# Federal Home Loan Bank Membership for Community Development Financial Institutions

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-31003

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 5, 2010
- **Citation:** 75 FR 678

## Text

FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 925 and 944
FEDERAL HOUSING FINANCE AGENCY
12 CFR Parts 1263 and 1290
RIN 2590-AA18
Federal Home Loan Bank Membership for Community Development Financial Institutions

AGENCIES:

Federal Housing Finance Board and Federal Housing Finance Agency.

ACTION:

Final rule.

SUMMARY:

The Federal Housing Finance Agency (FHFA) is amending its membership regulations to implement provisions of the Housing and Economic Recovery Act of 2008 (HERA) that authorized community development financial institutions (CDFIs) that have been certified by the CDFI Fund of the U.S. Treasury Department (CDFI Fund) to become members of a Federal Home Loan Bank (Bank). The newly-eligible CDFIs include community development loan funds, venture capital funds, and State-chartered credit unions without Federal insurance. This final rule sets out the eligibility and procedural requirements that will enable CDFIs to become members of a Bank and relocates part 925 in its entirety to part 1263. FHFA also is amending its community support regulations to provide that certified CDFIs may be presumed to be in compliance with the statutory community support requirements by virtue of their certification by the CDFI Fund and relocates part 944 in its entirety to part 1290.

DATES:

This rule is effective February 4, 2010.

FOR FURTHER INFORMATION CONTACT:

Sylvia C. Martinez, Senior Policy Advisor, 202-408-2825,
sylvia.martinez@fhfa.gov;
Amy Bogdon, Senior Advisor, 202-408-2546,
amy.bogdon@fhfa.gov,
Division of Federal Home Loan Bank Regulation; Neil R. Crowley, Deputy General Counsel, 202-343-1316,
neil.crowley@fhfa.gov
(not toll-free numbers), Office of General Counsel, Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Regulatory History

On May 15, 2009, FHFA published a proposed rule to implement the provisions of HERA authorizing CDFIs to become members of the Banks. 74 FR 22848 (May 15, 2009). FHFA received 79 comment letters on the proposed rule, most of which were generally supportive of the proposal, and many of which recommended ways in which the regulation could be amended to better achieve its objectives. FHFA received comment letters from the Banks, numerous CDFIs, trade associations, and other community organizations. The key substantive issues raised by the comment letters focused principally on the criteria that FHFA had proposed for the Banks to use in evaluating the financial condition of CDFIs applying for membership. In this final rule, FHFA has incorporated certain revisions suggested by commenters, but in other respects retains the substance of the proposed rule.

B. HERA Amendments

On July 30, 2008, HERA, Public Law 110-289, 122 Stat. 2654 (2008), became law and created FHFA as an independent agency of the Federal government. Among other things, HERA transferred to FHFA the supervisory and oversight responsibilities over the Banks that formerly had been vested in the now abolished Federal Housing Finance Board (Finance Board). The Banks continue to operate under regulations promulgated by Finance Board until such time as the existing regulations are supplanted by regulations promulgated by FHFA. Section 1206 of HERA also amended section 4(a) of the Bank Act, 12 U.S.C. 1424(a), which relates to Bank membership, by expressly authorizing certified CDFIs to become members.

C. CDFIs

CDFIs are private institutions that provide financial services dedicated to economic development and community revitalization in underserved markets. The CDFIs may be organized as nonprofit or for-profit entities and comprise diverse institutional structures and business lines. The four categories of institutions eligible for CDFI certification and CDFI Fund financial support are: (1) Federally regulated insured depository institutions and their holding companies; (2) credit unions, whether federally or State-chartered; (3) community development loan funds, which are unregulated institutions specializing in financing of housing, businesses or community facilities that provide health care, childcare, educational, cultural, or social services; and (4) community development venture capital funds, which are unregulated institutions that provide equity and debt-with-equity-features to small and medium-sized businesses in distressed communities.

The CDFIs serve as intermediary financial institutions that promote economic growth and stability in low- and moderate-income communities. They provide a unique range of financial products and services, such as mortgage financing for low-income and first-time homebuyers; homeowner or homebuyer counseling; financing for not-for-profit affordable housing developers; flexible underwriting and risk capital for needed community facilities; financial literacy training; technical assistance; and commercial loans and investments to assist start-up businesses in low-income areas. Frequently, CDFIs serve communities that are underserved by conventional financial institutions and may offer products and services that are not available from conventional financial institutions. Although CDFIs are generally small in asset size, studies have demonstrated that CDFIs can have meaningful positive effects on the low-and-moderate income communities that they serve. One common problem facing non-depository CDFIs, however, is that they do not have access to long-term funding, which may limit their ability to provide housing finance to their communities.

The CDFI Fund of the US Treasury was created to promote economic revitalization and community development through investment in and financial and technical assistance to CDFIs.
See
12 U.S.C. 4701(b). The CDFI Fund promotes these purposes through several programs, including the CDFI Program, the New Markets Tax Credit Program, the Bank Enterprise Award Program, and Native American Initiatives.
See
12 U.S.C. 4701
et seq.
and 12 CFR part 1805. An institution can obtain access to those resources by becoming certified by the CDFI Fund and then applying to the CDFI Fund to receive awards that are available under its programs.
See
12 U.S.C. 4704 and 12 CFR 1805.200. In order to be certified as a CDFI, an institution must satisfy several statutory and regulatory requirements, including that it have a primary mission of promoting community development, that it provides development services in conjunction with equity investments or loans, and that it serves certain targeted areas or populations. The CDFI certification requirements are more fully elaborated in the statute and the CDFI

program regulations.
See
12 U.S.C. 4702(5) and 12 CFR 1805.201. The CDFI Fund does not regulate the CDFIs that it certifies, nor does it evaluate their safety and soundness, either during the certification process or the awards application process. Thus, certification by the CDFI Fund does not represent a determination that a CDFI is in sound financial condition, although it does represent a determination by the CDFI fund that the entity satisfies the statutory requirements of being a CDFI. Indeed, the regulations of the CDFI Fund expressly state that certification does not constitute an opinion as to the financial viability of the certified CDFI or as to the likelihood that the CDFI will receive an award from the CDFI Fund.
See
12 CFR 1805.201(a). If a period of time has passed since an organization became certified as a CDFI, the CDFI Fund may require the CDFI to attest that no events have occurred that would materially affect its strategic direction, mission or business operation, and thereby, its status as a CDFI, before it may receive an award from the CDFI Fund.

D. Membership Requirements

Each Bank is a cooperative institution that is owned by its members. Bank membership is limited to the several types of financial institutions listed in section 4(a)(1) of the Bank Act. Prior to HERA, section 4(a)(1) provided that any building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, savings bank, or federally insured depository institution (including credit unions) was eligible to become a Bank member. Thus, prior to HERA a CDFI could not become a member of a Bank unless it was eligible for membership by virtue of being a federally insured bank, thrift or credit union. Section 1206 of HERA amended section 4(a)(1) to make all CDFIs that are certified by the CDFI Fund of the US Department of the Treasury under the Community Development Banking and Financial Institutions Act of 1994 (CDFI Act) eligible to become members of a Bank.
See
12 U.S.C. 1424(a)(1) (as amended). As a result of the HERA amendments, any loan funds, venture capital funds, or State-chartered credit unions without Federal insurance that have been certified by the CDFI Fund are now eligible for Bank membership.

In order for any eligible institution to become a member of a Bank, however, it also must comply with certain additional criteria that are specified in section 4(a)(1) and (2) of the Bank Act. Specifically, section 4(a)(1) of the Bank Act requires each applicant to demonstrate that it: (a) Is duly organized under State or Federal law; (b) either is subject to inspection and regulation under banking or similar laws or is certified as a CDFI under the CDFI Act; and (c) makes such home mortgage loans as are, in the judgment of the Director, long-term loans. Those three statutory requirements apply to all types of institutions that are eligible for membership, including the newly-eligible CDFIs. In addition, section 4(a)(2) of the Bank Act requires that an applicant that is an insured depository institution must: (a) Have at least 10 percent of its total assets in residential mortgage loans (with certain limited exceptions); (b) be in sound financial condition such that a Bank may safely make advances to it; (c) have a character of management that is consistent with sound and economical home financing; and (d) have a home-financing policy that is consistent with sound and economical home financing. 12 U.S.C. 1424(a)(1) and (2).

Prior to HERA, the Finance Board had adopted detailed regulations governing the substantive and procedural requirements for institutions seeking to become members of a Bank. Those membership regulations applied the financial condition, character of management, and home financing policy requirements to insurance company applicants (in addition to depository institutions), and established a process for the review and approval of all applications for Bank membership.
See
12 CFR part 925. The regulations included separate provisions governing the admission of depository institutions and insurance companies, respectively, recognizing that each type of institution operates under a different business model and a different regulatory regime. The regulations also included provisions dealing with several other matters, such as member stock purchase requirements, consolidation of Bank members, and withdrawal from Bank membership.

E. Proposed Rule

The proposed rule would have relocated the membership regulations of the Finance Board in their entirety from part 925 of the Finance Board regulations to part 1263 of the FHFA regulations, and also would have amended various provisions of the relocated regulations to implement the CDFI amendments. The proposed rule would have applied only to those CDFIs that had not been eligible for membership prior to HERA, such as loan funds, venture capital funds, and credit unions with State or private insurance. Federally insured depository institutions that also have been certified as CDFIs would be required to follow the membership regulations applicable to insured depository institutions generally, and could not become members under the CDFI provisions.

The key amendments to be made by the proposed rule related to how the Banks were to assess the financial condition of CDFI applicants. The proposed rule included two separate provisions relating to the financial condition of CDFI applicants. The first provision, which was set out in § 1263.11, applied only to CDFI credit unions, which are State-chartered credit unions that do not have National Credit Union Administration (NCUA) share insurance. The proposed rule would have required that the Banks assess the financial condition of all such CDFI credit unions under the same provisions that the Banks currently use in assessing the financial condition of NCUA-insured credit unions, which were eligible for Bank membership prior to HERA by virtue of their Federal share insurance. The second provision relating to financial condition was set out in § 1263.16(b) and applied to all other types of CDFI applicants. Those provisions were similar to the Finance Board's existing regulations relating to the financial condition of depository institution applicants, but were tailored to recognize the different structures and business models of the CDFIs. The proposed rule also included a number of conforming amendments, such as to the definitions and rebuttable presumptions, and sought comment on particular issues, such as whether CDFIs could take advantage of certain amendments made by HERA for the benefit of community financial institutions (CFIs) and whether the final rule should subject CDFIs to the existing community support requirements in the Finance Board regulations or to new requirements developed solely for CDFIs.

F. Differences

Section 1201 of HERA (codified at 12 U.S.C. 4513(f)) requires the Director of FHFA to consider the differences between the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) (collectively, the Enterprises) and the Banks with respect to the Banks' cooperative ownership structure, mission of providing liquidity to members, affordable housing and community development mission, capital structure, and joint and several liability, whenever promulgating regulations that affect the Banks. The Director may also consider

any other differences that are deemed appropriate. In preparing this final rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors and determined that the rule is appropriate, particularly because this final rule implements a statutory provision that applies only to the Banks.
See
12 U.S.C. 1424.

II. Summary of Comments

FHFA received 79 comment letters on the proposed rule. The preponderance of the comments came from the CDFI sector, which was represented by three national CDFI associations, a sign-on letter with 134 organizational signatures, and letters from nonprofit organizations and individuals. FHFA also received comments from nine Banks, three credit union associations, and two bank trade associations.

