Federal Register: January 5, 2010 (Volume 75, Number 2)
DOCID: fr05ja10-13 FR Doc E9-31003
FEDERAL HOUSING FINANCE BOARD
United States Institute of Peace
CFR Citation: 12 CFR Parts 925 and 944
RIN ID: RIN 2590-AA18
NOTICE: Part VI
DOCUMENT ACTION: Final rule.
Federal Home Loan Bank Membership for Community Development Financial Institutions
DATES: This rule is effective February 4, 2010.
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 newlyeligible CDFIs include community development loan funds, venture capital funds, and Statechartered 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.
Federal Housing Finance Board
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 110289, 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.
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 Statechartered; (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 debtwithequity features to small and mediumsized businesses in distressed communities.
The CDFIs serve as intermediary financial institutions that promote economic growth and stability in low and moderateincome communities. They provide a unique range of financial products and services, such as mortgage financing for lowincome and firsttime homebuyers; homeowner or homebuyer counseling; financing for notforprofit affordable housing developers; flexible underwriting and risk capital for needed community facilities; financial literacy training; technical assistance; and commercial loans and investments to assist startup businesses in lowincome 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 lowandmoderate income communities that they serve. One common problem facing nondepository CDFIs, however, is that they do not have access to longterm 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 [[Page 679]]
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 Statechartered 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, longterm 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 homefinancing 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 Sec. 1263.11, applied only to CDFI credit unions, which are Statechartered 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 NCUAinsured 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 Sec. 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 signon 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 projectspecific. As is the case with any member, the proceeds of advances are fungible and can be used by the CDFIs for overall assetliability 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 nondepository 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 nondepository 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 notforprofit CDFIs can address risk through patient investments, equity capital, risksharing 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
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. DefinitionsSubpart A
Section 1263.1Definitions. 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 preHERA 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 FDICinsured 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 longterm 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 newlyeligible CDFIs are insured by the FDIC, they cannot be CFIs and thus cannot either pledge community development loans as collateral or obtain longterm 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,'' ``longterm,'' ``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 predevelopment 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 longterm mortgage loans the existing definition of ``home mortgage loan'' in Sec. 1263.1 is sufficiently expansive to accommodate loans typically made by CDFIs. Such loans as loans on onetofour family properties, multifamily properties, residential properties that are partially used for business or farm purposes, or interests in longterm mortgages and mortgage passthrough 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. [[Page 682]]
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 casebycase 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 casebycase basis.
Longterm. The proposed regulation retained the existing definition of ``long term,'' which meant a termtomaturity of five years or greater. Some CDFI commenters noted that many CDFIs make shortterm predevelopment or construction bridge loans and requested that the definition of ``longterm'' be changed to accommodate these loan types. The phrase ``longterm'' appears only in four provisions of the proposed rules, just two of whichSec. Sec. 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 predevelopment 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 ``longterm.''
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 ``onetofour family property'' and ``multifamily property'' in Sec. 1263.1 to accommodate real property loans for such uses as residentowned 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 Sec. 1263.9, the existing definitions of ``home mortgage loans,'' ``multifamily property,'' and ``onetofour family property'' in Sec. 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 regulationsSec. Sec. 1263.6(b) and 1263.10both 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 newlyeligible CDFIs, the final rule does not amend that provision.
C. Eligibility RequirementsSubpart 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 Sec. Sec. 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 Sec. Sec. 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 newlyeligible 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 Sec. 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 Sec. 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 1263.6General 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 longterm 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 mortgagerelated assets that reflect a commitment to housing finance, as determined by the Bank in its discretion. 12 CFR 925.6(c).
In Sec. 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 mortgagerelated assets that reflect a commitment to housing finance, and relocated it to Sec. 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 mortgagerelated assets that reflect a commitment to housing finance, FHFA is also retaining that provision in the final rule without change. The term ``mortgagerelated 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), predevelopment or construction loans for real estate that will become or include residential property, or loans secured by subordinated liens on residential real estate.
Section 1263.7Duly 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 1263.8Subject 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 Sec. 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 Sec. 1263.8, which states that a certified CDFI is not subject to the ``inspection and regulation'' requirement.
Section 1263.9Makes LongTerm 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 ``longterm 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 longterm 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 longterm 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 longterm home mortgage loans'' requirement the Banks will view the extent to which the CDFI originates or purchases longterm 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 longterm home mortgage loans'' requirement the definition of home mortgage loans in Sec. 1263.1 is sufficiently expansive to accommodate loans typically made by CDFIs, such as loans on onetofour family properties, multifamily properties, residential properties with business components, interests in longterm mortgages, and mortgage passthrough securities backed by such mortgages.
Section 1263.11Financial Condition Requirement for Depository Institutions and CDFI Credit Unions. The proposed rule included two separate provisions for evaluating the financial condition of CDFI applicants: Sec. 1263.11, which related to CDFI credit unions, and Sec. 1263.16, which related to all other types of CDFIs. The proposal defined ``CDFI credit unions'' as Statechartered 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 Statechartered 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 respectsby adding CDFI credit unions to the list of institutions that are subject to Sec. 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 Sec. 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 Statechartered
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 1263.12Character 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 1263.13Home 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 1263.16Financial 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec.
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 Sec. 1263.17, which applies to all types of [[Page 686]]
applicants. The new requirement added to the introductory language of Sec. 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 Sec. 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 Sec. 1263.16(b)(1). As to the particular financial statements that must be submitted, Sec. 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 (CARSTM) assessment. The final rule does not require the submission of a CARSTM statement or other similar documents. In light of the revisions made to Sec. 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 recertification from the CDFI Fund in order to be admitted to membership, but FHFA has not included a recertification 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 recertification 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 recertification; 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 recertification from the CDFI Fund, a provision mandating recertification 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 Sec. 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
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