Affordable Housing Program Amendments, 76938-76961 [05-24396]

Agencies

• Federal Housing Finance Board

[Federal Register Volume 70, Number 248 (Wednesday, December 28, 2005)]
[Proposed Rules]
[Pages 76938-76961]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-24396]



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Part III





Federal Housing Finance Board





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12 CFR Part 951



Affordable Housing Program Amendments; Proposed Rule

Federal Register / Vol. 70, No. 248 / Wednesday, December 28, 2005 / 
Proposed Rules

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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 951

[No. 2005-23]
RIN 3069-AB26


Affordable Housing Program Amendments

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its Affordable Housing Program regulation to remove 
prescriptive requirements, clarify certain operational requirements, 
remove certain authorities, and otherwise streamline and reorganize the 
regulation.

DATES: The Finance Board will accept written comments on the proposed 
rule that are received on or before April 27, 2006.

ADDRESSES: Submit comments by any of the following methods:
    E-mail: comments@fhfb.gov.
    Fax: 202-408-2580.
    Mail/Hand Delivery: Federal Housing Finance Board, 1625 Eye Street, 
NW., Washington, DC 20006, ATTENTION: Public Comments.
    Federal eRulemaking Portal: https://www.regulations.gov. Follow the 
instructions for submitting comments. If you submit your comments to 
the Federal eRulemaking Portal, please also send it by e-mail to the 
Finance Board at comments@fhfb.gov to ensure timely receipt by the 
agency.
    Include the following information in the subject line of your 
submission: Federal Housing Finance Board. Proposed Rule: Affordable 
Housing Program Amendments. RIN Number 3069-AB26. Docket Number 2005-
23.
    We will post all public comments we receive on this rule without 
change, including any personal information you provide, such as your 
name and address, on the Finance Board Web site at https://www.fhfb.gov/
pressroom/pressroom_regs.htm.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Associate Director, 
Office of Supervision, by electronic mail at mcleanc@fhfb.gov or by 
telephone at 202-408-2537; Sylvia C. Martinez, Senior Advisor, Office 
of Supervision, by electronic mail at martinezs@fhfb.gov or by 
telephone at 202-408-2825; or Sharon B. Like, Senior Attorney, Office 
of General Counsel, by electronic mail at likes@fhfb.gov or by 
telephone at 202-408-2930. You can send regular mail to the Federal 
Housing Finance Board, 1625 Eye Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 10(j)(1) of the Federal Home Loan Bank Act (Bank Act) 
requires each Federal Home Loan Bank (Bank) to establish an affordable 
housing program (AHP), the purpose of which is to enable Bank members 
to provide subsidized financing for long-term, low- and moderate-
income, owner-occupied and affordable rental housing. See 12 U.S.C. 
1430(j)(1). The AHP has played an important role in allowing the Banks 
to support their members' efforts to meet the housing needs of their 
communities. Although the AHP is a shallow subsidy program, its 
strength lies in its capacity to leverage additional public and private 
resources for housing. Since the inception of the program in 1990, the 
Banks have awarded more than $2 billion in AHP subsidies to assist 
nearly 437,000 housing units. Seventy percent of the units receiving 
AHP subsidies were for very low-income households. AHP subsidies have 
proven to be useful in financing projects that present underwriting 
challenges, such as projects for the homeless and special needs 
populations, which may include persons with disabilities and the 
elderly. The AHP also has been used effectively with Low-Income Housing 