The comments from the CDFI sector were supportive of the general direction of the proposed rule but offered recommendations on specific membership standards, particularly those establishing thresholds for financial condition. Several commenters also recommended changes to current regulations as they relate to advances and collateral. The proposed rule sought to amend only the membership regulations and the community support regulations, and did not propose any revisions to the advances and collateral regulations. As a result, FHFA does not have the authority under the Administrative Procedure Act to amend those provisions as part of this rulemaking. To the extent that the collateral and advances regulations may need to be revised to better accommodate CDFI members, FHFA would undertake those changes as part of a separate rulemaking.

A number of commenters urged FHFA to establish a CDFI membership goal for each Bank,
i.e.,
require each Bank to admit a certain number of CDFIs as members each year, and requested that FHFA publicly release the number of CDFIs that become members, the amount of advances made to by CDFIs, and the reasons for the denial of any CDFI membership applications. At present, the number of members by type of institution is made available through the Federal Home Loan Banks' Combined Financial Report, and in the future, the number of CDFIs that become members each year should be included in the report for that year. FHFA also intends to release the number of CDFI members through its Public Use Data Base.

The final rule does not establish goals for CDFI membership. Whether any institution may become a member of a Bank depends on whether the institution has satisfied the statutory and regulatory requirements for membership. Because each application must be evaluated individually, FHFA does not believe that it is appropriate to establish membership goals, which suggest that CDFIs should be granted membership without regard to those requirements.

In a similar fashion, the final rule does not require the Banks to disclose the reasons for denying membership to a CDFI. Generally speaking, the Banks may deny an application only if an institution does not satisfy the statutory or regulatory requirements for membership, and the Banks do not disclose the reasons for the denial of individual applications. FHFA expects that the Banks will deny applications from CDFIs only in those circumstances, and further believes that releasing reasons for the denial of a membership application might result in reputational harm to the applicant with no public benefit. FHFA intends to monitor the Banks' implementation of the final rule, to ensure that they carry out the intent and spirit of the HERA amendments authorizing CDFIs to become members.

With respect to advances, neither FHFA nor the Banks track the use of member advances, and the final rule does not impose that requirement for advances made to CDFI members. With the exception of Community Investment Program Funds (12 U.S.C. 1430(i)), Bank advances to their members are not project-specific. As is the case with any member, the proceeds of advances are fungible and can be used by the CDFIs for overall asset-liability management, to enhance liquidity, and for other purposes.

Bank and depository institution commenters, in general, expressed concern that CDFI membership would compromise safe and sound lending practices and have an adverse financial impact on the Banks. Those concerns appear to be more closely related to risks of lending to a member, rather than to the key issue of this rulemaking, which relates to whether particular CDFIs have satisfied the statutory and regulatory requirements for membership. FHFA finds that these comments reflect a perception of risk that is not warranted by the performance of the CDFI sector or the asset size of these institutions.
1

The Banks are protected from the risks of doing business with their members through stock purchase requirements, sound underwriting, and collateral requirements. Moreover, CDFIs are small institutions. In 2008, the average size of a non-depository CDFI was $21,000,000, which suggests that, in the case of any single CDFI member the dollar amount of advances outstanding to that member is apt to be comparatively modest. Thus, even if a non-depository CDFI were to fail, the financial impact on a Bank would likely not be material. Notwithstanding those safety and soundness concerns, Congress has unambiguously spoken on the matter of CDFI membership and has determined that CDFIs that satisfy the requirements for membership are entitled to become Bank members. FHFA also is confident that CDFIs will bring added value to the Federal Home Loan Bank System (Bank System) consistent with the Banks' mission and without compromising their safety and soundness and it expects the Banks to be proactive in educating themselves about the CDFIs' lines of business and risk profiles.

1

See
Social Funds Community Investment Center, “Community Investing” (
http://www.communityinvest.org/overview/index.cfm.
Accessed on 7/27/09). According to this study, between 2003 and 2005, loan loss ratios among CDFIs were less than one percent. Through their tax exempt status not-for-profit CDFIs can address risk through patient investments, equity capital, risk-sharing arrangements, charitable contributions and private investments.

The commenters also raised a number of other issues relating to specific provisions of the proposed rule. To the extent that FHFA either adopts revisions in the final rule in response to those comments or declines to adopt comments that raised significant issues about the proposed rule, those matters are addressed below as part of the discussion about the individual sections of the final rule.

III. The Final Rule

A. General

The proposed rule would have relocated many provisions of the Finance Board's membership regulations without substantive changes. In the final rule, FHFA is adopting those provisions of the proposed rule without any further substantive changes. Thus, the provisions of the final rule that are located in Subpart B (Membership Application Process), Subpart D (Stock Requirements), Subpart E (Consolidations Involving Members), Subpart F (Withdrawal and Removal From Membership), Subpart G (Orderly Liquidation of Advances and Redemption of Stock), Subpart H (Reacquisition of Membership), Subpart I (Bank Access to Information) and Subpart J (Membership Insignia) are all

unchanged from the proposed rule and the predecessor provisions of the Finance Board regulations, apart from certain technical or conforming changes. All of the substantive revisions to the membership regulations relating to CDFI membership were located in Subpart A (Definitions) and Subpart C (Eligibility Requirements) of the proposed rule, and that remains the case with respect to the final rule. Those revisions are described separately below.

B. Definitions—Subpart A

Section 1263.1—Definitions.
The proposed rule would have carried over into part 1263 without substantive change to nearly all of the existing definitions from the Finance Board regulations, but would have revised certain definitions and added a number of new definitions to implement the statutory amendments regarding CDFI members. Except as described below, the final rule adopts the definitions from the proposed rule without further change.

Community development financial institution or CDFI (holding companies).
Section 1263.1 of the proposed rule defined “community development financial institution” and “CDFI” to include any institution that is certified by the CDFI Fund of the US Department of the Treasury, but excluded any bank or savings association that is insured under the Federal Deposit Insurance Act (12 U.S.C. 1811
et seq.
) or a credit union that is insured under the Federal Credit Union Act (12 U.S.C. 1751
et seq.
). The proposal excluded federally insured depository institutions and credit unions because they already were eligible for membership under the pre-HERA law. The final rule retains those aspects of the proposed definition, and also adds a new provision relating to bank or savings and loan holding companies that have been certified as CDFIs. The proposal did not include CDFI holding companies among the entities eligible for membership under the HERA amendments, and sought comment on that issue. One holding company, that has been certified as a CDFI and that controls a depository institution that is a member of a Bank, favored allowing similarly situated holding companies to become members in addition to the membership of their depository institution subsidiaries. That view was endorsed by another commenter, but several other commenters opposed allowing a bank or savings and loan holding company to obtain its own membership via the CDFI provisions. As a matter of general policy, FHFA believes that the benefits of Bank membership are best conveyed through depository institutions that have direct relationships with the communities in which they do business, and has decided not to allow depository institution holding companies to become Bank members at this time. FHFA intends to monitor the implementation of the CDFI membership provisions and is open to reconsidering this issue at a later date. FHFA notes, however, that there may be certain practical impediments to any holding company becoming a member, in addition to its depository institution subsidiaries, because a holding company would have to purchase its own membership stock in the Bank, in addition to any Bank stock owned by its subsidiaries. Moreover, the additional membership for the holding company would not necessarily provide any additional borrowing capacity beyond that already available to the subsidiary depository institution because current law allows a member to borrow against collateral owned and pledged by an affiliate. In the final rule, the definition of CDFI has been revised to make clear that holding companies for depository institutions cannot obtain membership via the CDFI membership provisions.

Community financial institutions.
The proposed rule also carried over without change from the Finance Board regulations the definition of “community financial institution.” The Bank Act defines CFIs as FDIC-insured members that have average total assets of $1 billion or less, as adjusted annually for inflation. Section 1211 of HERA amended the Bank Act to allow CFIs to obtain long-term advances for the purpose of funding “community development activities” and further allowed CFIs to pledge secured loans for “community development activities” as collateral for their advances. As HERA authorized CDFIs to become members and separately authorized CFIs to pledge community development collateral, the proposal requested comment on whether there was any basis in the legislative history to HERA that would allow FHFA to construe the new CFI provisions as applying to CDFIs as well as to CFIs. Commenters addressing this issue overwhelmingly favored allowing CDFI members to be deemed to be CFIs so they could take advantage of the HERA amendments relating to community development collateral for CFIs, although no commenters identified anything in the legislative history to support that view. In the absence of any such evidence of Congressional intent, FHFA must give effect to the language that Congress actually has used in the Bank Act. That language allows an institution to be designated as a CFI, and thus benefit from the expanded collateral available to CFIs, only if it has FDIC deposit insurance and also has total assets less than the statutory amount. Because none of the newly-eligible CDFIs are insured by the FDIC, they cannot be CFIs and thus cannot either pledge community development loans as collateral or obtain long-term advances to support community development purposes. Accordingly, the final rule does not change the existing definition of CFI.

FHFA did not propose any revisions to the definitions of “home mortgage loan,” “long-term,” “manufactured housing,” or “residential mortgage loan.” Nonetheless, a number of commenters suggested that FHFA amend each of those provisions in certain respects to bring them more in line with the business of CDFIs generally or with the business of the commenters. Those provisions are discussed separately below.

Home mortgage loan.
Some commenters asked that FHFA expand the definition of “home mortgage loan” to include certain other types of loans, such as loans secured by second liens, community acquisition loans (loans made to manufactured home communities), or pre-development or construction bridge loans. The Bank Act defines both “home mortgage” and “home mortgage loan” and FHFA cannot adopt a regulation that would include loans that would be precluded by the statutory definitions. The Bank Act defines a “home mortgage loan” as a loan made by a member upon the security of a home mortgage. It further defines a “home mortgage” as a mortgage upon real estate (held either in fee simple or a leasehold) on which one or more homes is located, and includes first mortgages and other types of first liens commonly used in the State where the real estate is located. 12 U.S.C. 1422(4) and (5). FHFA believes, for purposes of meeting the Bank Act standard, that an applicant must make long-term mortgage loans the existing definition of “home mortgage loan” in § 1263.1 is sufficiently expansive to accommodate loans typically made by CDFIs. Such loans as loans on one-to-four family properties, multifamily properties, residential properties that are partially used for business or farm purposes, or interests in long-term mortgages and mortgage pass-through securities backed by such mortgages qualify as home mortgage loans. FHFA is confident that most CDFIs would be able to meet the home mortgage loan eligibility requirements in the Bank Act.

Because the statute requires a “home mortgage” to be a first mortgage or other type of first lien, which requirement has long been in the Finance Board regulations, a loan secured by a subordinate lien cannot qualify as a “home mortgage loan.” Similarly, if a pre-development loan or construction bridge loan is not secured by real estate, or is secured by real estate that has no homes on it, then those loans also could not qualify as “home mortgage loans” under the statute. Whether other types of loans identified by the commenters may constitute “home mortgage loans” is largely a question of whether the particular types of loans at issue satisfy the statutory requirements noted above. FHFA believes that this issue is more appropriately addressed on a case-by-case basis, rather than by revisions to the regulatory definitions. In each such case, however, the inquiry will be the same,
i.e.,
whether the loan at issue is secured by a mortgage instrument, whether that instrument creates a first lien on real estate, and whether there are one or more homes or other dwelling units on the real estate at the time the loan is made and the security interest is created. If each of those questions can be answered in the affirmative, then the particular types of loans made by a CDFI applicant could qualify as “home mortgage loans.” To the extent that issues may arise about whether a particular type of loan made or held by a CDFI applicant in fact qualifies as a home mortgage loan, FHFA staff can assist the Banks and CDFI applicants in resolving that question on a case-by-case basis.

