Allocation of Joint and Several Liability on Consolidated Obligations Among the Federal Home Loan Banks

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 910

[No. 99-5]

RIN 3069-AA78

Allocation of Joint and Several Liability on Consolidated

Obligations Among the Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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

a rule to establish a framework for the orderly allocation of joint and

several liability among the Federal Home Loan Banks (FHLBank or Bank)

on consolidated obligations, i.e., bonds, notes or debentures issued by

the Finance Board pursuant to section 11 of the Federal Home Loan Bank

Act (Bank Act). The proposed rule is intended to protect holders of

consolidated obligations to the greatest extent practical by providing

a framework to ensure the continued timely payment of all principal and

interest on consolidated obligations in the unlikely event of a

projected inability of a Bank to meet its debt service payment

obligations. The proposed rule in no way would limit, restrict or

diminish the joint and several liability of the FHLBanks on the

consolidated obligations issued by the Finance Board.

DATES: The Finance Board will accept comments on the proposed rule in

writing on or before April 12, 1999.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by

electronic mail at [email protected] or by regular mail at the Federal

Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.

Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Joseph McKenzie, Deputy Chief

Economist, Office of Policy, Research and Analysis, by telephone at

(202) 408-2845 or by electronic mail at [email protected], or

Charlotte A. Reid, Special Counsel, Office of General Counsel, by

telephone at (202) 408-2510, by electronic mail at [email protected], or

by regular mail at the Federal Housing Finance Board, 1777 F Street,

NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Bank Act, see 12 U.S.C. 1421 et seq., provides plenary

authority to the Finance Board in connection with the issuance of

bonds, debentures and notes (consolidated obligations or COs) for which

the FHLBanks are jointly and severally liable.\1\ Section 11 of the

Bank Act authorizes the Finance Board to issue rules and regulations

governing the issuance of COs. See 12 U.S.C. 1431(a). Finance Board

regulations governing the issuance of COs are set forth in 12 CFR Parts

910 and 941.

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\1\ A bond, note or debenture represents a loan made to the

FHLBanks by a lender (``bondholder''). When the Finance Board issues

a bond, note or debenture on behalf of the FHLBanks, the FHLBanks

become legally obligated by the terms of the instrument to repay a

specific amount of money, at a specific point in time, at a

specified rate of interest. In practice, the FHLBanks receiving the

proceeds of the issuance assume the obligation to service the

principal and interest payments for that issuance on behalf of all

of the FHLBanks. Interest payments on bonds usually are made twice a

year. Because the Bank Act specifies that the FHLBanks are jointly

and severally liable on the consolidated obligations issued by the

Finance Board for the benefit of the FHLBanks, each FHLBank is

liable for the repayment of the entire debt, including the interest

payments, for each consolidated obligation. Consolidated obligations

are sold in book entry form. The owner of the bond, note or

debenture has no certificate, and there is no trust indenture

associated with the issuance. Standard & Poors and Moody's are the

two primary rating services that rate bonds. The rating services

have developed a letter ranking system to indicate their assessment

of the likelihood of default of the instruments rated. Bonds rated

AAA by Standard & Poors and Aaa by Moodys are the highest quality

debt obligations. All consolidated obligation bonds are rated AAA or

Aaa.

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The FHLBanks finance their operations principally with the proceeds

from COs issued by the Finance Board on their behalf. As of September

30, 1998, there were approximately $336.3 billion in consolidated

obligations outstanding. In the history of the FHLBank System, no

FHLBank has ever been delinquent or defaulted on a principal or

interest payment on any consolidated obligation issued by the Finance

Board or the Federal Home Loan Bank Board, its predecessor agency

(FHLBB).