Tax Credits (LIHTC or tax credits) by filling financing gaps, thereby 
enabling a larger percentage of very low-income households to be 
served.
    The AHP also serves as an important resource for low- or moderate-
income homeowners and first-time homebuyers. From 1990 through 2004, 
the program has assisted in the financing of 102,810 owner-occupied 
units under the Banks' competitive application programs, and 47,813 
units under their homeownership set-aside programs. Some of the units 
address specific housing needs, such as expanding homeownership 
opportunities for underserved households.
    The Finance Board has promulgated regulations implementing these 
provisions of the Bank Act, which are codified at 12 CFR part 951. 
These regulations generally have reflected a prescriptive approach, 
which was appropriate for rules implementing a newly created program. 
As the program has matured, however, the Finance Board has revised the 
AHP regulations a number of times, in part to provide greater 
responsibility to the Banks in managing the program and in part to 
implement improvements based on lessons learned in overseeing the 
operation of the program. The Finance Board believes, based in part on 
its review of the AHP on a Bank System level conducted in 2003-2005, 
Report of the Horizontal Review of the Affordable Housing Programs of 
the Federal Home Loan Banks (March 15, 2005) (Horizontal Review), that 
there are a number of areas in which the regulation can be further 
revised to enhance the success of the program.\1\
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    \1\ The Horizontal Review is available on the Housing Programs 
page of the Finance Board's Web site: https://www.fhfb.gov/
Default.aspx?Page=47.
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    In proposing these amendments, the Finance Board intends to address 
seven principal factors. First, additional definitions would be 
incorporated into the regulation at Sec.  951.1. These definitions 
would serve to establish the precise use of key terms that are included 
in the regulation. Second, the proposal would reorganize the regulatory 
text so that operational provisions relating to the competitive 
application program and the homeownership set-aside program, 
respectively, would be fully contained within separate sections of the 
regulation. Proposed Sec.  951.5 would address the competitive 
application program, while Sec.  951.6 would address the homeownership 
set-aside program. The proposed reorganization is intended to make it 
easier for program sponsors and other interested parties to understand 
the operation of the competitive application and homeownership set-
aside programs. Third, the use of AHP subsidy by loan pools and 
revolving loan funds would be permitted under the competitive 
application program, at the discretion of the particular Bank. This 
proposed change is intended to expand the range of eligible means of 
supporting affordable housing through the program. Fourth, restrictions 
on the use of AHP funds by projects located outside a Bank's district 
and scoring preferences for in-district projects, which the current 
regulation permits at the Bank's discretion, would no longer be 
permissible. This proposed change is in response to the expansion of 
interstate banking among Bank member institutions, which has resulted 
in many members serving markets outside a Bank's district boundaries. 
Fifth, provisions in the current regulation that allow a Bank to 
accelerate AHP contributions from the following year into the current 
year would be deleted. The Banks have not often used this authority, 
and it also may present some operational difficulties. Sixth, 
provisions in the regulation that would increase annually the maximum 
allowable dollar amount of a Bank's