Long-term.
The proposed regulation retained the existing definition of “long- term,” which meant a term-to-maturity of five years or greater. Some CDFI commenters noted that many CDFIs make short-term pre-development or construction bridge loans and requested that the definition of “long-term” be changed to accommodate these loan types. The phrase “long-term” appears only in four provisions of the proposed rules, just two of which—§§ 1263.6(a)(3) and 1263.9—are relevant to CDFI applicants. In each of those cases, the phrase modifies the term “home mortgage loan.” As noted above, “home mortgage loan” is also defined by statute and requires that the loan be secured by a first lien on real estate on which a home is located. To the extent that the pre-development or construction bridge loans are unsecured or are secured by property that has no homes on it, those loans would not qualify as home mortgage loans under the Bank Act irrespective of their maturity. Accordingly, the final rule does not change the definition of “long-term.”

Manufactured housing.
The existing regulation defines “manufactured housing” to mean a manufactured home as defined in section 603 of the National Manufactured Housing Construction and Safety Standards Act of 1974. This provision establishes safety and quality standards for the housing units. Some commenters proposed expanding the definition of “manufactured housing” and the definitions of “one-to-four family property” and “multifamily property” in § 1263.1 to accommodate real property loans for such uses as resident-owned manufactured housing cooperatives in which the land is owned in common or rented, and, to include real estate loans used to finance community facilities, infrastructure, and access roads within a manufactured housing complex. FHFA finds that for purposes of meeting the requirement in § 1263.9, the existing definitions of “home mortgage loans,” “multifamily property,” and “one-to-four family property” in § 1263.1 are adequate to accommodate real property loans to manufactured housing complexes where the property is used for residential purposes and dwellings are located on the property. Therefore, no change to the definition is necessary.

Residential mortgage loan.
Certain CDFI commenters asked that FHFA revise the definition of “residential mortgage loan” to expressly include loans made to manufactured housing communities. The term “residential mortgage loan” appears only in two provisions of the membership regulations—§§ 1263.6(b) and 1263.10—both of which relate to the statutory requirement that federally insured depository institutions must have at least 10 percent of their assets in residential mortgage loans in order to become a member of a Bank. That 10 percent requirement applies only to depository institutions and thus is not relevant for CDFI members. Because any amendments to this definition would have no effect on the newly-eligible CDFIs, the final rule does not amend that provision.

C. Eligibility Requirements—Subpart C

The proposed rule would have carried over into part 1263 all of the existing provisions from Subpart C of the Finance Board regulations, which established the various eligibility requirements for Bank membership. Subpart C is made up of 13 separate sections, and the proposed rule would have carried over six of those sections without any substantive changes. The final rule adopts each of those six sections without any substantive change. Those unchanged provisions are §§ 1263.8 (which relates to the inspection and regulation requirement, and includes a nonsubstantive conforming change to the existing language), 1263.10 (which requires depository institutions to have 10 percent of assets in residential mortgage loans), 1263.13 (which relates to an applicant's home financing policy), 1263.14 (which relates to applicants that are de novo depository institutions), 1263.15 (relating to applicants that have recently merged) and 1263.18 (relating to which Bank an applicant may join).

Although FHFA did not propose to amend any of those provisions, certain commenters raised questions about them or asked that they be revised in certain respects. For example, a number of commenters asked that CDFI applicants not be required to demonstrate that they have 10 percent of their assets in residential mortgage loans in order to become Bank members. The provisions about which those commenters expressed concern are §§ 1263.6(b) and 1263.10, both of which implement section 4(a)(2)(A) of the Bank Act, which requires federally insured depository institutions to have at least 10 percent of their assets in residential mortgage loans as a condition to becoming a Bank member. The proposed rule did not subject the newly-eligible CDFI applicants (which are not federally insured depository institutions) to the 10 percent requirement, nor does the final rule.

Certain other commenters asked that FHFA revise § 1263.14, which establishes special procedures for de novo insured depository institutions, so that newly organized CDFIs could also have the benefit of those procedures. FHFA declines to amend § 1263.14 to accommodate newly organized CDFI applicants because the requirements for obtaining a depository institution charter and Federal deposit insurance are considerably more rigorous than are the processes for obtaining certification from the CDFI Fund. A de novo depository institution typically is allowed to commence business and obtain deposit insurance only after one or more bank regulatory agencies have determined that the institution is adequately capitalized, has a sound business plan, capable management, and can operate in a safe and sound manner. There is no comparable regulatory review for CDFIs; indeed, the regulations of the CDFI Fund expressly state that CDFI certification does not represent an assessment that the entity is financially viable. 12 CFR 1805.201(a). In the absence of any such

independent financial evaluation of the CDFI applicants, FHFA does not believe that they should be included within the provisions for de novo depository institutions.

With respect to each of the seven other sections located within Subpart C, the proposed rule included some substantive revisions, all of which were intended to implement the HERA amendments. In the final rule, FHFA is adopting certain of those provisions as proposed, but is revising other provisions in response to comments received on the proposed rule. Each of those sections is described separately below.

Section 1263.6—General Eligibility Requirements.
Section 1263.6 of the proposed rule closely followed the requirements of section 4(a) of the Bank Act, which established the eligibility requirements for Bank membership. 12 U.S.C. 1424(a). That statutory provision lists the types of entities that are eligible to apply for membership, and then establishes several requirements that each entity must satisfy in order to be approved for membership. Certain of those statutory requirements apply to all applicants. Those requirements are located at section 4(a)(1)(A) through (C) and require that an applicant: (1) Is duly organized under Federal or State law; (2) is subject to inspection and regulation under Federal or State banking laws, or is a certified CDFI; and (3) makes long-term home mortgage loans. The other statutory requirements apply only to federally insured depository institutions, although the Finance Board also had long applied them to insurance company applicants, based on its authority to oversee the Banks to ensure that they operate in a safe and sound manner and carry out their housing finance mission.
See
12 CFR 925.6(a)(4) to (6). Those other statutory provisions are located at section 4(a)(2)(B) through (C) and require that an applicant: (1) Be in sound financial condition so that a Bank may safely make advances to it; and (2) have a character of management and a home financing policy that are consistent with sound and economical home financing. That Finance Board regulation also included a requirement that any applicant that is not an insured depository institution must have mortgage-related assets that reflect a commitment to housing finance, as determined by the Bank in its discretion. 12 CFR 925.6(c).

In § 1263.6 of the proposed rule, FHFA made only one substantive change to the Finance Board regulations, which was to add CDFIs to the list of entities that are eligible for membership. As a result, the proposed rule would have required CDFI applicants to comply with each of the three eligibility requirements imposed by section 4(a)(1) of the Bank Act,
i.e.,
duly organized, certified, and making home mortgage loans, as well as with the regulatory requirements relating to financial condition, character of management, and home financing policy. The proposed rule also retained the requirement that applicants that are not insured depository institutions must have mortgage-related assets that reflect a commitment to housing finance, and relocated it to § 1263.6(c). FHFA stated that it expected the Banks to assess the commitment to housing finance requirement in light of the unique community development orientation of CDFI applicants.

In the final rule, FHFA has retained the language of the proposed rule regarding the general eligibility requirements, but has also made certain further revisions in response to the comments. In paragraph (a), FHFA has added a clarifying parenthetical reference to CDFI credit unions. In paragraph (a)(1), FHFA has added a reference to “Tribal law.” Certain commenters had suggested this revision in order to allow CDFIs that are organized under the laws of Tribal governments to become members, which FHFA believes is permissible under the statute and is consistent with the intent of Congress. In paragraph (a)(2), FHFA has added a reference to certified CDFIs, to make clear that the “inspection and regulation” eligibility requirement does not apply to a CDFI applicant, which need only demonstrate that it has been certified by the CDFI Fund.

With respect to the requirement that applicants other than insured depository institutions must have mortgage-related assets that reflect a commitment to housing finance, FHFA is also retaining that provision in the final rule without change. The term “mortgage-related assets” is not defined, and FHFA believes that the term can be construed broadly in considering whether a CDFI applicant meets this requirement. Moreover, the regulations do not require that a CDFI applicant's assets be exclusively, or even predominantly, oriented to traditional housing finance. What is required is that the CDFI applicant has assets that, when viewed in the overall context of the applicant's business and how it provides products and services to its targeted markets, can be fairly said to support housing finance. Because CDFI applicants are apt to have asset profiles that differ from those that the Banks typically review, FHFA expects that the Banks will consider the assets of CDFI applicants in light of their unique products and mission. Thus, although a CDFI may be able to demonstrate its commitment to housing finance through traditional means, such as by originating mortgage loans or otherwise to supporting the development or acquisition of housing, it also may demonstrate its commitment through other means. Examples of such other means would include, but are not limited to, loans related to manufactured housing (regardless of whether the unit is deemed to be real estate), pre-development or construction loans for real estate that will become or include residential property, or loans secured by subordinated liens on residential real estate.

Section 1263.7—Duly Organized Requirement.
Section 4(a)(1)(A) of the Bank Act requires an applicant to be duly organized under the laws of any State or of the United States. 12 U.S.C. 1424(a)(1)(A). The regulations of the Finance Board provided that an applicant would be deemed to be duly organized if it is chartered by a State or Federal agency as one of several types of entities eligible for Bank membership. In the proposed rule, FHFA retained the existing language from the Finance Board regulation and added new language providing that being incorporated under State law would be sufficient for a CDFI to demonstrate that it is duly organized. As noted in the prior section, several commenters asked that FHFA also allow CDFIs that are organized under Tribal law to be deemed to be duly organized, and the final rule includes an additional reference to Tribal law to clarify that a CDFI that is incorporated under State or Tribal law is deemed to satisfy the statutory requirement.

Section 1263.8—Subject to Inspection and Regulation Requirement.
Section 4(a)(1)(B) of the Bank Act generally requires an applicant for membership to be subject to inspection and regulation under State or Federal banking or similar laws. In the case of a CDFI, the statute imposes an alternative requirement, which is that the applicant be certified by the CDFI Fund.
See
12 U.S.C. 1424(a)(1)(B). The proposed rule simply carried over the language from the Finance Board regulations without any changes. Nonetheless, several commenters asked that the final rule make clear that a CDFI applicant is not subject to the inspection and regulation requirement because of the alternative requirement noted above. FHFA agrees that clarification of this issue is appropriate and has addressed that

matter in both the general eligibility provisions of § 1263.6(a)(2) of the final rule, which states that an applicant must be either subject to inspection and regulation by a regulatory agency or be certified as a CDFI by the CDFI Fund, and in § 1263.8, which states that a certified CDFI is not subject to the “inspection and regulation” requirement.

Section 1263.9—Makes Long-Term Mortgage Loans Requirement.
As noted previously, section 4(a)(1)(C) of the Bank Act requires that every applicant for membership, including CDFIs, must make such home mortgage loans that the Director determines to be “long-term loans.” 12 U.S.C. 1424(a)(1)(C). The regulations of the Finance Board presumed that an applicant had satisfied that requirement if the regulatory reports that it filed with its regulator showed that it originates or purchases long-term home mortgage loans. Section 1263.9 of the proposed rule carried over the substance of the Finance Board regulation, with some modifications to accommodate CDFI applicants. Under that provision of the proposed rule, a CDFI applicant also would have been presumed to have satisfied that requirement if it provides to the Bank other documentation showing that the applicant originates or purchases long-term home mortgage loans.