Neither the Finance Board nor the FHLBB adopted regulations to

establish the manner in which the joint and several liability of the

FHLBanks would operate in the event of impending default or delinquency

on a consolidated obligation. Although the FHLBank System remains

financially healthy and strong, and no such default or delinquency is

expected, the joint and several liability has become a matter of

interest in recent years for other reasons. The municipal bankruptcy

and resulting receivership of the County of Orange, California (Orange

County), and the ensuing litigation brought by the receiver for Orange

County against the FHLBanks, Office of Finance and United States (among

others),\2\ raised issues concerning liability allocation arising from

issuing and servicing consolidated obligations. Additionally, new

initiatives and activities undertaken by the FHLBanks, such as the

Mortgage Partnership FinanceTM, pilot program

[[Page 6820]]

have caused at least one FHLBank to suggest that it would be beneficial

to clarify how the joint and several financial responsibility for the

consolidated obligations would be allocated among the FHLBanks if a

FHLBank were to experience a payment problem. The Finance Board

believes that it is prudent to clarify for holders of COs how they will

benefit from the statutory joint and several liability of the FHLBanks

set forth in section 11 of the Bank Act and to clarify for the FHLBanks

how their joint and several obligation would operate. The Finance Board

also believes it is important to emphasize the Finance Board's intent

that holders of COs will never experience an interruption in the flow

of interest or principal payments. The regulatory proposal is designed

to prevent delinquency in payment, to establish a payment priority

system, and to specify as a regulatory matter that the Finance Board

has ultimate authority and discretion at any time to call on any

FHLBank to make those payments.

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\2\ See County of Orange, et al. v. Federal Home Loan Bank of

Boston, et al., Case No. SA VC 97-122-GLT (C.D. Cal.). See also

County of Orange et al. v. Bear Stearns, & Co., et al., Case No. SA

CV 98-0527-GLT, et al. (C.D.Cal.) (Order granting good faith

settlement determinations entered November 30, 1998.) (Orange County

agreed to drop all claims against the FHLBank System in connection

with a settlement reached with Merrill, Lynch & Co. The FHLBanks,

Office of Finance, and United States deny any wrongdoing and will

not pay any amount in connection with the settlement.)

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The Finance Board cannot and does not seek to alter the statutory

joint and several liability of the FHLBanks for COs. Rather, pursuant

to its authority to ensure that the FHLBanks remain able to raise funds

in the capital markets and to adjust the relative equities among the

FHLBanks in connection with the issuance of COs, see 12 U.S.C.

1422a(a)(3)(B)(iii) and 1431(d), the Finance Board is proposing to

establish a procedure to assure timely interest and principal payments

on COs and a system of priorities among the FHLBanks under which the

assets of a FHLBank participating in the proceeds of a consolidated

obligation issuance would be applied first toward the satisfaction of

that consolidated obligation before the assets of any other FHLBank

would be reached.

II. Statutory and Regulatory Background

The Finance Board, consistent with its primary duty to ensure that

the FHLBanks operate in a financially safe and sound manner, must

``ensure that the FHLBanks remain adequately capitalized and able to

raise funds in the capital markets.'' See 12 U.S.C. 1422a(a)(3)(A) and

(3)(B)(iii). Pursuant to the authority set forth in sections 11(b) and

(c) of the Bank Act, the Finance Board may issue consolidated FHLBank

debentures or bonds which ``shall be the joint and several obligations

of all the Federal Home Loan Banks, and shall be secured and be issued

upon such terms and conditions as the [Finance] Board may prescribe.''

See 12 U.S.C. 1431(b) and (c). Moreover, section 11(d) of the Bank Act

provides that the Finance Board shall have full power to require the

FHLBanks to ``deposit additional collateral or to make substitutions of

collateral or to adjust equities between the Federal Home Loan Banks.''

12 U.S.C. 1431(d).

The FHLBanks collectively are the sole obligor on COs. The Bank Act

makes clear that COs are not the obligations of and are not guaranteed

by the United States. See 12 U.S.C. 1435. Congress underscored this

important precept when it enacted the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992, which provides in pertinent

part:

This chapter may not be construed as obligating the Federal

Government, either directly or indirectly, to provide any funds to *

* * the Federal Home Loan Banks, or to honor, reimburse, or

otherwise guarantee any obligation or liability of the * * * Federal

Home Loan Banks. This chapter may not be construed as implying that

any such * * * Bank, or any obligations or securities of such * * *

Bank, are backed by the full faith and credit of the United States.

Pub. L. 102-550, 106 Stat. 3944, tit. XIII, sec. 1304 (Oct. 28, 1992),

codified at 12 U.S.C. 4503.

