planned

Unit Developments, and other mixed income projects, would be eligible

for CIP advances.

In response to comments, the final rule changes the requirement in

the proposed rule that ``substantially all'' of the resident families

in a manufactured housing park have incomes at or below the targeted

incomes, to a requirement that at least 51 percent of the units in the

project are occupied by, or the rents are affordable to, families

meeting the targeted income level. This makes the occupancy/

affordability standard for manufactured housing parks consistent with

the 51 percent standard for rental housing projects, and is a clearer

standard to meet than the proposed standard.

Most occupants of manufactured housing parks own their homes but

rent the space on which their homes are located. Verification of income

is not a usual practice in the course of renting space to the owner of

a manufactured home. Therefore, it is difficult to verify that the

resident families in a manufactured housing park are income-eligible.

The criterion in the final rule that the manufactured housing park be

located in a neighborhood with a median income at or below the targeted

income level is intended as a proxy for the requirement that each

resident family be income-eligible.

The ``targeted income level'' for CICA advances provided under CIP

for housing projects and economic development projects is incomes at or

below 115 percent and 80 percent of the median income for the area,

respectively, both as adjusted for family size in accordance with the

methodology of the applicable area median income standard or, at the

option of the Bank, for a family of four. See id.

5. RDA and UDA Programs

Section 970.5(a)(3) of the final rule provides that each Bank may

offer RDA or UDA programs, or both, for community lending using the

targeted beneficiaries or targeted income levels specified in

Sec. 970.3, without prior Finance Board approval. ``RDA programs'' and

``UDA programs'' are programs offered by a Bank for community lending

in ``rural'' or ``urban'' areas, respectively. See Sec. 970.3.

``Targeted income levels'' for RDA and UDA programs, where applicable,

are incomes at or below 115 percent and 100 percent of the median

income for

[[Page 65542]]

the area, respectively, both as adjusted for family size in accordance

with the methodology of the applicable area median income standard or,

at the option of the Bank, for a family of four. See Sec. 970.3. These

income limits are higher than those required under CIP or AHP, and are

intended to benefit families not targeted by those programs. Due to

generally higher median incomes in urban areas, the UDA income

eligibility limit, although numerically lower than the RDA income

eligibility limit, reaches families with higher incomes.

A number of commenters specifically supported the income limits

established for RDA and UDA programs. Several Bank commenters stated

that these income limits do not go far enough to address the income

level imbalances between rural and urban areas. Several commenters

suggested that the RDA and UDA programs both should have the same

income limit of 115 percent, on the basis that while income ranges are

lower in rural areas, urban areas have higher costs of living. A trade

association commenter supported the establishment of such programs

generally, but expressed concern that the higher income limits of these

programs would divert financing from lower income and minority

neighborhoods to neighborhoods where residents are either mostly

middle-income or in the upper range of moderate-income. If a Bank

determines that the higher income limits of the RDA or UDA programs are

not appropriate for a particular CICA program it wishes to offer in its

district, under the final rule the Bank may adopt other income limits

upon prior Finance Board approval. See Sec. 970.3 (definition of

``targeted income level'').

Section 970.3 of the final rule defines ``urban area'' as: (1) a

unit of general local government with a population of more than 25,000;

or (2) an unincorporated area within a Metropolitan Statistical Area

(MSA) that does not qualify for housing or economic development

assistance from the USDA.

A Bank commenter recommended that ``rural area'' be defined as any

town with a population of 30,000 that is not attached to a central

city. Another Bank commenter suggested deletion of the proposed 30,000

reference, recommending instead that ``rural area'' be defined as any

county located outside an MSA, consistent with the definition in other

Federal housing programs. In response to these comments, ``rural area''

is defined in Sec. 970.3 as: (1) a unit of general local government

with a population of 25,000 or less; (2) an unincorporated area outside

an MSA; or (3) an unincorporated area within an MSA that qualifies for

housing or economic development assistance from the USDA. The

population number of 30,000 was changed to 25,000 in order to be

consistent with the definition of rural used in USDA housing programs.

Paragraph (3) of the definition takes into account a comment that the

proposed definition should not have excluded large areas within MSAs

that are predominantly rural in nature.

6. Other CICA Programs Requiring Finance Board Approval

Section 970.5(a)(4) of the final rule provides that each Bank may

offer CICA programs for community lending using targeted beneficiaries

and targeted income levels other than those specified in Sec. 970.3,

established by the Bank with the prior approval of the Finance Board.

In response to comments, this provision is intended to give the Banks

greater flexibility, in response to market needs and demands, to offer

CICA programs that may not use one of the enumerated targeted

beneficiaries or targeted income levels included in the final rule, to

better reflect the needs of the individual Bank's district.