In the final rule, FHFA is adopting this provision without change. Because certain commenters sought FHFA guidance on how the Banks are to apply this provision, as well as the other provisions relating to an applicant's home financing policy and its commitment to housing finance, FHFA is providing such guidance in this preamble. Although it is clear that a CDFI applicant must originate or purchase long-term home mortgage loans in order to become a member, the Bank Act and the implementing regulations do not set a minimum threshold for the amount of home mortgage loans that an applicant must make in order to satisfy that requirement. Similarly, neither the statute nor the regulations characterize this as an ongoing requirement for membership.

Given the differences between the business of a typical depository institution and that of a typical CDFI, the amount of home mortgage loans that a CDFI applicant originates or purchases will likely be considerably less than the amount that a similarly sized depository institution would originate or purchase. FHFA expects that in assessing a CDFI applicant's compliance with this “makes long-term home mortgage loans” requirement the Banks will view the extent to which the CDFI originates or purchases long-term home mortgage loans in light of their unique mission and community development orientation, and thus will deem such applicants to have satisfied this requirement if they in fact have originated or purchased home mortgage loans and can document that fact. Moreover, an applicant's compliance with this provision need be assessed only at the time that a CDFI applies for membership. This approach is consistent with how the Banks assess compliance with section 4(a)(2)(A) of the Bank Act, which requires certain insured depository institution applicants to have at least 10 percent of their assets in “residential mortgage loans.”

In an earlier portion of this preamble FHFA discussed in some detail the definitions of the terms “home mortgage loan” and “long-term” as they are used in the context of the membership regulations. As discussed earlier, FHFA believes that for purposes of meeting the “makes long-term home mortgage loans” requirement the definition of home mortgage loans in § 1263.1 is sufficiently expansive to accommodate loans typically made by CDFIs, such as loans on one-to-four family properties, multifamily properties, residential properties with business components, interests in long-term mortgages, and mortgage pass-through securities backed by such mortgages.

Section 1263.11—Financial Condition Requirement for Depository Institutions and CDFI Credit Unions.
The proposed rule included two separate provisions for evaluating the financial condition of CDFI applicants: § 1263.11, which related to CDFI credit unions, and § 1263.16, which related to all other types of CDFIs. The proposal defined “CDFI credit unions” as State-chartered credit unions that have been certified as CDFIs but do not have Federal share insurance. Because the Finance Board had previously adopted regulations for evaluating the financial condition of all depository institution applicants, including State-chartered credit unions with NCUA share insurance, FHFA proposed to require CDFI credit unions to comply with the same regulations under which all other depository institution applicants are evaluated. In brief, the proposal would require the Banks to evaluate the financial condition of CDFI credit unions based on information in the regulatory financial reports they file with their applicable regulators, their audited financial statements, and the examination reports prepared by their regulators. Although CDFI credit unions do not file financial regulatory reports with the NCUA, they do file comparable reports with their appropriate State regulator, and FHFA believes that those documents may be used to assess the financial condition of the CDFI credit unions. The proposed rule would have amended the Finance Board's regulatory text in two respects—by adding CDFI credit unions to the list of institutions that are subject to § 1263.11, and by requiring all CDFI credit unions to meet certain performance trend criteria.

These provisions of the proposed rule generated few comments, and FHFA is adopting § 1263.11 as proposed. One commenter asked that FHFA revise the “earnings” provision of the regulation to require a CDFI credit union to demonstrate positive earnings for two of the last three years, rather than for four of the six most recent calendar quarters, as was in the proposed rule. As noted above, the financial condition requirements for CDFI credit unions are essentially identical to those of the Finance Board regulations, which the Banks have long used to evaluate the condition other depository institutions that apply for membership. FHFA believes that those requirements are well understood by the Banks and by depository institutions generally, and does not believe that there is a compelling reason to alter the earnings requirement solely for the benefit of CDFI credit union applicants. Moreover, to revise the regulation in the manner requested would change the earnings analysis for all other depository institution applicants, which FHFA does not believe is warranted.

A few commenters, including those representing State-chartered credit unions, objected to the provisions of the proposed rule that would have required all CDFI credit union applicants to meet certain performance trend criteria. For all other depository institution applicants, those performance trend criteria apply only if the applicant has received a composite regulatory examination rating of “2” or “3.” FHFA did not receive comments from any prospective CDFI credit union member on this proposal. As was stated in the proposed rule, CDFI credit unions are not subject to oversight by the NCUA and have not previously been eligible for membership. As a result, the Banks may be less familiar with State examination processes and ratings, and FHFA believes that it is prudent to require all CDFI credit unions to demonstrate that their earnings, nonperforming assets, and allowance for loan and lease losses are consistent with the existing performance criteria. Thus,

the final rule adopts the language of the proposed rule on this issue without change.

Section 1263.12—Character of Management Requirement.
The proposed rule carried over all of the substance of the Finance Board regulation relating to the character of management standard and added a separate paragraph for assessing the management of all CDFI applicants other than CDFI credit unions. Under the proposed rule, the character of a CDFI applicant's management would be deemed to be consistent with sound and economical home financing if the applicant provides the Bank with an unqualified written certification that neither the applicant nor its senior officials are subject to any enforcement actions, criminal, civil or administrative proceedings, or criminal, civil or administrative monetary liabilities, lawsuits or judgments. The proposed rule would have required CDFI credit unions to comply with the existing provisions applicable to depository institutions generally, but would have imposed slightly different standards on other types of CDFIs, such as loan funds and venture capital funds, because they are not regulated and thus are not subject to regulatory examinations or administrative enforcement actions. This provision of the proposed rule did not generate any significant comments and is being adopted in final form without change.

Section 1263.13—Home Financing Policy Requirement.
Section 4(a)(2)(C) of the Bank Act provides that any insured depository institution applicant must have a home financing policy that is consistent with sound and economical home financing. Although the Bank Act applies this requirement only to depository institutions, the Finance Board regulations have applied it to all entities applying for Bank membership.
See
12 CFR 925.6(a)(6). The Finance Board regulations provide that an insured depository institution applicant may be deemed to have satisfied the statutory requirement if it has a satisfactory Community Reinvestment Act (CRA) rating, but requires that applicants not subject to the CRA file with the Bank a written justification showing how and why their home financing policy is consistent with the housing finance mission of the Bank System.
Id.
at 925.13.

FHFA did not propose any changes to the Finance Board regulation, and stated that CDFI applicants would be required to provide a written justification, acceptable to the Bank, explaining how and why their home financing policy is consistent with the Bank System's housing finance mission. Certain commenters asked that CDFI applicants be presumed to comply with this requirement by virtue of their certification from the CDFI Fund. Although some certified CDFIs may in fact have a housing finance orientation that would satisfy this requirement, that will not necessarily be the case for every CDFI that is certified by the CDFI Fund, given the potential variety of activities in which a CDFI may engage. Because not all CDFIs will have the same degree of involvement in housing finance activities, FHFA believes that the better approach is to have the Banks assess the housing finance policies of the CDFI applicants on an individual basis, which is what the proposed rule required. Accordingly, a CDFI applicant must provide to the Bank a written narrative describing the manner in which the CDFI supports housing finance generally, which may include direct support such as originating loans, as well as indirect support through other investments, activities, or services. FHFA believes that this should not be a burdensome requirement for most CDFI applicants, as they are likely to have some direct or indirect nexus to housing finance in their communities. Thus, FHFA expects that most CDFI applicants can readily demonstrate that their business operations and housing finance policies are consistent with the mission of the Bank System, which includes both traditional housing finance as well as other community investment activities.

Section 1263.16—Financial Condition Requirement for Insurance Company and Certain CDFI Applicants.
In the proposed rule, FHFA included new provisions for evaluating the financial condition of CDFI applicants. The provisions for evaluating CDFI credit unions were located in § 1263.11 and were discussed earlier in this document. The provisions for evaluating all other types of CDFI applicants, such as loan funds and venture capital funds, were located in § 1263.16(b) of the proposed rule. Those new provisions were similar in substance to the provisions relating to depository institutions, although their specific requirements differed somewhat, in recognition of the differences between depository institutions and the newly-eligible CDFIs. The structure of proposed § 1263.16(b) generally paralleled that of the provisions used for depository institutions,
i.e.,
the regulation identified the types of financial documents that a Bank must review in assessing a CDFI applicant's financial condition and established standards for determining whether the financial condition of a particular applicant was such that a Bank could safely make advances to the applicant. These provisions of the proposed rule generated a significant number of comment letters, which raised a variety of issues relating to the manner in which the Banks were to assess the financial condition of CDFI applicants. The following paragraphs address the various provisions of § 1263.16(b) in the order they appear within the regulation, and describe key aspects of the proposal, the comments, and the approach taken in the final rule.

Review requirement.
Section 1263.16(b)(1) of the proposed rule required a Bank to obtain certain specified financial statements from each CDFI applicant, as well as its certification from the CDFI Fund, and any other information the Bank deemed necessary to assessing the applicant's financial condition. In the introductory language for this provision, the proposed rule restated language from the regulations of the Finance Board for depository institution applicants, which stated that a Bank “shall obtain” certain information from an applicant in assessing its financial condition. In the final rule, FHFA has revised that language to state that an applicant “shall submit” the required information, which is intended to make clear that an applicant must provide a Bank with sufficient information for the Bank to make an informed assessment of the applicant's financial condition. The final rule also adds a new requirement to this introductory language, which provides that a Bank shall consider all information provided by a member before deciding whether to approve or deny the membership application. This change relates to the standards established by § 1263.16(b)(2), which are presumptive indicators of an applicant's compliance with the requirement that it be in sufficiently sound financial condition that a Bank can safely make advances to it. Under the proposed rule, an applicant's failure to comply with one or more of the presumptive standards does not mean that the applicant cannot become a member of a Bank. Instead, it means that the applicant must overcome the presumption of noncompliance by providing the Bank with additional information demonstrating that the applicant is indeed in sufficiently sound financial condition to obtain advances from the Bank. The processes for rebutting such presumptions of noncompliance are established by § 1263.17, which applies to all types of

applicants. The new requirement added to the introductory language of § 1263.16(b)(1) is intended to ensure that a Bank does not automatically deny membership to a CDFI applicant based solely on that applicant's failure to satisfy any of the presumptive standards. It also is intended to make clear that a CDFI applicant has a right to submit additional information, beyond that required by the regulation, to demonstrate that it is in sound financial condition and to have that information considered by the Bank before it decides whether to approve the application.

The above revisions are intended to work in tandem with additional new language that the final rule adds to § 1263.16(b)(1)(iii). As proposed, that provision would have required an applicant to provide any additional information relating to its financial condition that is requested by the Bank. Because of the possibility that some CDFI applicants may not satisfy one of the presumptive standards, but may nonetheless be in sound financial condition, FHFA believes that it is important to make clear in the regulation that each CDFI applicant has the right to submit whatever information that it believes demonstrates its financial condition, regardless of whether the Bank has asked for such information. For example, if a CDFI applicant would not satisfy the net asset ratio requirement, it could submit additional information as part of its initial membership application demonstrating that its financial condition is sufficiently sound to satisfy the regulatory requirement, notwithstanding its failure to satisfy the presumptive standard. If the information in fact demonstrates that the applicant's financial condition is sufficiently sound to borrow from the Bank, FHFA expects that the Bank would approve the membership application.