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allocation to its homeownership set-aside program and maximum allowable 
dollar acceleration amount under a Bank's competitive application 
program, based on the annual inflation rate, would be deleted. This 
change would address the potential for inflation to increase the 
allocation of AHP contributions to the homeownership set-aside program 
relative to the competitive application program. Finally, prescriptive 
monitoring requirements in the current regulation, which detail 
specific monitoring and control processes with which a Bank must 
comply, would be replaced by standards based on required outcomes 
rather than prescribed control processes. The Finance Board invites 
comments on all aspects of the proposed rule.

II. Analysis of the Proposed Rule

A. Definitions: Proposed Sec.  951.1

    The proposed rule would revise certain of the existing AHP 
definitions and would define a number of other terms that are used 
throughout the regulation. See 12 CFR 951.1. Proposed new definitions 
are discussed in the context of specific regulatory requirements. The 
more substantive changes are described below.
    Affordable. The existing definition would be revised by adding a 
reference, consistent with the AHP statutory term, to ``rent charged to 
a household,'' which would be defined to mean the rent that is actually 
paid by the household occupying the unit. See 12 U.S.C. 1430(j)(13)(D). 
The existing regulatory language may not be clear on this point and 
could be read to mean the amount of rent charged by the owner for the 
unit, which would be greater than the rent actually paid by the 
occupants if the occupants receive financial assistance for rent 
payments from other sources.
    The proposed rule also would add a new paragraph (2), which would 
address units that are subsidized with low-income housing assistance 
under the Department of Housing and Urban Development (HUD) Section 8 
program. See 42 U.S.C. 1437f. This provision is intended to clarify 
that rents charged to a household under a Section 8 agreement will be 
deemed to be ``affordable'' for AHP purposes, even if the rent 
increases after initial occupancy, if the rent met the AHP definition 
of ``affordable'' upon initial household occupancy and thereafter has 
continued to comply with the Section 8 agreement for that household. 
This provision would be applicable for purposes of the annual 
adjustment of targeting commitments after initial occupancy under 
proposed Sec.  951.7(a)(3) (which is re-designated from current 
Sec. Sec.  951.10(d) and 951.11(b)).
    AHP project. The proposed rule would add a new definition, which 
would apply to both owner-occupied and rental projects that have been 
awarded or have received AHP subsidy through the competitive 
application program. This is intended to codify existing practice and 
clarify that the term ``project'' does not apply to direct subsidies, 
i.e., grants, to households made pursuant to the homeownership set-
aside program. The term would apply to both single-family and 
multifamily projects. The proposed rule also would make conforming 
changes to the definitions of ``owner-occupied project'' and ``rental 
project.''
    Low- or moderate-income household and very low-income household. 
The existing regulation defines ``low- or moderate-income household'' 
to mean a household that has an income of 80 percent or less of the 
median income for the area, with the income limit adjusted for family 
(i.e., household) size, in a Bank's discretion, in accordance with the 
methodology of the applicable median income standard. The proposed rule 
would amend the household-size adjustment provisions in paragraph (3) 
of the existing definition of ``low- or moderate-income household'' and 
(and similarly for the definition of ``very low-income household'') by 
changing the household-size adjustment from an optional to a mandatory 
requirement, provided that if the source for the area median income 
data has no methodology to adjust the household income limit for 
household size, the Bank is not required to make such an adjustment. 
This change would bring the AHP into conformance with other federal 
programs that adjust for household size.
    As further discussed below, the proposed rule would relocate 
certain provisions of the existing definitions relating to when a 
household's income must be determined, to proposed Sec. Sec.  
951.5(c)(1) and 951.6(c)(2)(i) for the competitive application program 
and the homeownership set-aside program, respectively.
    Median income for the area. The existing definition lists a number 
of median income standards that a Bank may adopt for purposes of 
determining household income eligibility. The regulation also provides 
that a Bank may request Finance Board approval of a median income for 
any definable geographic area, as published by a federal, state, or 
local government entity for purposes of that entity's housing programs. 
The proposed rule would remove the language ``for purposes of that 
entity's housing programs.'' This would enable the Finance Board to 
approve, upon a Bank's request, median income standards from sources, 
such as the Census Bureau, that publish median income data but do not 
have their own housing programs.
    Owner-occupied project and rental project. The proposed rule would 
amend the existing definitions by clarifying that they apply only to 
the competitive application program and by deleting language requiring 
the project to involve ``the purchase, construction, or 
rehabilitation'' of owner-occupied housing or rental housing, 
respectively. That requirement would be relocated to the provisions 
addressing the eligibility requirements for the use of AHP subsidy, at 
proposed Sec.  951.5(c)(1)(i) and (ii). The proposed rule also would 
add manufactured housing to the types of owner-occupied housing and 
emergency shelters and single-room occupancy (SRO) housing as types of 
rental housing, which are explicitly referenced in the rule.
    Retention period. The proposed rule would amend the existing 
definition to clarify that, in the case of rehabilitated units that 
currently are occupied by the owner and do not involve a closing, the 
retention period would commence on the date of completion of the 
rehabilitation.
    Sponsor. The proposed rule would amend the existing definition by 
authorizing a Bank to define certain terms in its AHP Implementation 
Plan and by adding 2 entities to the definition. The terms ``ownership 
interest'' and ``integrally involved'' are key terms in the existing 
definition of ``sponsor.'' The proposed rule would retain those terms 
but would require each Bank to define what they mean in its AHP 
Implementation Plan. Under the existing definition, a Bank must 
consider a ``sponsor'' to include any entity that has an ownership 
interest in a rental project, regardless of how small or temporary such 
ownership interest is. Requiring a Bank to define ``ownership 
interest'' in its AHP Implementation Plan would allow it to address 
concerns that some rental projects may manipulate ownership interests 
in order to receive points as not-for-profit sponsors under the 
competitive application program's scoring system. The proposed rule 
also would expand the definition to include revolving loan funds or 
entities that establish loan pools. Those terms would be used for 
purposes of implementing proposed amendments to the competitive 
application program rules, which would