7. Mixed-Use Projects

a. CICA programs other than CIP

Section 970.5(b)(1) of the final rule provides that for projects

funded under CICA programs other than CIP, involving a combination of

housing projects and economic development projects, only the economic

development components of the project must meet the appropriate

targeted income level for the respective CICA program.

b. CIP programs

Section 970.5(b)(2) of the final rule provides that for projects

funded under CIP, both the housing and economic development components

of the project must meet the appropriate targeted income levels. This

is necessary to ensure satisfaction of the statutory CIP targeting

requirements for housing and economic development projects. See 12

U.S.C. 1430(i)(2).

8. Refinancing

Section 970.5(c) of the final rule provides that CICA advances

other than AHP may be used to refinance economic development and

housing projects, provided that any equity proceeds of the refinancing

of rental housing and manufactured housing park projects are used to

rehabilitate the projects or to preserve affordability for current

residents.

A trade association commenter specifically supported allowing the

use of CICA advances for refinancing of economic development projects.

Several commenters opposed the proposed restriction on the use of CICA

advances for refinancing as unnecessary and difficult to enforce from a

compliance standpoint. One commenter stated that the restriction in

proposed Secs. 970.5(d)(2) and 970.7(d) on owner-occupied refinancing

would penalize low-income families vis a vis upper-income families who

face no such limitations on their right to refinance their homes. The

Finance Board agrees that targeted homeowners should be able to take

advantage of all the incidents of home ownership, including accessing

any equity that has accumulated, that other homeowners may use.

Accordingly, the proposed refinancing restriction for owner-occupied

housing has been omitted from the final rule. In response to a

commenter's request for clarification, the final rule's reference to

``any'' equity proceeds makes clear that there is no restriction on

refinancing that results in no ``equity proceeds,'' i.e., refinancing

with no cash out to achieve a lower debt service. The Finance Board

believes that the restriction on refinancing of rental housing and

manufactured housing park projects is necessary to ensure that

occupants of such projects are not adversely affected by a refinancing,

such as taking equity out of a project resulting in an increase in

rents to cover the repayment of the financing.

9. Pricing and Availability of CICA Advances

a. Advances to members

Consistent with proposed Sec. 970.7(f)(1), Sec. 970.5(d)(1) of the

final rule provides that for CICA programs other than AHP and CIP, a

Bank shall price advances to members as provided in Sec. 935.6 of the

Finance Board's Advances Regulation (12 CFR 935.6), and may price such

advances at rates below the price of advances of similar amounts,

maturities and terms made pursuant to section 10(a) of the Bank Act (12

U.S.C. 1430(a)). Permitting the Banks to price such CICA advances as

regular advances may provide the Banks with a financial incentive to

make such advances. Banks still have the option to provide reduced

pricing for such advances in order to provide borrowers with a

financial incentive to undertake community lending.

[[Page 65543]]

b. Pricing of CIP advances

Consistent with the statutory requirement, Sec. 970.5(d)(2) of the

final rule provides that the price of CICA advances made under CIP

shall not exceed the Bank's cost of issuing consolidated obligations of

comparable maturity, taking into account reasonable administrative

costs. See id. section 1430(i)(1). The CIP pricing provision formerly

appeared at Sec. 935.7 of the Finance Board's Advances Regulation (12

CFR 935.7).

Section 970.5(f)(1) of the proposed rule would have allowed the

Banks, in pricing CIP advances, to take into account only those

administrative costs necessary for the operation of the CIP. A trade

association commenter specifically supported this pricing restriction,

stating that it would ensure that the prices of CIP advances are lower

than prices of other similar regular advances. A Bank commenter pointed

out that it currently prices CIP advances by adding a minimal markup

based on the overall cost of putting advances on its books, not based

on unique CIP costs. The commenter noted that if unique CIP costs are

singled out and spread only over the relatively small CIP advances

portfolio, the resulting price markup may actually be greater than the

current CIP markup. In response to the latter comment, the final rule

does not include the pricing restriction of the proposed rule.

In the proposed rule, the Finance Board requested comment on

whether the rule should contain a list of factors that could be the

basis for deeper CIP discounts by the Banks. See 63 FR 25721. The

proposed rule noted that several Banks vary CIP pricing based on the

kinds of projects being financed and the income levels of the

households benefiting from the project, such as projects that benefit

families with incomes at or below 80 percent of the area median income.

One Bank provided lower pricing for members that have been assigned a

rating of outstanding under the Community Reinvestment Act. See 12

U.S.C. 2901 et seq. A Bank commenter supported inclusion of such a list

in the rule in order to provide special incentives for borrowers to use

CIP advances for projects that are difficult to develop. A trade

association commenter and Bank commenter supported inclusion of a list

of such factors in the rule as long as adoption of the factors was

optional for the Banks. A number of Bank commenters opposed inclusion

of a list of such factors, stating that the adoption of such pricing

factors should be left to the discretion of the Banks in order to

ensure greater flexibility and creativity on the part of the Banks.