The revisions described above are the only substantive amendments that the final rule makes to § 1263.16(b)(1). As to the particular financial statements that must be submitted, § 1263.16(b)(i) of the proposed rule would have required CDFIs to submit financial statements audited under generally accepted auditing standards (GAAS), as well as more recent quarterly financial statements, if those are available. An applicant also was required to submit financial statements for the two years prior to the most recent audited financial statements. At a minimum, all such financial statements must include income and expense statements, statements of activities, statements of financial position, and statements of cash flows. The financial statements for the most recent year also would have to include detailed disclosures or schedules relating to the affiliates of the CDFI applicant regarding the financial position of each affiliate, their lines of business, and the relationship between the affiliates and the applicant CDFI. There were no objections from commenters to this requirement and it is retained in the final rule. FHFA believes that in most cases a GAAS audited statement will suffice to show evidence of financial condition and anticipates that the Banks will be judicious in the amount of additional information they require CDFI applicants to submit. The proposed rule also asked whether CDFIs that do not typically obtain audited financial statements should be permitted to submit an alternative financial statement. Some commenters representing both the CDFI sector and the Banks recommended that in addition to an audited statement, a CDFI applicant be permitted to submit an alternative third party assessment, such as the CDFI Assessment and Rating System (CARS
TM
) assessment. The final rule does not require the submission of a CARS
TM
statement or other similar documents. In light of the revisions made to § 1263.16(b)(1)(iii), which allows a CDFI applicant to provide the Bank with any information the applicant believes relevant to its financial condition, FHFA does not believe that the final rule needs to specify by name any other types of documents to be submitted.

The proposed rule also required any CDFI applicant that had been certified more than three years prior to applying for membership to submit to the Bank a written statement certifying that it had not undergone any material events that would adversely affect its strategic direction, mission, or business operations. Some commenters asked that the final rule be revised to require any such CDFI applicants to obtain a re-certification from the CDFI Fund in order to be admitted to membership, but FHFA has not included a re-certification requirement in the final rule. As an initial matter, the Bank Act requires only that a CDFI must have been “certified” by the CDFI Fund in order to be eligible for membership, and does not speak to how long ago the certification must have been obtained. Under the regulations of the CDFI Fund, a certification appears to remain effective unless the CDFI Fund rescinds the certification, such as if it finds that a CDFI no longer meets the certification requirements. 12 CFR 1805.201(a). Moreover, the regulations of the CDFI Fund do not provide a means by which an entity that has been previously certified, can routinely obtain re-certification for purposes unrelated to the CDFI Fund, such as applying for Bank membership. There does not appear to be any way for a certified CDFI to obtain routine re-certification; therefore FHFA believes that requiring submission of a written statement attesting to the absence of any material adverse events is an appropriate means of providing some assurance that an applicant has not done anything to jeopardize its standing as a CDFI. Indeed, in the absence of a means of obtaining routine re-certification from the CDFI Fund, a provision mandating re-certification as a condition of membership could effectively frustrate the intent of Congress to allow CDFIs to become Bank members.

Financial condition standards.
Section 1263.16(b)(2) of the proposed rule sets out four presumptive standards that a CDFI applicant must satisfy in order to be deemed to satisfy the financial condition requirement of § 1263.6(a)(4),
i.e.,
that an applicant's condition is such that a Bank can safely make advances to it. The four presumptive standards related to an applicant's compliance are net asset ratio, earnings, loan loss reserves, and liquidity. These provisions generated a significant number of comments and suggested revisions, which FHFA has considered in developing the final rule. The final rule generally retains the standards of financial condition that were in the proposed rule, but also includes some revisions based on the suggestions of the commenters. Each of the provisions relating to the four presumptive standards is discussed separately below.

Net asset ratio.
The proposed rule would have required that a CDFI applicant have a ratio of net assets to total assets of at least 20 percent, with net and total assets including restricted assets, where net assets is calculated as the residual value of assets over liabilities and is based on the information derived from the applicant's most recent financial statement. In the absence of independent regulatory examinations for this group of CDFIs, the proposed financial condition requirements for Bank membership were based on accepted prudential standards,
i.e.,
the net asset ratio mirrored the “Financial Ratios of Minimum Prudent Standards” used by the CDFI Fund, which prescribes a minimum net asset ratio of 20 percent (or .20). The 20 percent

standard also was subjected to peer benchmarking. A survey of 130 loan fund CDFIs conducted in 2002 found that the median net asset ratio to be .437 and the mean ratio to be .446.
2

Similarly, the CDFI Fund reported that during the period between 2003 and 2005, non-depository CDFIs had a net asset ratio of “about 40 percent”.
3

These ratios are higher than the 20 percent net asset ratio threshold in the proposed rule.

2
Lam, Marcus
et al.
“Recommendations for CDFI Performance Measurement.”
See
Table 2.1 based on data obtained from the Opportunity Finance Network's CDFI Project. Unpublished document, March 2002.

3
United States Department of the Treasury, CDFI Fund, “
Three-year Trend Analysis of Community Investment Impact System Institutional Level Report Data FY 2003-2005” at 47. See

http://www.cdfifund.gov/impact_we_make/ciis/CDFI3yearTrend.pdf.

The preponderance of CDFI sector commenters objected to the 20 percent net assets ratio in the proposed rule as too high. Several CDFI commenters called on FHFA to reduce the net asset ratio to not greater than 10 percent. These commenters argued that a 10 percent net asset ratio would be in line with the standards used by the Federal regulators for a well-capitalized federally insured credit union and suggested that FHFA adopt internal capital ratios similar to those applicable to FDIC-insured institutions.

FHFA believes that the capital composition of CDFIs and insured depositories, respectively, reflect different institutional models and are not directly comparable. The variations in CDFI sources of revenue and capital do not readily permit classifications comparable to those used by depository institutions. For example, a CDFI's assets may include: (1) Unrestricted net assets, which are assets available for use by the CDFI without encumbrance; (2) designated net assets, which have been designated by a CDFI board for a specific purpose and can become undesignated; (3) temporarily restricted net assets, which are assets that cannot be released without prior agreement from the donor but can be converted to unrestricted capital upon satisfaction of donor requirements; and (4) permanently restricted net assets that have financial covenants that cannot be removed, except, in some cases during liquidation of assets pursuant to insolvency.

The terms of grant and investor covenants also can affect the permanency of capital. In addition, the components of capital will also vary from one nonprofit CDFI to another. For example, a unique characteristic of CDFI loan funds is their use of a debt-as-equity instrument known as Equity Equivalent Investments or “EQ2.” The EQ2 represents a small fraction (5 percent) of the aggregate capital of all loan funds.
4

Regulated financial institutions investing in CDFIs are attracted to EQ2 investments because regulators treat EQ2 investments in a CDFI as eligible in meeting the requirements of the CRA. The EQ2 loans are deeply subordinated to all other debt; carry a rolling term; limit the rights of the investor to call the investment; and, carry interest that is independent from income. The EQ2 are included as capital in CDFI financial statements. This treatment increases capital ratios and enables a CDFI to access capital at lower rates.

4
CDFI Data Project 2007.

FHFA recognizes that a CDFI's balance sheet and financial ratios may vary depending on the line of financial products and services that it offers. A CDFI active in lending might be more leveraged than a service-oriented CDFI and this could result in a lower net asset ratio. Such a finding does not by itself indicate declining financial performance or that the financial condition of the CDFI is not sufficiently sound to allow the Bank to safely make advances to it. Further, the CDFI specializing in lending might have more experience in asset-liability management. In fact, data show that as a CDFI grows and matures it will have lower net asset ratios than those of emerging CDFIs.
5

It is likely that these organizations have become more active lenders and less dependent on grants. More recently, however, there is evidence that financial distress among CDFI investors, such as insured depositories and grant makers, has resulted in reduced investments in CDFIs, lowering the CDFIs' equity and thus affecting their net asset ratios.
6

5

See
CDFI Fund,
Three Year Trend Analysis
at 47.

6

See
Opportunity Finance Network, “
CDFI Market Conditions Report: Fourth Quarter 2008”,
(April, 2009).
See
“
The Economic Crisis and Community Development Finance: An Industry Assessment”,
Community Development Investment Center Working paper Series, Federal Reserve Bank of San Francisco, (May 2009).

Recognition of these varying conditions notwithstanding, FHFA is not inclined to accept the recommendations made by the commenters that the minimum net asset ratio should be reduced, either to equal the capital ratios of insured depositories or to some other value between 10 percent and 20 percent. In the absence of regulatory standards and comprehensive examinations of the CDFIs, there is no good way for FHFA to establish the merit of one particular numerical ratio over another. Moreover, the 20 percent net asset ratio is consistent with the experience of the CDFI Fund, and appears well below the levels documented in the peer benchmarking studies described earlier. In light of those factors, FHFA decided to retain the requirement in the proposed rule that a CDFI applicant must demonstrate a 20 percent net asset ratio in order to satisfy the presumptive standard. FHFA emphasizes, however, that the revisions to § 1263.16(b)(1) are intended to allow an applicant that does not meet any of the presumptive standards, including the 20 percent threshold, to provide additional evidence of its financial condition and have the Bank consider that information prior to acting on the application. Moreover, FHFA intends to monitor the Banks' implementation of this rule, including their assessment of additional information provided by any applicant that does not initially meet one of the presumptive standards.

Earnings.
Under the proposed rule, the applicant would have been required to show a positive net income for any two of the three most recent years, where net income is calculated as gross revenues less total expenses and is based on information derived from the applicant's most recent financial statement. Most commenters supported the standard in the proposed rule as reasonable measure of a CDFI's earnings, but a number of CDFIs and CDFI trade associations proposed revising this provision to allow applicants to use a rolling three-year average to demonstrate that they have achieved a pattern of positive net income over that time. Those commenters favored this method because it recognizes fluctuations on a CDFI balance sheet resulting from newly received and expiring grants. The rolling three-year average method is also consistent with the methods used by some grantors. FHFA believes that these suggestions have merit and has amended the final rule to delete the requirement that an applicant show positive net income in two of the most recent three years and replaced it with a requirement that an applicant have positive income on a rolling three-year average basis.

Loan loss reserves.
The proposed rule included a requirement that an applicant's ratio of loan loss reserves to loans and leases 90 days or more delinquent (including loans sold with full recourse) be at least 30 percent, where loan loss reserves are a specified balance sheet account that reflects the amount reserved for loans expected to

be uncollectible and are based on information derived from the applicant's most recent financial statement. FHFA proposed the 30 percent threshold, which is half the reserve requirement that applies to depository institution applicants, in recognition of the historically low delinquency rate among CDFI-originated loans and the willingness and ability of CDFIs to work with borrowers to modify loans. Generally speaking, CDFI loans have performed as well or better than prime loans, and FHFA believed that it was appropriate for the loan loss reserve standard to recognize that difference.