The issuance of COs is governed by Finance Board regulations set

forth in 12 CFR Parts 910 and 941. The Finance Board sets the general

parameters for the issuance of COs through periodic debt

authorizations. See, e.g., Finance Board Res. No. 98-59 (Dec. 2, 1998).

As originally enacted in 1932, section 11 of the Bank Act made no

provision for the Finance Board's predecessor, the FHLBB, to issue COs

on behalf of the FHLBanks. Section 11 permitted the FHLBanks, under

certain conditions, to issue debt individually or in concert with one

or more other FHLBanks. In all cases, as originally enacted, section 11

required that ``the [FHL]Banks shall be jointly and severally liable

for the payment when due of all bonds and debentures, and of notes and

other obligations issued by any [FHL]Bank.'' 12 U.S.C. 1431 (1932). The

FHLBanks were permitted to make agreements to ensure the payment of

such obligations, so long as the agreements did not restrict in any way

the FHLBanks' joint and several liability. Thus, under the original

statutory scheme, the FHLBanks were jointly and severally liable for

the debt of any FHLBank and were required (subject to the rules,

regulations and orders of the FHLBB) to make provisions for the payment

of their obligations on the bonds, etc., so long as there was no

restriction on the joint and several liability of the FHLBanks. To

date, no FHLBank has issued any debt instrument in the capital markets.

See H.R. Rep. No. 1922, 73rd Cong., 2d Sess., at 72-74 (1934).

In 1934, Congress amended section 11 of the Bank Act to give the

FHLBank System more ready access to the capital markets. Section 503 of

the National Housing Act of 1934 amended section 11 of the Bank Act to

authorize the FHLBB to issue consolidated obligations on which the

FHLBanks would be jointly and severally liable. 12 U.S.C. 1431(b) and

(c). The constraints on the FHLBanks' power to issue debt contained in

section 11 as originally enacted were replaced by a provision that made

the FHLBanks' power to issue debt ``generally subject to the rules and

regulations prescribed by the Federal Home Loan Bank Board.'' 12 U.S.C.

1431 (1932). The 1934 amendments also eliminated the requirement that

the FHLBanks must be jointly and severally liable for any individual

FHLBank's issuance. Section 11 as it reads now is essentially unchanged

from the 1934 amendments.

Sections 11(b) and (c) of the Bank Act provide that every

consolidated obligation ``shall be the joint and several liability of

all [FHL]Banks. * * *'' See 12 U.S.C. 1431(b) and (c). The imposition

of joint and several liability means that each FHLBank is an obligor on

every consolidated obligation; that is, each FHLBank is bound jointly

with all other FHLBank-obligors and is liable separately for the entire

obligation.\3\ The legal effect of joint and several liability is that

a ``creditor may sue one or more of the parties to such liability

separately, or all of them together at his option.''\4\

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\3\ See Williston & Jaeger, 2 A Treatise on the Law of Contracts

Sec. 316 (3d ed., 1959).

\4\ See Black's Law Dictionary 751 (5th ed. 1979). ``On such a

contract each obligor is liable severally or jointly with his co-

obligors for all of the damages caused by a breach. There is,

therefore, one more cause of action than there are obligors.'' Id.

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Pursuant to the statutory authority recited above, the Finance

Board has promulgated regulations governing the issuance of

consolidated obligations. In 1989, Congress authorized the Finance

Board to maintain the Office of Finance, a joint office of the

FHLBanks, and to delegate the ministerial functions associated with the

issuance of the consolidated obligations. See 12 U.S.C. 1422b(b)(1) and

(2). See also Financial Institutions Reform, Recovery and Enforcement

Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 183, tit. VII, sec.

702, Aug. 9, 1989. Accordingly, the Finance Board delegated to the

Office of Finance the authority to issue consolidated obligations under

section 11 of the Bank Act subject to Finance Board regulations,

resolutions or

[[Page 6821]]

policies. See 12 CFR 900.30. The operations of the Office of Finance

are governed by regulations promulgated by the Finance Board in 12 CFR

Part 941.