The Finance Board found these comments to be extremely useful. In

response to these comments, Sec. 970.5(d)(6) of the final rule

authorizes each Bank to establish a fund (Discount Fund), as discussed

further below, which the Bank may use to reduce the price of CIP or

CICA advances below the advance prices provided by part 970. The

Finance Board believes the Discount Fund authorized by the final rule

will be a more productive method of addressing the points raised by the

commenters than the inclusion of a list of factors for a Bank to

consider contained in the proposal.

c. Pricing of AHP advances

Section 970.5(d)(3) of the final rule provides that a Bank shall

price CICA advances made under AHP in accordance with parts 935 and 960

of the Finance Board's regulations (12 CFR parts 935, 960).

d. Advances to nonmember borrowers

Section 970.5(d)(4)(i) of the final rule provides that a Bank may

offer advances under CICA programs to nonmember borrowers at the Bank's

option, except for AHP and CIP, which are available only to members.

Consistent with proposed Sec. 970.7(f)(2), Sec. 970.5(d)(4)(ii) of

the final rule provides that a Bank shall price advances to nonmember

borrowers as provided in Sec. 935.24 of the Finance Board's Advances

Regulation (12 CFR 935.24), and may price such advances at rates below

the price of advances of similar amounts, maturities and terms made

pursuant to section 10b of the Bank Act (12 U.S.C. 1430b).

A consumer mortgage trade association and a member thrift expressed

their opinion that the Banks do not have authority to provide advances

to nonmembers under section 10(j)(10) of the Bank Act. The trade

association also stated that the rule would allow the Banks to compete

with well-functioning private markets, thereby destabilizing those

markets. The Finance Board disagrees.

Section 10(j)(10) of the Bank Act provides that ``[n]o provision of

this subsection or subsection (i) of this section shall preclude any

Bank from establishing additional community investment cash advance

programs or contributing additional sums to the Affordable Housing

Reserve Fund.'' See id. section 1430(j)(10) (emphasis added). While

advances under AHP and CIP are restricted by statute to members,

section 10(j)(10) states that the Banks may establish ``additional''

community investment cash programs, i.e., programs in addition to those

specified in the Bank Act. There is nothing in the plain language of

section 10(j)(10) to suggest or require that Bank advances under

``additional'' CICA programs be restricted solely to members. The

Finance Board has determined that the statutory language is

sufficiently broad to be reasonably interpreted to allow Bank lending

to nonmembers, especially since the Banks already are authorized to

lend to nonmember borrowers pursuant to section 10b of the Bank Act.

See id. section 1430b. The final rule does not require that the Banks

offer CICA programs to nonmember borrowers, but merely provides for

such an option, if a Bank should choose to do so.

e. Pricing pass-through

Section 970.5(d)(5) of the final rule provides that a Bank may

require that borrowers receiving CICA advances pass through the benefit

of any price reduction from regular advance pricing to their borrowers.

This provision extends the pricing pass-through option for CIP advances

in proposed Sec. 970.5(g) to all CICA advances, which was recommended

by a trade association commenter. As suggested by commenters, the

benefit of a price reduction may be passed through in a number of ways

other than as a reduction in the interest rate on the end loan, such as

through reduced fees or downpayment requirements on the end loan.

The statutory provisions governing CIP do not require members that

obtain CIP advances to pass on the benefit of the pricing differential

between CIP advances and regular Bank advances to the owners or

occupants of CIP-financed projects. See 12 U.S.C. 1430(i)(1). A 1996

survey of the Banks' CIP pricing policies indicated that two Banks

specifically required such a pass-through and four Banks encouraged a

pass-through.

f. Discount Fund

As discussed above, the Finance Board in the proposed rule

requested comment on whether the rule should contain a list of factors

that could be the basis for deeper CIP discounts by the Banks. See 63

FR 25721. A number of commenters opposed including an exclusive list of

such factors in the rule. In lieu of that approach, Sec. 970.5(d)(6) of

the final rule provides that a Bank may establish a Discount Fund which

the Bank may use to reduce the price of CIP or other CICA advances

below the advance prices provided for by part 970. Price reductions

made through the

[[Page 65544]]

Discount Fund must be made in accordance with a fair distribution

scheme. This authority is intended to encourage the Banks to find

sources of income both from within the Bank and from third party

partners to be used to reduce the cost of financing for community

lending. One Bank currently has established such a fund with monies

received from a third party partner which the Bank uses to reduce the

cost of CIP advances, with discounts below the CIP rate ranging from 50

to 300 basis points for maturities up to 20 years.

E. Reporting--Sec. 970.6

Section 970.6(a) of the final rule requires each Bank, by July 1,

1999, to provide to the Finance Board an initial assessment of the

credit needs and market opportunities in a Bank's district for

community lending.

Section 970.6(b) provides that, effective in 2000, each Bank

annually shall provide to the Finance Board, on or before January 31, a

Community Lending Plan (as outlined in Sec. 936.6(a) (as amended by

this final rule)).

Section 970.6(c) requires each Bank to provide such other reports

concerning its CICA programs as the Finance Board may request from time

to time.