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deal with revolving loan funds and loan pools, respectively.
    Subsidy. The proposed rule would revise the existing definition, 
principally by deleting the provisions that specify the dates as of 
which the amount of the subsidy is to be determined. The substance of 
those provisions would be incorporated into the section that sets forth 
the eligibility requirements relating to the competitive application 
program, at proposed Sec.  951.5(c)(12). The proposed rule also would 
remove the term ``homeownership set-aside funds'' from the definition 
of ``subsidy'' because they are direct subsidies, which are included 
within the definition of ``subsidy.''

B. Required Annual AHP Contributions; Allocation of Contributions: 
Proposed Sec.  951.2

    Annual AHP contributions: Proposed Sec.  951.2(a). Under the Bank 
Act, each Bank annually must contribute to its AHP an amount equal to 
the greater of 10 percent of the Bank's previous year's net income or 
such prorated amount as is required to assure that the aggregate 
contribution of the 12 Banks is no less than $100 million. 12 U.S.C. 
1430(j)(5)(C). In recent years, the Banks have not used the pro rata 
allocation method because the annual contributions based on the 10 
percent of income formula have exceeded $100 million. Nonetheless, 
proposed Sec.  951.2(a)(2) would revise the existing provisions to 
clarify that if the pro rata formula were to be used in any future 
year, the required annual contribution for any Bank could not exceed 
its net earnings for the previous year. This is primarily intended as a 
safety and soundness measure to avoid the possibility that a Bank might 
otherwise be required to contribute an amount in excess of its income, 
thereby reducing its regulatory capital.
    Net earnings of a Bank. Proposed Sec.  951.1 would revise the 
existing definition to clarify existing practice with respect to how a 
Bank's earnings are determined for purposes of calculating its required 
AHP contribution. See 12 CFR 951.1. Pursuant to registration of its 
equity securities with the Securities and Exchange Commission (SEC), 
each Bank must present its financial statements in its SEC filings in 
accordance with Generally Accepted Accounting Principles in the United 
States (GAAP). The application of Statement of Financial Accounting 
Standards No. 150, Accounting for Certain Financial Instruments with 
Characteristics of Both Liabilities and Equity (SFAS 150), to the Banks 
requires them to categorize capital stock subject to a mandatory 
redemption request as a liability on the statement of condition and 
requires that they treat the dividends on capital stock subject to a 
mandatory redemption request as interest expense. The Bank Act 
provisions related to the AHP provide that each Bank shall make an 
annual contribution equal to 10 percent of its net earnings for the 
previous year after reduction for any payment required under 12 U.S.C. 
1441b (regarding the Resolution Funding Corporation) and before 
declaring any dividend. 12 U.S.C. 1430(j)(8). Because the Bank Act 
requires that the AHP contribution be calculated before the declaration 
of dividends, net earnings for purposes of calculating the AHP 
contribution should not be reduced by any dividend declaration, 
including those associated with mandatorily-redeemable stock, even 
though those dividends may be treated as interest expense in the 
calculation of GAAP net income.
    Allocation of contributions: Proposed Sec.  951.2(b). The proposed 
rule would relocate the allocation of contributions provisions for the 
competitive application program and homeownership set-aside program in 
existing Sec.  951.3(a) to proposed Sec.  951.2(b), as they relate to 