The issuance of the consolidated obligations is governed by the

regulations set forth in 12 CFR Parts 910 and 941. The Finance Board

also adopted a regulation that provides for a leverage limit on the

issuance of consolidated obligations. The rule prohibits the issuance

of senior bonds where immediately following such issuance the aggregate

amount of senior bonds and unsecured, senior liabilities would exceed

twenty times the total paid-in capital stock, retained earnings, and

reserves (exclusive of loss and deposit reserves required pursuant to

section 1431(g) of all of the FHLBanks).\5\ Additionally, the Finance

Board promulgated a regulation requiring the FHLBanks to maintain

certain assets at all times free of lien or pledge (the so-called

``negative pledge'' requirement) to ensure sufficient collateralization

of the consolidated obligations.\6\ Since the Finance Board was

authorized to issue consolidated obligations on which the FHLBanks are

jointly and severally liable, no FHLBank has defaulted on any principal

or interest payment.

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\5\ The following definitions apply to the leverage limit

provisions: ``(b) `Consolidated bonds' means bonds or notes issued

on behalf of all [FHL]Banks. (c) `Senior bonds' means consolidated

bonds issued pursuant to 12 U.S.C. 1431 and this part and not

defeased, other than bonds specifically subordinated to any then

outstanding consolidated bonds. (d) `Unsecured, senior liabilities'

means all obligations of the Banks recognized as a liability under

Generally Accepted Accounting Principles, except (1) Liabilities

that are covered by a perfected security interest; (2) Consolidated

bonds; (3) Bonds issued pursuant to 12 U.S.C. 1431(a); and (4)

Allowances for losses for off-balance sheet obligations.'' 12 CFR

910.0(b)-(d).

\6\ See 12 CFR 910.1(c). ``The [FHL]Banks shall at all times

maintain assets of the following types, free from any lien or

pledge, in a total amount at least equal to the amount of senior

bonds outstanding: (1) Cash; (2) Obligations of or fully guaranteed

by the United States; (3) Secured advances; (4) Mortgages as to

which one or more [FHL]Banks have any guaranty or insurance, or

commitment therefore, by the United States or any agency thereof;

(5) Investments described in section 16(a) of the Bank Act, as

amended (12 U.S.C. 1436(a)); and (6) Other securities which have

been assigned a rating or assessment by a major nationally

recognized securities rating agency that is equivalent to or higher

than the rating or assessment assigned by such agency or senior

bonds outstanding. (Proviso omitted.)''

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Under the present system, a FHLBank that needs funds for its

operations contacts the Office of Finance to begin negotiations with

one or more of the numerous broker-dealers who have been pre-screened

and qualified by the Office of Finance to purchase and resell

consolidated obligations in the capital markets. Once the parties are

in agreement on the terms of the obligation, offering documents are

prepared and the Office of Finance issues instructions for the delivery

of the consolidated obligation to, and simultaneous receipt of the

proceeds from, the purchaser through the electronic payment system

operated by the Federal Reserve Bank of New York (``FEDWIRE''). A

``Master Fiscal Agency Agreement'' is in place between the FHLBanks and

the Board of Governors of the Federal Reserve System for this purpose.

The Office of Finance has an account at the Federal Reserve Bank of New

York (NY Fed) that is used to effect delivery and payment transactions.

Pursuant to FEDWIRE instructions from the Office of Finance, the NY Fed

credits OF's account with the proceeds of a consolidated obligation

issuance. Likewise, the NY Fed debits OF's account for interest and

principal payments on a consolidated obligation. (In some cases, more

than one FHLBank may participate in an issuance, and is entitled to the

proceeds in the proportions agreed upon, and required to make principal

and interest payments accordingly.) At the end of each business day,

the OF nets the proceeds against the principal and interest payments

due for each participating FHLBank. While a participating FHLBank is

obligated to make the principal and interest payments on its

consolidated obligations, all FHLBanks, by law, are jointly and

severally liable for the interest and principal payments on all

consolidated obligations, which is stated on the face of the Offering

Circular.