F. Documentation--Sec. 970.7

Section 970.7(a) of the final rule provides that each Bank shall

require the borrower to certify to the Bank that each project funded by

a CICA advance (other than AHP) meets the respective targeting

requirements of the CICA program. Such certification shall include a

description of how the project meets the requirements, and where

appropriate, a statistical summary or list of incomes of the borrowers,

rents for the project, or salaries of jobs created or retained. The

certification requirement is based on current documentation practices

employed by the Banks for their CIPs.

Section 970.7(b) provides that for those CICA-funded projects that

also receive funds from another targeted Federal economic development

program that has income targeting requirements that are the same as, or

more restrictive than, the targeting requirements of the applicable

CICA program, the Bank shall permit the borrower to certify that

compliance with the criteria of such Federal economic development

program will meet the requirements of the respective CICA program.

Section 970.7(c) provides that such certifications shall satisfy

the Bank's obligations to document compliance with the CICA lending

provisions of part 970. Finance Board examination of the Banks for

compliance with part 970 will be satisfied by demonstration of

compliance with the documentation requirements of Sec. 970.7.

Examination as to whether any Bank's level of community lending is

consistent with the carrying out of such Bank's mission would be

undertaken pursuant to separate regulatory standards to be developed by

the Finance Board in the future.

Several commenters recommended that the rule include specific CICA

documentation and monitoring requirements in order to avoid

discouraging member participation due to lack of clear requirements as

to any reporting and monitoring burdens. Another Bank commenter stated

that the proposed rule contained reporting requirements that would

discourage program users from participating in CICA programs. The

documentation requirements contained in the final rule should provide

the clarity requested by the commenter without being so burdensome as

to discourage participation by borrowers in CICA programs.

G. Conforming Amendments to the Finance Board's Advances Regulation and

Incentive Compensation Regulation

The final rule makes several conforming amendments to other

regulations. First, the final rule amends the Finance Board's Advances

Regulation in order to make clear that a Bank may make long-term

advances for the purpose of financing community lending and affordable

housing finance activities that meet the requirements of a CICA

program. Specifically, the final rule amends the existing definition of

``residential housing finance assets'' in Sec. 935.1 of the Advances

Regulation to include loans or investments financed by CICA advances.

See 12 CFR 935.1 (as amended). The final rule also revises certain

provisions of the Advances Regulation regarding the use of long-term

advances under the CIP in order to make clear that these provisions

apply to all CICA programs, not just the CIP. See id.

Secs. 935.13(a)(5), 935.14(b)(2) (as amended). In addition, the final

rule replaces the definition of ``Community Investment Program'' in the

Advances Regulation with a new definition of ``Community Investment

Cash Advance,'' which, as discussed above, includes advances made under

CICA programs, including the CIP. See id. Sec. 935.1.

Second, the final rule replaces a reference to CIP with a reference

to CICA in Sec. 932.41(c)(2)(ii) of the Finance Board's Compensation

Regulation, see id. Sec. 932.41(c)(2)(ii) (as amended by the final

rule), and deletes references to ``growth'' in the activities to be

considered to encourage quality over volume as the appropriate

standard.

III. Regulatory Flexibility Act

The final rule applies only to the Banks, which do not come within

the meaning of ``small entities,'' as defined in the Regulatory

Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance

with section 605(b) of the RFA, see id. Sec. 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.

List of Subjects

12 CFR Part 932

Banks, Banking, Conflicts of interest, Elections, Ethical conduct,

Federal home loan banks, Financial disclosure, Reporting and

recordkeeping requirements.

12 CFR Part 935

Credit, Federal home loan banks, Reporting and recordkeeping

requirements.

12 CFR Part 936

Credit, Federal home loan banks, Housing, Reporting and

recordkeeping requirements.

12 CFR Part 970

Credit, Federal home loan banks, Housing, Reporting and

recordkeeping requirements.

Accordingly, chapter IX, title 12, Code of Federal Regulations, is

hereby amended as set forth below:

SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

1. The authority citation for part 932 continues to read as

follows:

Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C.

8101 et seq.

2. Amend Sec. 932.41 by revising the first sentence of paragraph

(c)(2)(ii) to read as follows:

Sec. 932.41 Compensation.

* * * * *

(c) Incentive payments for Bank employees.

* * * * *

(2) * * *

(ii) At least fifty percent of the Bank President's incentive

payment shall be based on the extent to which the Bank meets reasonable

numerical performance targets established by the Bank's board of

directors related to the

[[Page 65545]]

Bank's achievement of its housing finance mission, which shall include

substantial consideration of innovative products directed at unmet

credit needs, Community Investment Cash Advances (including Community

Investment Program advances) as defined in Sec. 935.1 of this chapter,

non-advance credit support and risk management products for members, as

well as advances, including long-term advances. * * *

* * * * *

PART 935--ADVANCES

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

follows:

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

1430b, and 1431.

2. Section 935.1 is amended by adding in alphabetical order the

following definition of Community Investment Cash Advance, by removing

the definition of Community Investment Program, and in the definition

of Residential housing finance assets by republishing the introductory

text and revising paragraph (4) to read as follows:

Sec. 935.1 Definitions.