Notwithstanding that, FHFA explained its rationale for the 30 percent requirement in the proposed rule, a number of commenters serving or representing depository institutions stated that the 30 percent figure was too low and recommended that it be increased to 60 percent, the same as it is for depositories. For the same reasons that were cited in the proposed rule, FHFA believes that the 30 percent figure is appropriate for CDFI applicants, and that increasing the ratio to 60 percent would not take into consideration the default experience for CDFI loans. One CDFI commenter recommended lowering the reserve ratio to 20 percent, in recognition that nonprofit institutions typically work with borrowers to modify loans. In light of current economic conditions affecting all lenders, FHFA believes that a 20 percent reserve may be too low and is not prepared to accept that suggestion, though it notes that any CDFI applicant not meeting the 30 percent requirement could provide the Bank additional information demonstrating why, in the context of the business conducted by that CDFI, its level of loan loss reserves is consistent with the concept of operating in a sound financial condition. Accordingly, the final rule adopts the loan loss reserve standard exactly as it was proposed.

Liquidity ratio.
The proposed rule included a standard requiring a CDFI applicant to have an operating liquidity ratio of at least 1.0 for the current year, and for one or both of the two preceding years, where the numerator of the ratio includes unrestricted cash and cash equivalents and the denominator of the ratio is the average quarterly operating expense for the four most recent quarters. FHFA believes that this liquidity ratio provides a measure of funds available to pay creditors by requiring a CDFI to have sufficient liquidity to cover its average operating expenses for one quarter. The preponderance of commenters supported the liquidity ratio in the proposed rule, and one commenter suggested that the final rule replace the reference to “current year” with a reference to the “four most recent quarters.” FHFA agrees with that suggestion and has incorporated it into the final rule. In all other respects, the final rule is identical to the proposed rule on this topic.

Self-sufficiency or sustainability ratio.
The proposed rule sought comment on whether FHFA should incorporate into the final rule a requirement that a CDFI applicant have a minimum self-sufficiency or sustainability ratio,
i.e.,
a ratio used to evaluate the extent to which a CDFI can cover its expenses from earned revenue and, by inference, the CDFI's independence from grants and loans. FHFA acknowledged in the proposed rule that self-sufficiency ratios can be affected by the type of services and grant programs operated by the CDFI, and thus may not adequately portray a CDFI's financial condition. Moreover, if a self-sufficiency ratio for Bank membership were to be too stringent, it could conflict with the service delivery requirements for a CDFI to become certified by the CDFI Fund.
See
12 U.S.C. 4701(b). Most of the commenters addressing this issue believed that a self-sufficiency ratio was not necessary, though some commenters did advocate for its inclusion. Given the above-described concerns and the absence in the comments of any compelling reasons for adopting a self-sufficiency requirement, FHFA does not include one in the final rule.

Section 1263.17—Rebuttable Presumptions.
The membership regulations of the Finance Board had long included a series of presumptive standards, under which an applicant that satisfied a particular standard would be presumed to have satisfied the underlying statutory or regulatory requirement to which the standard related. For example, those regulations presumed that an insurance company applicant that was subject to inspection and regulation by a State regulator that is accredited by the National Association of Insurance Commissioners had satisfied the statutory “inspection and regulation” requirement of 12 U.S.C. 1424(a)(1)(B).
See
12 CFR 925.8. In the event that an insurance company applicant was not regulated by an accredited agency, and thus had failed to meet the presumptive standard, other provisions of the regulations allowed the applicant to rebut the presumption of non-compliance by providing the Bank with “substantial evidence” that it in fact could satisfy the statutory requirement notwithstanding the lack of accreditation for its regulator.
See
12 CFR 925.17(c). In the proposed rule, FHFA retained this framework, with certain modifications to proposed § 1263.17 to accommodate CDFI applicants. In effect, the proposed rule would have applied the presumptive compliance and rebuttal provisions to CDFI applicants in the same manner that they apply to other applicants.

Certain commenters objected to this arrangement, apparently on the mistaken belief that the presumption and rebuttal structure of the regulation disadvantaged CDFI applicants by presuming that they had not satisfied one or more of the requirements for membership. In the final rule FHFA retains the presumption and rebuttal provisions as proposed. Each of the regulation's presumptive standards for Bank membership is linked to one of the statutory or regulatory requirements that each applicant must satisfy in order to become a Bank member. An applicant that satisfies a presumptive standard is presumed to have satisfied the underlying statutory or regulatory requirement and need do nothing more with respect to that requirement.

An applicant that does not satisfy a presumptive standard, however, is not conclusively determined to have failed to satisfy the underlying requirement. Instead, the regulation effectively requires an applicant to go through a somewhat more rigorous process before a Bank can determine that the applicant in fact has satisfied the underlying membership requirement. FHFA believes that this level of scrutiny is appropriate because Congress has established certain requirements for membership that each applicant must satisfy in order to become a member and FHFA has a responsibility to ensure that the Banks admit to membership only those applicants that have satisfied all applicable requirements for membership. FHFA also believes that this arrangement ultimately works to the benefit of an applicant because it provides an opportunity to present whatever additional documentation an applicant believes relevant to satisfying a particular requirement for membership. As a practical matter, FHFA also notes that the addition of the new provisions into § 1263.16(b)(1)(ii) and (b)(1)(iii), which allow CDFI applicants to submit as part of their original membership application whatever information they believe relevant to their application, and gives CDFI applicants an opportunity to address any such issues at the beginning of the application process, which should lessen the likelihood that a CDFI applicant will need to rely on the rebuttal provisions of § 1263.17.

D. Community Support Amendment—Part 944

Section 10(g) of the Bank Act requires FHFA to adopt regulations establishing standards of community investment or service for members of the Banks to maintain continued access to long-term Bank advances. That section further provides that the regulations shall take into account factors such as a member's performance under the CRA and the member's record of lending to first-time homebuyers. 12 U.S.C. 1430(g)(1) and (2). In the proposed rule, FHFA stated its belief that a CDFI member should be able to comply with the existing community support regulations but also requested comments on whether FHFA should develop an alternative community support regulation for CDFIs that recognizes their unique mission and business practices. The comments received on this issue were split, with some advocating a revision to the community support regulations to accommodate CDFI members and others expressing the view that most CDFI members should be able to satisfy the requirements of the existing community support regulations. After consideration, FHFA decided to amend the community support regulations to add provisions in the final rule that deem a CDFI member (other than a depository institution or credit union) to have satisfied the statutory community support if it is certified by the CDFI Fund. The substance of the new provisions and FHFA's rationale are set out below.

The existing Finance Board regulations implementing the community support requirement are located at 12 CFR part 944, and incorporate the two factors cited by the statute,
i.e.,
the CRA and the record of lending to first-time homebuyers. Under these provisions, a Bank member that is subject to the CRA is deemed to meet the CRA standard if its most recent CRA evaluation is “outstanding” or “satisfactory.”
See
12 CFR 944.3(b)(1). A member also is presumed to meet the first-time homebuyer lending standard if its CRA evaluation is “outstanding” and there are no public comments or other information to the contrary. 12 CFR 944.3(c). Members that are not subject to the CRA, such as credit unions and insurance companies, are only required to meet the first-time homebuyer lending standard.
Id.
Because the newly-eligible CDFIs are not subject to the CRA, they too would only be subject to the first-time homebuyer lending standard if they were to be subject to the existing regulations. Section 944.3(c)(1) includes a non-exclusive list of eligible activities that meet the first-time homebuyer lending standard, such as having an established record of lending to first-time homebuyers, providing homeownership counseling programs for first-time homebuyers, providing or participating in marketing plans and related outreach programs targeted to first-time homebuyers, and providing technical assistance or financial support to organizations that assist first-time homebuyers.
See id.
at 944.3(c)(1).

When the Finance Board adopted the current community support regulations, it construed the statutory provisions narrowly and described the references to the CRA and first-time homebuyers as “mandatory statutory factors.”
See
61 FR 60229, 60230 (November 27, 1996) (proposed rule). At that time, however, the Bank Act did not authorize CDFIs to become Bank members, and the Finance Board did not consider the issue of how the community support requirements should be applied to CDFIs, which are not subject to the CRA and may not be as actively involved in first-time home buyer activities as are depository institutions. In light of the HERA amendments, FHFA reconsidered that interpretation and determined that it need not construe the references to the CRA and first-time home buyers as “mandatory factors” for all members. FHFA believes that it has the authority under section 10(g) of the Bank Act to adopt different community support standards for particular categories of members if it believes that the circumstances warrant such a difference. With respect to certified CDFI members, FHFA believes that the circumstances warrant that they be treated differently from depository institution and insurance company members with respect to the community support requirements and is including in the final rule revisions to the community support regulations to deal with certified CDFI members.

Section 10(g) of the Bank Act mandates that FHFA adopt regulations that establish standards of community investment or service for the members of the Banks. That mandate appears clearly intended to encourage members to be engaged in providing community investments and services by making their access to long-term advances dependent on how involved they are in those activities. That approach makes eminent sense, in the case of depository institutions and insurance companies, because the principal focus of the business of such entities may well involve activities that do not have a community orientation. In the case of CDFIs, however, the principal, and in some cases the exclusive business focus is on community oriented services and investments. Indeed, in order to become certified by the CDFI Fund a CDFI must by statute have a primary mission of promoting community development, serve an investment area (which is a geographic area that meets certain criteria of economic distress), and provide development services (which are activities that promote community development and are integral to lending or investment activities) in conjunction with equity investments or loans. 12 U.S.C. 4702(5)(A). Given that a principal reason certified CDFIs exist is to promote economic revitalization and community development through investments and other services within their local communities,
see
12 U.S.C. 4701(b), and that certification represents a determination by the CDFI Fund that the CDFI has satisfied the above described statutory requirements, FHFA believes that an entity that has been certified by the CDFI Fund may be presumed to have satisfied the community support requirements of section 10(g) of the Bank Act. Accordingly, the final rule includes several amendments to the existing community support regulations to implement that determination. The final rule also relocates the existing community support regulations from 12 CFR part 944 to 12 CFR part 1290.

Section 1290.1 of the final rule adds several definitions to those in the existing community support regulations and revises one existing definition. The newly defined terms are “appropriate Federal banking agency,” “appropriate State regulator,” “Bank,” “CDFI Fund,” “community development financial institution,” and “FHFA.” The definition of “targeted community lending” is revised to replace a cross-reference to a definition from the Finance Board regulations with the actual content of the cross-referenced definition, which does not alter the substance of the defined term.

Section 1290.2 of the relocated community support regulations is being revised by including in paragraph (a) (which deals with the biennial selection of members for community support review) new language saying that the review process applies “except as otherwise provided in this section.” That new language refers to new paragraph (e), which provides that a member that has been certified as a CDFI by the CDFI Fund shall be deemed to be in compliance with the community support requirements of section 10(g) of the Bank Act by virtue of that certification and is not subject to the biennial review under paragraph (a) of this section. This language also includes an express statement that the

exclusion for certified CDFIs does not apply to any members that are insured depository institutions or CDFI credit unions. Those institutions would continue to be evaluated under the community support requirements that apply to all other depository institutions and credit unions, notwithstanding their CDFI status. FHFA has excluded those institutions because it believes that all depository institution and credit union members should be evaluated for community support compliance under the same regulatory standards,
i.e.,
the CRA and first-time home buyer standards described above.

IV. Paperwork Reduction Act

The final rule will have no substantive or material effect on any collection of information covered by the Paperwork Reduction Act of 1995 (PRA).
See
44 U.S.C. 3501
et seq.
Therefore, FHFA has not submitted this final rule to the Office of Management and Budget (OMB) for review.

The currently approved information collection, entitled “Members of the Banks,” has been assigned control number 2590-0003 by the Office of Management and Budget (OMB). FHFA uses this information as set forth in the existing Members of the Banks regulation.