the requirements for AHP contributions, which are set forth in proposed 
Sec.  951.2.
    Homeownership set-aside allocation: Proposed Sec.  951.2(b)(2). AHP 
subsidies are disbursed through a Bank's competitive application 
program and its homeownership set-aside program. Under the existing 
rules, a Bank may set aside annually up to the greater of $3 million or 
25 percent of its annual required AHP contribution to provide funds to 
members through its homeownership set-aside programs. See 12 CFR 
951.3(a)(1)(i). If member demand in a given year exceeds the AHP 
subsidy amount available for that year, a Bank may accelerate or 
``borrow'' additional amounts from the following year's AHP 
contribution, up to the greater of $3 million or 25 percent of the 
Bank's projected contribution for the following year, to the current 
year's set-aside program.
    In addition to those amounts, a Bank may set aside annually up to 
the greater of $1.5 million or 10 percent of its annual required AHP 
contribution to fund a set-aside program to be used solely to provide 
financial assistance to first-time homebuyers. See 12 CFR 
951.3(a)(1)(ii). If member demand for that set-aside program exceeds 
the amount of available AHP subsidy for a particular year, a Bank may 
accelerate or ``borrow'' additional amounts from the following year's 
AHP contribution, up to the greater of $1.5 million or 10 percent of 
the Bank's projected contribution for the following year, to the 
current year's first-time homebuyer set-aside program. These maximum 
allowable dollar amounts are adjusted annually by the Finance Board to 
reflect any percentage increase in the preceding year's Consumer Price 
Index (CPI). See 12 CFR 951.3(a)(1)(iii).
    The proposed rule would remove the annual CPI adjustment of the 
caps on the dollar amounts that may be allocated to the set-aside 
programs, principally because it has the potential over time to 
increase the amounts allocated to the set-aside programs at the expense 
of the competitive application program. As such, the CPI adjustment 
could potentially affect the balance between amounts allocated to 
owner-occupied housing and rental housing, respectively. Similarly, 
because the provision allowing acceleration of the maximum allowable 
dollar allocation under the competitive application program into the 
current year from the subsequent year would be eliminated, the 
provision authorizing a CPI adjustment of the accelerated amount, as 
provided under existing Sec.  951.3(a)(2), would be eliminated as a 
conforming amendment.
    The Finance Board is proposing to make a number of other changes 
regarding the allocation of AHP funds to the homeownership set-aside 
programs, as noted below.
    Consolidation of separate program authorities: Proposed Sec.  
951.2(b)(2). Proposed Sec.  951.2(b)(2) would retain the maximum 
allowable aggregate allocation of AHP dollars to the homeownership set-
aside programs, i.e., the greater of $4.5 million or 35 percent of a 
Bank's annual required AHP contribution, but would eliminate the first-
time homebuyer set-aside program authority as a separate and distinct 
authority. See 12 CFR 951.3(a)(1). The proposed rule would replace the 
separate first-time homebuyer set-aside program provision with a 
requirement that at least one-third of a Bank's aggregate annual 
homeownership set-aside allocation be targeted for first-time 
homebuyers, which should be functionally equivalent to the results 
under the current structure. The Finance Board understands that most of 
the Banks currently dedicate a substantial portion of their general 
homeownership set-aside allocation to first-time homebuyers before 
setting aside funds under the separate homeownership set-aside 
authority that specifically targets first-time homebuyers. Therefore, 
the Finance