The likelihood of a delinquency or default on a consolidated

obligation has been and continues to be extremely remote. In order to

avoid the possibility of such delinquency or default on a consolidated

obligation, however remote, the Finance Board believes it is important

to adopt a regulation that will codify the authority of the Finance

Board to act promptly to intercede before any substantial deterioration

of a FHLBank's earnings, and to ensure the continued timely servicing

of any and all COs. To the maximum extent possible under the law,

holders of consolidated obligations will have first priority in any

payment plan. The FHLBanks that participate in a consolidated

obligation will be called upon to use all of their available assets to

make good on their payment obligations. Any non-participating FHLBank

that makes an interest payment or otherwise makes good on a

consolidated obligation shall be entitled to reimbursement from the

participating FHLBanks and all other FHLBanks as the Finance Board

determines pursuant to this proposed rule.

III. Analysis of Proposed Rule

In furtherance of the Finance Board's duties to ensure that the

FHLBanks operate in a safe and sound manner and are able to obtain

funding in the capital markets, the proposed rule sets forth the means

by which the Finance Board will apportion the joint and several

liability on consolidated obligations among the FHLBanks. The proposed

rule would establish a process by which the Finance Board would look

first to the assets of a FHLBank that received the proceeds of a

consolidated obligation to make the principal and interest payments on

that consolidated obligation, and defines such a FHLBank as a

``participating FHLBank'' for purposes of that issuance. The proposed

rule would define a FHLBank that projected a net loss, non-compliance

with statutory and regulatory liquidity requirements set forth in

section 11 of the Bank Act, 12 U.S.C. 1431(g), and section III of the

Finance Board's Financial Management Policy (FMP), or an inability to

service the interest and principal payments due on the consolidated

obligations in which it was a participating FHLBank as a ``non-

performing FHLBank.'' The proposed rule would require each FHLBank to

submit quarterly certifications to the Finance Board regarding the

consolidated obligations in which the FHLBank is a participating

FHLBank. Each participating FHLBank must certify quarterly that it will

not suffer a net loss, will remain in compliance with the statutory and

regulatory liquidity requirements set forth in section 11 of the Bank

Act, 12 U.S.C. 1431(g), and the FMP, and will remain capable of

satisfying all consolidated obligation payments due in the next

quarter. The proposed rule further provides that any participating

FHLBank that cannot so certify shall file a consolidated obligation

payment plan with the Finance Board specifying the measures the FHLBank

will undertake to fully and timely meet its payment obligations. The

proposed rule would require a non-performing FHLBank to refrain from

incurring non-essential expenses, paying dividends or redeeming stock

until its plan has been approved by the Finance Board or all of its

consolidated obligation payment obligations for the quarter have been

satisfied. The proposed rule would require a non-performing FHLBank to

apply all of its assets to meet its consolidated obligation payments.

Furthermore, the proposed rule would codify the authority of the

Finance Board to

[[Page 6822]]

require any other FHLBank to make any such payment; and provide for any

FHLBank making consolidated obligation payments on behalf of a non-

performing FHLBank to receive reimbursement.

The proposed rule would add two new definitions to section 910.0--

``Participating Federal Home Loan Bank,'' and ``Non-performing Federal

Home Loan Bank.'' The proposed rule would also add a new section 910.7.

Section 910.7(a) would state the joint and several liability of the

FHLBanks and the duty of the FHLBanks to give priority to consolidated

obligation payments. Proposed section 910.7(b)(1) would require

quarterly certification by each FHLBank to the Finance Board that the

FHLBank will not suffer a net loss, will remain in compliance with the

statutory and regulatory liquidity requirements set forth in section 11

of the Bank Act, 12 U.S.C. 1431(g), and the FMP, and will remain

capable of servicing all of its consolidated obligation payments due

during that quarter. Section (b)(2) would require a participating

FHLBank to report immediately any projected net loss, inability to

service its consolidated obligations, or any non-compliance with the

statutory and regulatory liquidity requirements. The proposed rule in

section (b)(3) would codify the authority of the Finance Board to

require a FHLBank to file a report pursuant to section (b)(2) under

certain circumstances. Under section (c) of the proposed rule any

FHLBank projecting or experiencing an inability to service its current

consolidated obligations would be required to submit a consolidated

obligation payment plan to the Finance Board and would be required to

refrain from incurring non-essential operating expenses, declaring or

paying dividends, or redeeming any stock, until its consolidated

obligation payment plan is approved by the Finance Board and its

consolidated obligation payment obligations are satisfied. In the

remote event that any participating FHLBank would be unable, due to

actual or projected cash flow or balance sheet deficiencies, to service

such consolidated obligations, section (d) of the proposed rule

provides that the Finance Board would order one or more other FHLBanks

to make such payments. The non-performing FHLBank would be liable to

those other FHLBanks for reimbursement. The Finance Board would look to

the assets of the non-performing FHLBank for reimbursement of such

payments.