The Community Support Statement Form contained in the currently approved information collection, entitled “Community Support Requirements,” has been assigned the control number 2590-0005 by the OMB. FHFA uses this information as set forth in the existing Community Support Requirements Regulation.

FHFA plans to direct the Banks to use a revised version of those instructions, applications, and forms, which revised version will not materially modify the approved information collections.

V. Regulatory Flexibility Act

The final rule will apply 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, 5 U.S.C. 605(b), the General Counsel of FHFA hereby certifies that the final rule will not have a significant economic impact on a substantial number of small entities.

List of Subjects

12 CFR Parts 925 and 1263
Federal home loan banks, Reporting and recordkeeping requirements.

12 CFR Parts 944 and 1290
Credit, Federal home loan banks, Housing, Reporting and recordkeeping requirements.

For the reasons stated in the preamble, FHFA hereby amends chapters IX and XII, of title 12 of the Code of Federal Regulations as follows:

CHAPTER IX—FEDERAL HOUSING FINANCE BOARD

PART 925—[REDESIGNATED AS PART 1263]

1. Transfer 12 CFR part 925 from chapter IX, subchapter D, to chapter XII, subchapter D and redesignate as 12 CFR part 1263.

2. Revise the newly redesignated part 1263 to read as follows:

PART 1263—MEMBERS OF THE BANKS

Subpart A—Definitions

Sec.
1263.1
Definitions.

Subpart B—Membership Application Process

1263.2
Membership application requirements.
1263.3
Decision on application.
1263.4
Automatic membership.
1263.5
Appeals.

Subpart C—Eligibility Requirements

1263.6
General eligibility requirements.
1263.7
Duly organized requirement.
1263.8
Subject to inspection and regulation requirement.
1263.9
Makes long-term home mortgage loans requirement.
1263.10
Ten percent requirement for certain insured depository institution applicants.
1263.11
Financial condition requirement for depository institutions and CDFI credit unions.
1263.12
Character of management requirement.
1263.13
Home financing policy requirement.
1263.14
De novo insured depository institution applicants.
1263.15
Recent merger or acquisition applicants.
1263.16
Financial condition requirement for insurance company and certain CDFI applicants.
1263.17
Rebuttable presumptions.
1263.18
Determination of appropriate Bank district for membership.

Subpart D—Stock Requirements

1263.19
Par value and price of stock.
1263.20
Stock purchase.
1263.21
Issuance and form of stock.
1263.22
Adjustments in stock holdings.
1263.23
Excess stock.

Subpart E—Consolidations Involving Members

1263.24
Consolidations involving members.

Subpart F—Withdrawal and Removal from Membership

1263.25
Reserved.
1263.26
Voluntary withdrawal from membership.
1263.27
Involuntary termination of membership.
1263.28
Reserved.

Subpart G—Orderly Liquidation of Advances and Redemption of Stock

1263.29
Disposition of claims.

Subpart H—Reacquisition of Membership

1263.30
Readmission to membership.

Subpart I—Bank Access to Information

1263.31
Reports and examinations.

Subpart J—Membership Insignia

1263.32
Official membership insignia.

Authority:

12 U.S.C. 1422, 1423, 1424, 1426, 1430, 1442, 4511, 4513.

Subpart A—Definitions

§ 1263.1
Definitions.
For purposes of this part:

Adjusted net income
means net income, excluding extraordinary items such as income received from, or expense incurred in, sales of securities or fixed assets, reported on a regulatory financial report.

Aggregate unpaid loan principal
means the aggregate unpaid principal of a subscriber's or member's home mortgage loans, home-purchase contracts and similar obligations.

Allowance for loan and lease losses
means a specified balance-sheet account held to fund potential losses on loans or leases, which is reported on a regulatory financial report.

Appropriate regulator
means:

(1) In the case of an insured depository institution or CDFI credit union, the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, or appropriate State regulator that has regulatory authority over, or is empowered to institute enforcement action against, the institution, as applicable, and

(2) In the case of an insurance company, an appropriate State regulator accredited by the National Association of Insurance Commissioners.

Bank Act
means the Federal Home Loan Bank Act, as amended (12 U.S.C. 1421 through 1449).

CDFI credit union
means a State-chartered credit union that has been certified as a CDFI by the CDFI Fund and that does not have Federal share insurance.

CDFI Fund
means the Community Development Financial Institutions

Fund established under section 104(a) of the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4703(a)).

CFI asset cap
means $1 billion, as adjusted annually by FHFA, beginning in 2009, to reflect any percentage increase in the preceding year's Consumer Price Index (CPI) for all urban consumers, as published by the U.S. Department of Labor.

Class A stock
means capital stock issued by a Bank, including subclasses, that has the characteristics specified in section 6(a)(4)(A)(i) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(i)) and applicable FHFA regulations.

Class B stock
means capital stock issued by a Bank, including subclasses, that has the characteristics specified in section 6(a)(4)(A)(ii) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(ii)) and applicable FHFA regulations.

Combination business or farm property
means real property for which the total appraised value is attributable to residential, and business or farm uses.

Community development financial institution or CDFI
means an institution that is certified as a community development financial institution by the CDFI Fund under the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4701
et seq.
), other than a bank or savings association insured under the Federal Deposit Insurance Act (12 U.S.C. 1811
et seq.
), a holding company for such a bank or savings association, or a credit union insured under the Federal Credit Union Act (12 U.S.C. 1751
et seq.
).

Community financial institution or CFI
means an institution:

(1) The deposits of which are insured under the Federal Deposit Insurance Act (12 U.S.C. 1811
et seq.
); and

(2) The total assets of which, as of the date of a particular transaction, are less than the CFI asset cap, with total assets being calculated as an average of total assets over three years, with such average being based on the institution's regulatory financial reports filed with its appropriate regulator for the most recent calendar quarter and the immediately preceding 11 calendar quarters.

Composite regulatory examination rating
means a composite rating assigned to an institution following the guidelines of the Uniform Financial Institutions Rating System (issued by the Federal Financial Institutions Examination Council), including a CAMELS rating or other similar rating, contained in a written regulatory examination report.

Consolidation
includes a consolidation, a merger, or a purchase of all of the assets and assumption of all of the liabilities of an entity by another entity.

Director
means the Director of FHFA or his or her designee.

Dwelling unit
means a single room or a unified combination of rooms designed for residential use.

Enforcement action
means any written notice, directive, order, or agreement initiated by an applicant for Bank membership or by its appropriate regulator to address any operational, financial, managerial or other deficiencies of the applicant identified by such regulator. An “enforcement action” does not include a board of directors' resolution adopted by the applicant in response to examination weaknesses identified by such regulator.

Funded residential construction loan
means the portion of a loan secured by real property made to finance the on-site construction of dwelling units on one-to-four family property or multifamily property disbursed to the borrower.

Gross revenues
means, in the case of a CDFI applicant, total revenues received from all sources, including grants and other donor contributions and earnings from operations.

Home mortgage loan
means:

(1) A loan, whether or not fully amortizing, or an interest in such a loan, which is secured by a mortgage, deed of trust, or other security agreement that creates a first lien on one of the following interests in property:

(i) One-to-four family property or multifamily property, in fee simple;

(ii) A leasehold on one-to-four family property or multifamily property under a lease of not less than 99 years that is renewable, or under a lease having a period of not less than 50 years to run from the date the mortgage was executed; or

(iii) Combination business or farm property where at least 50 percent of the total appraised value of the combined property is attributable to the residential portion of the property, or in the case of any community financial institution, combination business or farm property, on which is located a permanent structure actually used as a residence (other than for temporary or seasonal housing), where the residence constitutes an integral part of the property; or

(2) A mortgage pass-through security that represents an undivided ownership interest in:

(i) Long-term loans, provided that, at the time of issuance of the security, all of the loans meet the requirements of paragraph (1) of this definition; or

(ii) A security that represents an undivided ownership interest in long-term loans, provided that, at the time of issuance of the security, all of the loans meet the requirements of paragraph (1) of this definition.

Insured depository institution
means an insured depository institution as defined in section 2(9) of the Bank Act, as amended (12 U.S.C. 1422(9)).

Long-term
means a term to maturity of five years or greater.

Manufactured housing
means a manufactured home as defined in section 603(6) of the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended (42 U.S.C. 5402(6)).

Multifamily property
means:

(1) Real property that is solely residential and includes five or more dwelling units;

(2) Real property that includes five or more dwelling units combined with commercial units, provided that the property is primarily residential; or

(3) Nursing homes, dormitories, or homes for the elderly.

Nonperforming loans and leases
means the sum of the following, reported on a regulatory financial report:

(1) Loans and leases that have been past due for 90 days (60 days, in the case of credit union applicants) or longer but are still accruing;

(2) Loans and leases on a nonaccrual basis; and

(3) Restructured loans and leases (not already reported as nonperforming).

Nonresidential real property
means real property that is not used for residential purposes, including business or industrial property, hotels, motels, churches, hospitals, educational and charitable institution buildings or facilities, clubs, lodges, association buildings, golf courses, recreational facilities, farm property not containing a dwelling unit, or similar types of property.

One-to-four family property
means:

(1) Real property that is solely residential, including one-to-four family dwelling units or more than four family dwelling units if each dwelling unit is separated from the other dwelling units by dividing walls that extend from ground to roof, such as row houses, townhouses or similar types of property;

(2) Manufactured housing if applicable State law defines the purchase or holding of manufactured housing as the purchase or holding of real property;

(3) Individual condominium dwelling units or interests in individual cooperative housing dwelling units that are part of a condominium or cooperative building without regard to the number of total dwelling units therein; or

(4) Real property which includes one-to-four family dwelling units combined with commercial units, provided the property is primarily residential.

Operating expenses
means, in the case of a CDFI applicant, expenses for business operations, including, but not limited to, staff salaries and benefits, professional fees, interest, loan loss provision, and depreciation, contained in the applicant's audited financial statements.

Other real estate owned
means all other real estate owned (
i.e.,
foreclosed and repossessed real estate), reported on a regulatory financial report, and does not include direct and indirect investments in real estate ventures.

Regulatory examination report
means a written report of examination prepared by the applicant's appropriate regulator, containing, in the case of insured depository institution applicants, a composite rating assigned to the institution following the guidelines of the Uniform Financial Institutions Rating System, including a CAMELS rating or other similar rating.

Regulatory financial report
means a financial report that an applicant is required to file with its appropriate regulator on a specific periodic basis, including the quarterly call report for commercial banks, thrift financial report for savings associations, quarterly or semi-annual call report for credit unions, the National Association of Insurance Commissioners' annual or quarterly report for insurance companies, or other similar report, including such report maintained by the appropriate regulator on a computer on-line database.