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Board believes the proposed change would simplify the regulation but 
would not cause a substantive change in the allocation of homeownership 
set-aside funds to first-time homebuyers.
    Removal of acceleration authority. The Finance Board also is 
proposing to remove the existing provisions that permit a Bank to 
accelerate or ``borrow'' AHP funds from the subsequent year to fund the 
current year's homeownership set-aside programs. See 12 CFR 
951.3(a)(1)(i) and (ii). The Banks have not often used that authority 
(in 2004 only two Banks did so) and it presents operational 
difficulties because it requires the Banks to project future earnings 
in order to determine how much they may accelerate into the current 
year, and these projections may not prove to be accurate. Deleting this 
provision would eliminate some unnecessary complexity to the 
administration and monitoring of the AHP fund as well as to a Bank's 
balance sheet. For much the same reason, the Finance Board is proposing 
to eliminate the provision allowing acceleration of competitive 
application program allocations, as provided under existing Sec.  
951.3(a)(2).

C. AHP Implementation Plan: Proposed Sec.  951.3

    Proposed Sec.  951.3(a) would reorganize and streamline 
requirements for a Bank's AHP Implementation Plan to conform them to 
amendments that are being proposed to other parts of the AHP 
regulation. See 12 CFR 951.3(b). The proposed amendments to the 
specific program operating requirements for AHP Implementation Plans 
are discussed elsewhere in this preamble in the context of the 
particular operating requirements. The proposed rule also would add a 
requirement that the AHP Implementation Plan include the Banks' 
retention agreement requirements.
    Proposed Sec.  951.3(c) would require a Bank to notify the Finance 
Board within 30 days of amending its AHP Implementation Plan and 
proposed Sec.  951.3(d) would require a Bank to make the amended Plan 
publicly available through its Web site within 30 days after adoption 
of the amendments. Under the current rules, the Bank must submit all 
amendments to the Finance Board and must make its Plan available to 
members of the public upon request. See 12 CFR 951.3(b)(4)-(5). Making 
the AHP Implementation Plan available through the Banks' websites is 
intended to provide the public with easy access to important 
information about the AHP as well as to promote greater transparency 
and accountability in the program.

D. Advisory Councils: Proposed Sec.  951.4

    The proposed rule would make a number of revisions to the 
provisions dealing with the Advisory Councils of the Banks, many of 
which are intended to clarify but not change the substance of the 
existing rule. See 12 CFR 951.4. The provisions that have a substantive 
effect are described below.
    Terms of Advisory Council members: Proposed Sec.  951.4(b). Section 
951.4(b) of the proposed rule is intended to enhance the effectiveness 
of the Advisory Councils by lessening the likelihood that the terms of 
more than one-third of the Advisory Council members will expire in any 
1 year. To that end, the proposed rule would require each Bank to adopt 
policies governing how it would conduct the appointment process and 
would require each Bank to appoint members to terms of ``up to'' 3 
years. The intent of the latter change is to allow the Banks to appoint 
some individuals to terms of 1 or 2 years as a means of ensuring an 
appropriate balance of experience and service among members of the 
Council as a whole. Under the current rules, the Banks must appoint 
members of the Council for a 3 year term. See 12 CFR 951.4(d).
    Election of officers: Proposed Sec.  951.4(c). Section 951.4(c) 
would impose on the Advisory Council an affirmative obligation to elect 
certain officers, which is intended to ensure that each Advisory 
Council has in place a chairman and vice chairman. The current rule 
permits, but does not require, such officers. See 12 CFR 951.4(e).
    Duties: meetings with the Banks: Proposed Sec.  951.4(d)(1). 
Section 951.4(d)(1) of the proposed rule would revise the duties of the 
Advisory Council principally by adding a list of specific matters on 
which the Advisory Council must provide recommendations to the Bank's 
board of directors. See 12 CFR 951.4(f)(1). Those matters include: the 
relative allocation of AHP subsidy between the competitive application 
and homeownership set-aside programs; eligibility criteria for each 
program; scoring criteria and related definitions for the competitive 
application program; any priority criteria for the homeownership set-
aside program; and the AHP Implementation Plan.
    Proposed Sec.  951.4(d)(3) also would extend the deadline by which 
the Advisory Council must submit its annual analysis of the low- and 
moderate-income housing and community lending activity of the Bank to 
the Finance Board. See 12 CFR 951.4(f)(3). The proposed rule would 
extend that deadline from March 1 to May 1 and would require each Bank 
to publish the analysis on a publicly available website within 30 days 
of its submission to the Finance Board. The proposed change in the due 
date responds to requests received from some of the Advisory Councils, 
which meet quarterly, for additional time after the end of each 
calendar year to prepare, review, and approve their report. Making the 
Advisory Councils' analyses available to the public through the Banks' 
websites is intended to promote greater transparency and accountability 
in the Banks' AHP and in the work of the Banks' Advisory Councils.
    No delegation: Proposed Sec.  951.4(f). Proposed Sec.  951.4(f) 
would prohibit a Bank's board of directors from delegating to Bank 
officers or other Bank employees its responsibility for appointing 
Advisory Council members or for meeting with the Advisory Council. This 
provision is intended to ensure that each board of directors fulfills 
its statutory obligations with regard to its interaction with the 
Advisory Council and is consistent with findings of the Finance Board's 
Horizontal Review, which indicated that Bank boards in general could 
improve how they interact with their Advisory Councils. See 12 U.S.C. 
1430(j)(11).