Under section (e) of the proposed rule, the reallocation of the

payment obligations among the other FHLBanks would be based on the pro

rata participation of each FHLBank in all consolidated obligations

outstanding as of the most recent month end for which the Finance Board

has data. The reallocation (as opposed to payments that may be ordered

by the Finance Board) would occur only after the non-performing FHLBank

had applied all of its assets to service any consolidated obligation.

Finally, section (f) of the proposed rule codifies the authority of the

Finance Board to act if the inability of any FLHBank to service its

consolidated obligations cannot be cured promptly.

IV. Regulatory Flexibility Act

The proposed rule applies only to the FHLBanks, 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, 5 U.S.C. 605(b), the Finance Board

hereby certifies that this proposed rule, if promulgated as a final

rule, will not have significant economic impact on a substantial number

of small entities.

V. Paperwork Reduction Act

This proposed rule does not contain any collections of information

pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 350, et

seq. Consequently, the Finance Board has not submitted any information

to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 910

Consolidated bonds and debentures, Federal home loan banks,

Securities.

For the reasons stated in the preamble, the Finance Board proposes

to amend 12 CFR part 910 as follows:

PART 910--CONSOLIDATED BONDS AND DEBENTURES

1. Revised the authority citation for part 910 to read as follows:

Authority: 12 U.S.C. 1422a, 1422b and 1431.

2. Amend Sec. 910.0 by adding paragraphs (e) and (f) to read as

follows:

Sec. 910.0 Definitions.

* * * * *

(e) Participating Federal Home Loan Bank means the Federal Home

Loan Bank or Banks that received proceeds from the sale of a

consolidated obligation issued by the Board pursuant to section 11 of

the Federal Home Loan Bank Act (12 U.S.C. 1431).

(f) Non-Performing Federal Home Loan Bank means any participating

Federal Home Loan Bank that fails to certify pursuant to

Sec. 910.7(b)(1) of this part that it is able to pay principal and

interest payments when due, that fails to make such payments when due,

that fails to file a plan with the Board to meet its obligations on

consolidated obligations, that is required by the Board pursuant to

Sec. 910.7(b)(3) of this part to file a report, or that is determined

by the Board to require assistance in meeting its obligations on

consolidated obligations.

3. Add Sec. 910.7 to read as follows:

Sec. 910.7 Joint and several liability

(a) In general. (1) Each and every Federal Home Loan Bank,

individually and collectively, has a duty to make full and timely

payment of all principal and interest on consolidated obligations when

due.

(2) Each and every Federal Home Loan Bank individually and

collectively shall ensure that the timely payment of principal and

interest on all consolidated obligations is given priority over, and is

paid in full in advance of any payment to or redemption of shares from

any shareholder, or any other creditor not entitled by law or contract

to priority over or parity with the holder of consolidated obligations.

(b) Certification and Reporting. (1) Before the end of each

calendar quarter, and before declaring or paying any dividend for that

quarter, the President of each Federal Home Loan Bank shall certify in

writing to the Finance Board that the Federal Home Loan Bank will not

suffer a net loss, will remain in compliance with the statutory and

regulatory liquidity requirements set forth in section 11 of the

Federal Home Loan Bank Act (12 U.S.C. 1431(g)), and the Board's

Financial Management Policy, and will remain capable of making full and

timely payment of all interest and principal payments on consolidated

obligations coming due during the upcoming quarter, in which such

Federal Home Loan Bank is a participating Federal Home Loan Bank (as

defined in Sec. 910.0(e) of this part).