* * * * *

Community Investment Cash Advance or CICA means any advance made

through a program offered by a Bank under section 1430 of the Act and

parts 960 and 970 of this chapter to provide advances for community

lending and affordable housing, including advances made under: a Bank's

Rural Development Advance (RDA) program, offered under section

1430(j)(10) of the Act; a Bank's Urban Development Advance (UDA)

program, offered under section 1430(j)(10) of the Act; a Bank's

Affordable Housing Program (AHP), offered under section 1430(j) of the

Act; a Bank's Community Investment Program (CIP), offered under section

1430(i) of the Act; or any other program offered by a Bank that meets

the requirements of part 970 of this chapter.

* * * * *

Residential housing finance assets means any of the following:

* * * * *

(4) Loans or investments financed by advances made pursuant to a

CICA program;

* * * * *

Sec. 935.7 [Removed and reserved]

3. Section 935.7 is removed and reserved.

4. Section 935.13 is amended by revising paragraph (a)(5) to read

as follows:

Sec. 935.13 Restrictions on advances to members that are not qualified

thrift lenders.

(a) * * *

(5) The requirements of paragraph (a)(2) of this section shall not

apply to applications from non-savings association members for CICA

advances.

* * * * *

5. Section 935.14 is amended by revising paragraph (b)(2) to read

as follows:

Sec. 935.14 Limitations on long-term advances.

* * * * *

(b) * * *

(2) Applications for CICA advances are exempt from the requirements

of paragraph (b)(1) of this section.

PART 936--COMMUNITY SUPPORT REQUIREMENTS

1. The authority citation for part 936 continues to read as

follows:

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

1430.

2. Amend Sec. 936.1 by revising paragraphs (g) and (h) to read as

follows:

Sec. 936.1 Definitions.

* * * * *

(g) CICA or Community Investment Cash Advance has the same meaning

as in Sec. 935.1 of this chapter.

(h) Community lending has the same meaning as in Sec. 970.3 of this

chapter.

* * * * *

3. Amend Sec. 936.5 by revising paragraph (e) to read as follows:

Sec. 936.5 Restrictions on access to long-term advances.

* * * * *

(e) CICA. A member that is subject to a restriction on access to

long-term advances under this part shall not be eligible to participate

in a CICA program offered under parts 960 and 970 of this chapter. The

restriction in this paragraph (e) shall not apply to CICA applications

or funding approved before the date the restriction is imposed.

* * * * *

4. Amend Sec. 936.6 by revising paragraphs (a) introductory text,

(a)(2) and (a)(4), removing paragraph (b), redesignating paragraph (c)

as paragraph (b) and revising it, and adding paragraph (a)(5) to read

as follows:

Sec. 936.6 Bank community support programs.

(a) Requirement. Consistent with the safe and sound operation of

the Bank, each Bank shall establish and maintain a community support

program. A Bank's community support program shall:

* * * * *

(2) Promote and expand affordable housing finance;

* * * * *

(4) Encourage members to increase their community lending and

affordable housing finance activities by providing incentives such as

awards or technical assistance to nonprofit housing developers or

community groups with outstanding records of participation in community

lending or affordable housing finance partnerships with members;

(5) Include an annual Community Lending Plan, approved by the

Bank's board of directors and subject to modification, which shall

require the Bank to:

(i) Conduct market research in the Bank's district;

(ii) Describe how the Bank will address identified credit needs and

market opportunities in the Bank's district for community lending;

(iii) Consult with its Advisory Council and with members, nonmember

borrowers, and public and private economic development organizations in

the Bank's district in developing and implementing its Community

Lending Plan; and

(iv) Establish quantitative community lending performance goals.

(b) Notice. A Bank shall provide annually to each of its members a

written notice:

(1) Identifying CICA programs and other Bank activities that may

provide opportunities for a member to meet the community support

requirements and to engage in community lending; and

(2) Summarizing community lending and affordable housing activities

undertaken by members, nonmember borrowers, nonprofit housing

developers, community groups, or other entities in the Bank's district,

that may provide opportunities for a member to meet the community

support requirements and to engage in community lending.

5. Revise Sec. 936.7 to read as follows:

Sec. 936.7 Reports.

Each Advisory Council annual report required to be submitted to the

Finance Board pursuant to section 10(j)(11) of the Act shall include an

analysis of the Bank's community lending and affordable housing

activities.

6. Subchapter F, consisting of part 970, is added to chapter IX to

read as follows:

[[Page 65546]]

SUBCHAPTER F--COMMUNITY INVESTMENT

PART 970--Community Investment Cash Advance Programs

Sec.

970.1 Scope.

970.2 Purpose.

970.3 Definitions.

970.4 Community Lending Plan.

970.5 Community Investment Cash Advance Programs.

970.6 Reporting.

970.7 Documentation.

Authority: 12 U.S.C. 1422b(a)(1) and 1430.