E. Competitive Application Program: Proposed Sec.  951.5

    The proposed rule would consolidate existing regulatory provisions 
governing the operation of the competitive application program into a 
single section of the AHP rule--proposed Sec.  951.5. Under the current 
regulation, a number of those provisions are located in different 
sections of the AHP regulations. The principal revisions to the 
existing regulatory structure are described below.
    Eligible applicants: Proposed Sec.  951.5(b)(2). Section 
951.5(b)(2) of the proposed rule would eliminate the current provision 
that allows a Bank to accept AHP applications from institutions that 
are not members of the Bank, but that have applied for membership. See 
12 CFR 951.6(b)(1). At one time, that provision may have encouraged 
institutions to become members of their district Bank but the Finance 
Board believes that given the growth in membership in recent years such 
an incentive is no longer necessary.
    Eligibility requirements: Proposed Sec.  951.5(c). Under the 
proposed rule, Sec.  951.5(c) would set out all of the various 
eligibility requirements that may apply in connection with the

[[Page 76942]]

receipt of AHP subsidies under the competitive application program.
    Timing of household income-eligibility determination: Proposed 
Sec.  951.5(c)(1). With regard to the timing of when a household's 
income eligibility must be determined, the proposed rule would relocate 
the current provisions from the definitions of ``low- or moderate-
income household'' and ``very low-income household'' in Sec.  951.1 to 
proposed Sec.  951.5(c)(1). The proposed rule also would incorporate 
into this section, without change, the requirements in the existing 
definitions of ``owner-occupied project'' and ``rental project'' that 
the AHP subsidy be used for the purchase, construction, or 
rehabilitation of owner-occupied or rental housing.
    Need for subsidy, project costs, project feasibility: Proposed 
Sec. Sec.  951.5(c)(2), 951.5(c)(3), and 951.5(c)(4). The proposed rule 
would make several changes to the project eligibility requirements 
applicable to the Banks in determining whether a project is eligible 
for funding. The Banks currently review projects to assess their ``need 
for subsidy,'' reasonableness of ``project costs,'' and 
``feasibility.'' In determining a project's eligibility, the existing 
regulation requires that the project demonstrate a need for the 
subsidy, based on its estimated total sources and uses of funds. See 12 
CFR 951.5(b)(2). The proposed rule would maintain this requirement but 
eliminate a related requirement that the estimated sources and uses of 
funds analysis include estimates of the market value of in-kind 
donations and volunteer professional labor or services. See 12 CFR 
951.5(b)(2)(i)(B). Experience since 1998 indicates that estimates of 
non-cash costs generally do not affect the amount of subsidy needed for 
a project. Elimination of this requirement also would obviate the need 
for the Finance Board's Regulatory Interpretation 1999-03, which 
addresses non-cash sources and uses.\2\ The proposed rule also would 
make the need for subsidy requirement independent of the project 
developmental and operational feasibility requirements. The changes are 
intended to provide the Banks with more opportunities to assist smaller 
projects and projects with higher production or operating costs, such 
as projects with services or more common space.
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    \2\ Regulatory Interpretation 199-03 is available in the Freedom 
of Information Act Reading Room on the Finance Board's Web site: 
https://www.thib.gov/Default.aspx?Page=59&ListCategory=8#8.
---------------------------------------------------------------------------