(2) A Federal Home Loan Bank shall report immediately to the Board

if at any time:

(i) The Federal Home Loan Bank is unable to provide the

certification required in paragraph (b)(1) of this section;

(ii) Subsequent to providing the certification required in

paragraph (b)(1) of this section, the Federal Home Loan Bank projects

that it will incur a net loss, fail to comply with statutory and

regulatory liquidity requirements, or will be unable to timely and

fully service consolidated obligations in which the Federal Home Loan

Bank is

[[Page 6823]]

a participating Federal Home Loan Bank due during the quarter;

(iii) The Federal Home Loan Bank actually incurs a net loss, fails

to comply with statutory and regulatory liquidity requirements, or will

be unable to timely and fully service consolidated obligations in which

the Federal Home Loan Bank is a participating Federal Home Loan Bank

due during the quarter.

(iv) The report shall be accompanied by the consolidated obligation

payment plan referenced in paragraph (c) of this section.

(3) If at any time the Board has reason to believe that a Federal

Home Loan Bank will incur a net loss, cease to be in compliance with

the statutory and regulatory liquidity requirements, or will lack the

capacity to timely and fully service its consolidated obligations, the

Board may require such Federal Home Loan Bank to file a report pursuant

to paragraph (b)(2) of this section.

(c) Consolidated obligation payment plans. (1) If a participating

Federal Home Loan Bank becomes a non-performing Federal Home Loan Bank

(as defined in Sec. 910.0(f) of this part) as a result of failing to

provide the certification required in paragraph (b)(1) of this section,

that Federal Home Loan Bank shall, prior to the beginning of the

quarter in which the shortfall is estimated to occur, submit a

``consolidated obligation payment plan.'' A consolidated obligation

payment plan shall specify the measures the non-performing Federal Home

Loan Bank will undertake to make full and timely payments of all

principal and interest consolidated obligation payments due during the

quarter.

(2) A Federal Home Loan Bank submitting a report pursuant to

paragraphs (b)(2) or (b)(3) of this section, shall at the same time

submit a consolidated obligation payment plan as described in paragraph

(c)(1) of this section.

(3) A non-performing Federal Home Loan Bank shall refrain from

incurring any non-essential expenses, from declaring or paying

dividends, and from redeeming any capital stock, until such time as the

Board has approved the Federal Home Loan Bank's consolidated obligation

payment plan or ordered another remedy, and all of the non-performing

Federal Home Loan Bank's consolidated obligation payments have been

brought current.

(d) Board payment orders. (1) The Board, in its discretion, may

order any Federal Home Loan Bank to make any principal or interest

payment due on any consolidated obligation.

(2) To the extent that a Federal Home Loan Bank is ordered by the

Board to make, or otherwise by agreement makes, any payment on any

consolidated obligation in excess of its obligations as a participating

Federal Home Loan Bank, the Federal Home Loan Bank shall be entitled to

reimbursement from the non-performing Federal Home Loan Bank (which

shall have a corresponding obligation to reimburse the Federal Home

Loan Bank providing assistance) to the extent of such payment and other

associated costs, including reasonable interest.

(e) Adjustment of equities. (1) Any non-performing Federal Home

Loan Bank shall apply its assets to fulfill its consolidated

obligations payment obligations, which shall include reimbursement

(including reasonable interest) to any Federal Home Loan Bank that has

made payments on behalf of the non-performing Federal Home Loan Bank,

whether by agreement with the non-performing Federal Home Loan Bank or

by order of the Board.

(2) If the assets of a non-performing Federal Home Loan Bank are

insufficient to satisfy all consolidated obligation payment obligations

set forth in paragraph (e)(1) of this section, then the Board shall

allocate the outstanding liability among the remaining Federal Home

Loan Banks on a pro rata basis in proportion to each Federal Home Loan

Bank's participation in all consolidated obligations outstanding as of

the end of the most recent month for which the Board has data.

(f) Reservation of authority. Nothing in this section shall affect

the Board's ability to take such enforcement or other action against

any Federal Home Loan Bank pursuant to the Board's authority under the

Federal Home Loan Bank Act or otherwise to supervise the Federal Home

Loan Banks and ensure that they are operated in a safe and sound

manner.

Dated: January 27, 1999.

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

Bruce A. Morrison,

Chairman.

[FR Doc. 99-3407 Filed 2-10-99; 8:45 am]

BILLING CODE 6725-01-P