Residential mortgage loan
means any one of the following types of loans, whether or not fully amortizing:

(1) Home mortgage loans;

(2) Funded residential construction loans;

(3) Loans secured by manufactured housing whether or not defined by State law as secured by an interest in real property;

(4) Loans secured by junior liens on one-to-four family property or multifamily property;

(5) Mortgage pass-through securities representing an undivided ownership interest in─

(i) Loans that meet the requirements of paragraphs (1) through (4) of this definition at the time of issuance of the security;

(ii) Securities representing an undivided ownership interest in loans, provided that, at the time of issuance of the security, all of the loans meet the requirements of paragraphs (1) through (4) of this definition; or

(iii) Mortgage debt securities as defined in paragraph (6) of this definition;

(6) Mortgage debt securities secured by─

(i) Loans, provided that, at the time of issuance of the security, substantially all of the loans meet the requirements of paragraphs (1) through (4) of this definition;

(ii) Securities that meet the requirements of paragraph (5) of this definition; or

(iii) Securities secured by assets, provided that, at the time of issuance of the security, all of the assets meet the requirements of paragraphs (1) through (5) of this definition;

(7) Home mortgage loans secured by a leasehold interest, as defined in paragraph (1)(ii) of the definition of “home mortgage loan,” except that the period of the lease term may be for any duration; or

(8) Loans that finance properties or activities that, if made by a member, would satisfy the statutory requirements for the Community Investment Program established under section 10(i) of the Bank Act (12 U.S.C. 1430(i)), or the regulatory requirements established for any CICA program.

Restricted assets
means both permanently restricted assets and temporarily restricted assets, as those terms are used in Financial Accounting Standard No. 117, or any successor publication.

Total assets
means the total assets reported on a regulatory financial report or, in the case of a CDFI applicant, the total assets contained in the applicant's audited financial statements.

Unrestricted cash and cash equivalents
means, in the case of a CDFI applicant, cash and highly liquid assets that can be easily converted into cash that are not restricted in a manner that prevents their use in paying expenses, as contained in the applicant's audited financial statements.

Subpart B—Membership Application Process

§ 1263.2
Membership application requirements.

(a)
Application.
An applicant for membership in a Bank shall submit to that Bank an application that satisfies the requirements of this part. The application shall include a written resolution or certification duly adopted by the applicant's board of directors, or by an individual with authority to act on behalf of the applicant's board of directors, of the following:

(1)
Applicant review.
Applicant has reviewed the requirements of this part and, as required by this part, has provided to the best of applicant's knowledge the most recent, accurate, and complete information available; and

(2)
Duty to supplement.
Applicant will promptly supplement the application with any relevant information that comes to applicant's attention prior to the Bank's decision on whether to approve or deny the application, and if the Bank's decision is appealed pursuant to § 1263.5, prior to resolution of any appeal by FHFA.

(b)
Digest.
The Bank shall prepare a written digest for each applicant stating whether or not the applicant meets each of the requirements in §§ 1263.6 to 1263.18, the Bank's findings, and the reasons therefor.

(c)
File.
The Bank shall maintain a membership file for each applicant for at least three years after the Bank decides whether to approve or deny membership or, in the case of an appeal to FHFA, for three years after the resolution of the appeal. The membership file shall contain at a minimum:

(1)
Digest.
The digest required by paragraph (b) of this section.

(2)
Required documents.
All documents required by §§ 1263.6 to 1263.18, including those documents required to establish or rebut a presumption under this part, shall be described in and attached to the digest. The Bank may retain in the file only the relevant portions of the regulatory financial reports required by this part. If an applicant's appropriate regulator requires return or destruction of a regulatory examination report, the date that the report is returned or destroyed shall be noted in the file.

(3)
Additional documents.
Any additional document submitted by the applicant, or otherwise obtained or generated by the Bank, concerning the applicant.

(4)
Decision resolution.
The decision resolution described in § 1263.3(b).

§ 1263.3
Decision on application.

(a)
Authority.
FHFA hereby authorizes the Banks to approve or deny all applications for membership, subject to the requirements of this part. The authority to approve membership applications may be exercised only by a committee of the Bank's board of directors, the Bank president, or a senior officer who reports directly to the Bank president, other than an officer with responsibility for business development.

(b)
Decision resolution.
For each applicant, the Bank shall prepare a written resolution duly adopted by the Bank's board of directors, by a committee of the board of directors, or

by an officer with delegated authority to approve membership applications. The decision resolution shall state:

(1) That the statements in the digest are accurate to the best of the Bank's knowledge, and are based on a diligent and comprehensive review of all available information identified in the digest; and

(2) The Bank's decision and the reasons therefor. Decisions to approve an application should state specifically that:

(i) The applicant is authorized under the laws of the United States and the laws of the appropriate State to become a member of, purchase stock in, do business with, and maintain deposits in, the Bank to which the applicant has applied; and

(ii) The applicant meets all of the membership eligibility criteria of the Bank Act and this part.

(c)
Action on applications.
The Bank shall act on an application within 60 calendar days of the date the Bank deems the application to be complete. An application is “complete” when a Bank has obtained all the information required by this part, and any other information the Bank deems necessary, to process the application. If an application that was deemed complete subsequently is deemed incomplete because the Bank determines during the review process that additional information is necessary to process the application, the Bank may stop the 60-day clock until the application again is deemed complete, and then resume the clock where it left off. The Bank shall notify an applicant in writing when its application is deemed by the Bank to be complete, and shall maintain a copy of such letter in the applicant's membership file. The Bank shall notify an applicant if the 60-day clock is stopped, and when the clock is resumed, and shall maintain a written record of such notifications in the applicant's membership file. Within three business days of a Bank's decision on an application, the Bank shall provide the applicant and FHFA with a copy of the Bank's decision resolution.

§ 1263.4
Automatic membership.

(a)
Automatic membership for certain charter conversions.
An insured depository institution member that converts from one charter type to another automatically shall become a member of the Bank of which the converting institution was a member on the effective date of such conversion, provided that the converting institution continues to be an insured depository institution and the assets of the institution immediately before and immediately after the conversion are not materially different. In such case, all relationships existing between the member and the Bank at the time of such conversion may continue.

(b)
Automatic membership for transfers.
Any member whose membership is transferred pursuant to § 1263.18(d) automatically shall become a member of the Bank to which it transfers.

(c)
Automatic membership, in the Bank's discretion, for certain consolidations.
—(1) If a member institution (or institutions) and a nonmember institution are consolidated, and the consolidated institution has its principal place of business in a State in the same Bank district as the disappearing institution (or institutions), and the consolidated institution will operate under the charter of the nonmember institution, on the effective date of the consolidation, the consolidated institution may, in the discretion of the Bank of which the disappearing institution (or institutions) was a member immediately prior to the effective date of the consolidation, automatically become a member of such Bank upon the purchase of the minimum amount of Bank stock required for membership in that Bank, as required by § 1263.20, provided that:

(i) 90 percent or more of the consolidated institution's total assets are derived from the total assets of the disappearing member institution (or institutions); and

(ii) The consolidated institution provides written notice to such Bank, within 60 calendar days after the effective date of the consolidation, that it desires to be a member of the Bank.

(2) The provisions of § 1263.24(b)(4)(i) shall apply, and upon approval of automatic membership by the Bank, the provisions of § 1263.24(c) and (d) shall apply.

§ 1263.5
Appeals.

(a)
Appeals by applicants.
—(1)
Filing procedure.
Within 90 calendar days of the date of a Bank's decision to deny an application for membership, the applicant may file a written appeal of the decision with FHFA.

(2)
Documents.
The applicant's appeal shall be addressed to the Deputy Director for Federal Home Loan Bank Regulation, Federal Housing Finance Agency, 1625 Eye Street, NW., Washington, DC 20006, with a copy to the Bank, and shall include the following documents:

(i)
Bank's decision resolution.
A copy of the Bank's decision resolution; and

(ii)
Basis for appeal.
An applicant must provide a statement of the basis for the appeal with sufficient facts, information, analysis, and explanation to rebut any applicable presumptions, or otherwise to support the applicant's position.

(b)
Record for appeal.
—(1)
Copy of membership file.
Upon receiving a copy of an appeal, the Bank whose action has been appealed (appellee Bank) shall provide FHFA with a copy of the applicant's complete membership file. Until FHFA resolves the appeal, the appellee Bank shall supplement the materials provided to FHFA as any new materials are received.

(2)
Additional information.
FHFA may request additional information or further supporting arguments from the appellant, the appellee Bank, or any other party that FHFA deems appropriate.

(c)
Deciding appeals.
FHFA shall consider the record for appeal described in paragraph (b) of this section and shall resolve the appeal based on the requirements of the Bank Act and this part within 90 calendar days of the date the appeal is filed with FHFA. In deciding the appeal, FHFA shall apply the presumptions in this part, unless the appellant or appellee Bank presents evidence to rebut a presumption as provided in § 1263.17.

Subpart C—Eligibility Requirements

§ 1263.6
General eligibility requirements.

(a)
Requirements.
Any building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, savings bank, community development financial institution (including a CDFI credit union), or insured depository institution, upon submission of an application satisfying all of the requirements of the Bank Act and this part, shall be eligible to become a member of a Bank if:

(1) It is duly organized under Tribal law, or under the laws of any State or of the United States;

(2) It is subject to inspection and regulation under the banking laws, or under similar laws, of any State or of the United States or, in the case of a CDFI, is certified by the CDFI Fund;

(3) It makes long-term home mortgage loans;

(4) Its financial condition is such that advances may be safely made to it;

(5) The character of its management is consistent with sound and economical home financing; and

(6) Its home financing policy is consistent with sound and economical home financing.

(b)
Additional eligibility requirement for insured depository institutions other than community financial institutions.
In order to be eligible to become a member of a Bank, an insured depository institution applicant other than a community financial institution also must have at least 10 percent of its total assets in residential mortgage loans.

(c)
Additional eligibility requirement for applicants that are not insured depository institutions.
In order to be eligible to become a member of a Bank, an applicant that is not an insured depository institution also must have mortgage-related assets that reflect a commitment to housing finance, as determined by the Bank in its discretion.

(d)
Ineligibility.
Except as otherwise provided in this part, if an applicant does not satisfy the requirements of this part, the applicant is ineligible for membership.

§ 1263.7
Duly organized requirement.
An applicant shall be deemed to be duly organized, as required by section 4(a)(1)(A) of the Bank Act (12 U.S.C. 1424(a)(1)(A)) and § 1263.6(a)(1), if it is chartered by a State or Federal agency as a building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, savings bank, or insured depository institution or, in the case of a CDFI applicant, is incorporated under State or Tribal law.

§ 1263.8
Subject to inspection and regulation requirement.
An applicant shall be deemed to be subject to inspection and regulation, as required by section 4(a)(1)(B) of the Bank Act (12 U.S.C. 1424 (a)(1)(B)) and § 1263.6(a)(2) if, in the case of an insured depository institution or insurance company applicant, it is subject to inspection and regulation by its appropriate regulator. A CDFI applicant that is certified by the CDFI Fund is not subject to this requirement.

§ 1263.9
Makes long-term home mortgage loans requirement.
An applicant shall be deemed to make long-term home mortgage loans, as required by section 4(a)(1)(C) of the Bank Act (12 U.S.C. 1424(a)(1)(C)) and § 1263.6(a)(3), if, based on the applicant's most recent regulatory financial report filed with its appropriate regulator, or other documentation provided to the Bank, in the case of a CDFI applicant that does not file such reports, the applicant originates or purchases long-term home mortgage loans.

§ 1263.10
Ten percent requirement for certain insured depository institution applicants.
An insured depository institution applicant that is subject to the 10 percent requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C. 1424(a)(2)(A)) and § 1263.6(b) shall be deemed to be in compliance with such requirement if, based on the applicant's most recent regulatory financial report filed with its appropriate regulator, the applicant has at least 10 percent of its total assets in residential mortgage loans, except that any assets used to secure mortgage debt securities as described in paragraph (6) of the definition of “residential mortgage loan” set fo

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-31003. Public record. Not legal advice.