Sec. 970.1 Scope.

Section 10(j)(10) of the Act authorizes the Banks to offer

Community Investment Cash Advance (CICA) programs. (See 12 U.S.C.

1430(j)(10)). This part establishes requirements for all CICA programs

offered by a Bank, except for a Bank's Affordable Housing Program

(AHP), which is governed specifically by part 960 of this chapter.

Sec. 970.2 Purpose.

The purpose of this part is to identify community lending projects

that the Banks may support through the establishment of CICA programs

under section 10(j)(10) of the Act. (12 U.S.C. 1430(j)(10)). Pursuant

to this part, a Bank may offer Rural Development Advance (RDA) or Urban

Development Advance (UDA) programs, or both, for community lending

using the targeted beneficiaries or targeted income levels specified in

Sec. 970.3 of this part, without prior Finance Board approval. A Bank

also may offer other CICA programs for community lending using targeted

beneficiaries and targeted income levels other than those specified in

Sec. 970.3 of this part, established by the Bank with the prior

approval of the Finance Board. In addition, a Bank shall offer CICA

programs under section 10(i) of the Act (Community Investment Program

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

Housing Program (AHP), 12 U.S.C. 1430(j)).

Sec. 970.3 Definitions.

As used in this part:

Act means the Federal Home Loan Bank Act, as amended (12 U.S.C.

1421 et seq.).

Advance has the same meaning as in Sec. 935.1 of this chapter.

AHP means the Affordable Housing Program, the CICA program required

to be offered pursuant to section 10(j) of the Act (12 U.S.C. 1430(j))

and part 960 of this chapter.

Bank means a Federal Home Loan Bank established under the authority

of the Act.

Board of Directors means the Board of Directors of the Finance

Board.

Champion Community means a community which developed a strategic

plan and applied for designation by either the Secretary of HUD or the

Secretary of the USDA as an Empowerment Zone or Enterprise Community,

but was designated a Champion Community.

CICA or Community Investment Cash Advance has the same meaning as

in Sec. 935.1 of this chapter.

CICA program or Community Investment Cash Advance program means:

(1) A Bank's AHP;

(2) A Bank's CIP;

(3) REA Bank's RDA program or UDA program using any combination of

the targeted beneficiaries and targeted income levels specified in

Sec. 970.3 of this part; and

(4) Any other program offered by a Bank using targeted

beneficiaries and targeted income levels other than those specified in

Sec. 970.3 of this part, established by the Bank with the prior

approval of the Finance Board.

CIP means the Community Investment Program, a CICA program required

to be offered pursuant to section 10(i) of the Act (12 U.S.C. 1430(i)).

Community lending means providing financing for economic

development projects for targeted beneficiaries.

Economic development projects means:

(1) Commercial, industrial, manufacturing, social service, and

public facility projects and activities; and

(2) Public or private infrastructure projects, such as roads,

utilities, and sewers.

Family means one or more persons living in the same dwelling unit.

Finance Board means the agency established as the Federal Housing

Finance Board.

Housing projects means projects or activities that involve the

purchase, construction or rehabilitation of, or predevelopment

financing for:

(1) Individual owner-occupied housing units, each of which is

purchased or owned by a family with an income at or below the targeted

income level;

(2) Projects involving multiple units of owner-occupied housing in

which at least 51% of the units are owned or are intended to be

purchased by families with incomes at or below the targeted income

level;

(3) Rental housing where at least 51% of the units in the project

are occupied by, or the rents are affordable to, families with incomes

at or below the targeted income level; or

(4) Manufactured housing parks where:

(i) At least 51% of the units in the project are occupied by, or

the rents are affordable to, families with incomes at or below the

targeted income level; or

(ii) The project is located in a neighborhood with a median income

at or below the targeted income level.

HUD means the United States Department of Housing and Urban

Development.

Median income for the area. (1) Owner-occupied housing projects and

economic development projects. For purposes of owner-occupied housing

projects and economic development projects, median income for the area

means one or more of the following, as determined by the Bank:

(i) The median income for the area, as published annually by HUD;

(ii) The applicable median family income, as determined under 26

U.S.C. 143(f) (Mortgage Revenue Bonds) and published by a State agency

or instrumentality;

(iii) The median income for the area, as published by the USDA; or

(iv) The median income for any definable geographic area, as

published by a Federal, state, or local government entity for purposes

of that entity's housing and economic development programs, and

approved by the Board of Directors, at the request of a Bank, for use

under the Bank's CICA programs.

(2) Rental housing projects. For purposes of rental housing

projects, median income for the area means one or more of the

following, as determined by the Bank:

(i) The median income for the area, as published annually by HUD;

or

(ii) The median income for any definable geographic area, as

published by a Federal, state, or local government entity for purposes

of that entity's housing programs, and approved by the Board of

Directors, at the request of a Bank, for use under the Bank's CICA

programs.

Member means an institution that has been approved for membership

in a Bank and has purchased capital stock in the Bank in accordance

with Sec. Sec. 933.20 and 933.25 of this chapter.

MSA means a Metropolitan Statistical Area as designated by the

Office of Management and Budget.

Neighborhood means:

(1) A census tract or block numbering area;

(2) A unit of local government with a population of 25,000 or less;

(3) A rural county; or

(4) A geographic location designated in comprehensive plans,

ordinances, or other local documents as a

[[Page 65547]]

neighborhood, village, or similar geographic designation that is within

the boundary of but does not encompass the entire area of a unit of

general local government.

Nonmember borrower means an entity that has been approved as a

nonmember mortgagee pursuant to Subpart B of part 935 of this chapter.

Provide financing means:

(1) Originating loans;

(2) Purchasing a participation interest, or providing financing to

participate, in a loan consortium for CICA-eligible housing or economic

development projects;

(3) Making loans to entities that, in turn, make loans for CICA-

eligible housing or economic development projects;

(4) Purchasing mortgage revenue bonds or mortgage-backed

securities, where all of the loans financed by such bonds and all of

the loans backing such securities, respectively, meet the eligibility

requirements of the CICA program under which the member or nonmember

borrower receives an advance;

(5) Creating or maintaining a secondary market for loans, where all

such loans are mortgage loans meeting the eligibility requirements of

the CICA program under which the member or nonmember borrower receives

an advance;

(6) Originating CICA-eligible loans within 3 months prior to

receiving the CICA advance; and

(7) Purchasing low-income housing tax credits.

RDA or Rural Development Advance means an advance made pursuant to

an RDA program.

RDA program or Rural Development Advance program means a program

offered by a Bank for community lending in rural areas.

Rural area means:

(1) A unit of general local government with a population of 25,000

or less;

(2) An unincorporated area outside an MSA; or

(3) An unincorporated area within an MSA that qualifies for housing

or economic development assistance from the USDA.

Small business means a ``small business concern,'' as that term is

defined by section 3(a) of the Small Business Act (15 U.S.C. 632(a))

and implemented by the Small Business Administration under 13 CFR part

121, or any successor provisions.

Targeted beneficiaries means beneficiaries determined by the

geographical area in which a project is located (Geographically Defined

Beneficiaries), by the individuals who benefit from a project as

employees or service recipients (Individual Beneficiaries), or by the

nature of the project itself (Activity Beneficiaries), as follows:

(1) Geographically Defined Beneficiaries:

(i) The project is located in a neighborhood with a median income

at or below the targeted income level;

(ii) The project is located in a rural Champion Community, or a

rural Empowerment Zone or rural Enterprise Community, as designated by

the Secretary of the USDA;

(iii) The project is located in an urban Champion Community, or an

urban Empowerment Zone or urban Enterprise Community, as designated by

the Secretary of HUD;

(iv) The project is located in an Indian area, as defined by the

Native American Housing Assistance and Self-Determination Act of 1996

(25 U.S.C. 4101 et seq.), Alaskan Native Village, or Native Hawaiian

Home Land;

(v) The project is located in an area and involves a property

eligible for a Brownfield Tax Credit;

(vi) The project is located in an area affected by a military base

closing and is a ``community in the vicinity of the installation'' as

defined by the Department of Defense at 32 CFR part 176;

(vii) The project is located in a designated community under the

Community Adjustment and Investment Program as defined under 22 U.S.C.

290m-2;

(viii) The project is located in a Federally declared disaster

area; or

(ix) The project is located in a state declared disaster area, or

qualifies for assistance under another Federal or state targeted

economic development program, approved by the Finance Board.

(2) Individual Beneficiaries:

(i) The annual salaries for at least 51% of the permanent full- and

part-time jobs, computed on a full-time equivalent basis, created or

retained by the project, other than construction jobs, are at or below

the targeted income level; or

(ii) At least 51% of the families who otherwise benefit from (other

than through employment), or are provided services by, the project have

incomes at or below the targeted income level.

(3) Activity Beneficiaries: Projects that qualify as small

businesses.

(4) Other Targeted Beneficiaries. A Bank may designate, with the

prior approval of the Finance Board, other targeted beneficiaries for

its community lending.

(5) Only targeted beneficiaries identified in paragraphs (1)(i)

through (1)(iv), and (2)(i) and (2)(ii) of this definition are eligible

for CIP advances.

Targeted income level means:

(1) For rural areas, incomes at or below 115 percent of the median

income for the area, as adjusted for family size in accordance with the

methodology of the applicable area median income standard or, at the

option of the Bank, for a family of four;

(2) For urban areas, incomes at or below 100 percent of the median

income for the area, as adjusted for family size in accordance with the

methodology of the applicable area median income standard or, at the

option of the Bank, for a family of four;

(3) For CICA advances provided under CIP:

(i) For economic development projects, incomes at or below 80

percent of the median income for the area; or

(ii) For housing projects, incomes at or below 115 percent of the

median income for the area, both as adjusted for family size in

accordance with the methodology of the applicable area median income

standard or, at the option of the Bank, for a family of four; or

(4) For CICA advances provided under any other CICA program offered

by a Bank, a targeted income level established by the Bank with the

prior approval of the Finance Board.

UDA or Urban Development Advance means an advance made pursuant to

a UDA program.

UDA program or Urban Development Advance program means a program

offered by a Bank for community lending in urban areas.

Urban area means:

(1) A unit of general local government with a population of more

than 25,000; or

(2) An unincorporated area within an MSA that does not qualify for

housing or economic development assistance from the USDA.

USDA means the United States Department of Agriculture.

Sec. 970.4 Community Lending Plan

Each Bank shall develop and adopt an annual Community Lending Plan

pursuant to Sec. 936.6 of this chapter.

Sec. 970.5 Community Investment Cash Advance Programs.

(a) In general.

(1) Each Bank shall offer an AHP in accordance with part 960 of

this chapter.

(2) Each Bank shall offer a CIP to provide financing for housing

projects and for eligible community lending at the appropriate targeted

income levels.

(3) Each Bank may offer RDA programs or UDA programs, or both, for

[[Page 65548]]

community lending using the targeted beneficiaries or targeted income

levels specified in Sec. 970.3 of this part, without prior Finance

Board approval.

(4) Each Bank may offer CICA programs for community lending using

targeted beneficiaries and targeted income levels other than those

specified in Sec. 970.3 of this part, established by the Bank with the

prior approval of the Finance Board.

(b) Mixed-use projects. (1) For projects funded under CICA programs

other than CIP, involving a combination of housing projects and

economic development projects, only the economic development components

of the project must meet the appropriate targeted income level for the

respective CICA program.

(2) For projects funded under CIP, both the housing and economic

development components of the project must meet the appropriate

targeted income levels.

(c) Refinancing. CICA advances other than AHP may be used to

refinance economic development projects and housing projects, provided

that any equity proceeds of the refinancing of rental housing and

manufactured housing parks are used to rehabilitate the projects or to

preserve affordability for current residents.

(d) Pricing and Availability of CICA advances.

(1) Advances to members. For CICA programs other than AHP and CIP,

a Bank shall price advances to members as provided in Sec. 935.6 of

this chapter, and may price such advances at rates below the price of

advances of similar amounts, maturities and terms made pursuant to

section 10(a) of the Act. (12 U.S.C. 1430(a)).

(2) Pricing of CIP advances. The price of CICA advances made under

CIP shall not exceed the Bank's cost of issuing consolidated

obligations of comparable maturity, taking into account reasonable

administrative costs.

(3) Pricing of AHP advances. A Bank shall price CICA advances made

under AHP in accordance with parts 935 and 960 of this chapter.

(4) Advances to nonmember borrowers. (i) A Bank may offer advances

under CICA programs to nonmember borrowers at the Bank's option, except

for AHP and CIP, which are available only to members.

(ii) A Bank shall price advances to nonmember borrowers as provided

in Sec. 935.24 of this chapter, and may price such advances at rates

below the price of advances of similar amounts, maturities and terms

made pursuant to section 10b of the Act. (12 U.S.C. 1430b).

(5) Pricing pass-through. A Bank may require that borrowers

receiving CICA advances pass through the benefit of any price reduction

from regular advance pricing to their borrowers.

(6) Discount Fund. (i) A Bank may establish a fund which the Bank

may use to reduce the price of CIP or other CICA advances below the

advance prices provided for by this part.

(ii) Price reductions made through the Discount Fund shall be made

in accordance with a fair distribution scheme.

Sec. 970.6 Reporting.

(a) By July 1, 1999, each Bank shall provide to the Finance Board

an initial assessment of the credit needs and market opportunities in a

Bank's district for community lending.

(b) Effective in 2000, each Bank annually shall provide to the

Finance Board, on or before January 31, a Community Lending Plan.

(c) Each Bank shall provide such other reports concerning its CICA

programs as the Finance Board may request from time to time.

Sec. 970.7 Documentation.

(a) A Bank shall require the borrower to certify to the Bank that

each project funded by a CICA advance (other than AHP) meets the

respective targeting requirements of the CICA program. Such

certification shall include a description of how the project meets the

requirements, and where appropriate, a statistical summary or list of

incomes of the borrowers, rents for the project, or salaries of jobs

created or retained.

(b) For those CICA-funded projects that also receive funds from

another targeted Federal economic development program that has income

targeting requirements that are the same as, or more restrictive than,

the targeting requirements of the applicable CICA program, the Bank

shall permit the borrower to certify that compliance with the criteria

of such Federal economic development program will meet the requirements

of the respective CICA program.

(c) Such certifications shall satisfy the Bank's obligations to

document compliance with the CICA lending provisions of this part.

Dated: October 28, 1998.

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

Bruce A. Morrison,

Chairman.

[FR Doc. 98-31489 Filed 11-25-98; 8:45 am]

BILLING CODE 6725-01-P