    Section 951.5(c)(3)(i) of the proposed rule would clarify that the 
determination of project costs is a separate eligibility requirement 
and would remove a requirement that project costs be ``customary'' and 
determined according to ``industry standards'' in accordance with the 
Bank's project feasibility guidelines. See 12 CFR 951.5(b)(2)(ii). In 
lieu of that requirement, the proposal would require a Bank to 
determine whether a project's costs are reasonable by taking into 
account the location of the project, development conditions, and other 
non-financial household or project characteristics, such as housing for 
the elderly or for persons with disabilities. The changes are intended 
to make the eligibility review process more adaptive to deeply 
subsidized projects such as those serving special needs populations.
    The existing regulation does not differentiate between the 
developmental feasibility of a project and, in the case of rental 
housing, the operational feasibility of the project over time. The 
proposed rule, at Sec.  951.5(c)(4), would separate these two aspects 
of project feasibility. Proposed Sec.  951.5(c)(4)(i) would require 
that a project be developmentally feasible, which is defined as the 
likelihood that the project will be completed and occupied, based on 
relevant factors contained in the Bank's project feasibility 
guidelines, including the project's development budget, market 
analysis, and the sponsor's experience in providing the requested 
assistance to households. Proposed Sec.  951.5(c)(4)(ii) would require 
that a rental project be operationally feasible, which is defined as 
the ability of the project to operate in a financially sound manner, in 
accordance with the Bank's project feasibility guidelines, as projected 
in the project's operating pro forma or similar statement of 
operational feasibility.
    Financing costs: Proposed Sec.  951.5(c)(5). The proposed rule 
would make a technical reorganizing change by relocating the provision 
regarding interest rates, points, fees, and other charges for loans 
financing the project from existing Sec.  951.5(b)(2)(iii) to proposed 
Sec.  951.5(c)(5). See 12 CFR 951.5(b)(2)(iii).
    Refinancing: Proposed Sec.  951.5(c)(8). Proposed Sec.  951.5(c)(8) 
would make a technical change regarding the use of AHP subsidies in 
connection with a refinancing of a project. See 12 CFR 951.5(b)(6). The 
proposal would clarify that such refinancing is permitted only if it 
generated equity proceeds and if the proceeds are used to purchase, 
construct, or rehabilitate eligible housing units. The proposal also 
would clarify that the requirement regarding use of the equity proceeds 
applies only to an amount of equity proceeds that is at least equal to 
the amount of AHP subsidy in the project.
    Project sponsor qualifications: Proposed Sec.  951.5(c)(10). 
Proposed Sec.  951.5(c)(10) would revise existing Sec.  951.5(b)(8) by 
requiring a Bank to adopt written policies regarding the project 
sponsor qualifications for revolving loan funds and loan pools, which 
issues are discussed separately below. See 12 CFR 951.5(b)(8).
    Calculation of AHP subsidy: Proposed Sec.  951.5(c)(12). Proposed 
Sec.  951.5(c)(12), which relates to the calculation of the AHP 
subsidy, would incorporate, without change, the provisions regarding 
the time at which the calculation of subsidy is to be made. Those 
provisions are currently included as part of the definition of 
``subsidy'' in Sec.  951.1.
    Use of AHP subsidy by revolving loan funds and loan pools: Proposed 
Sec. Sec.  951.5(c)(13) and 951.5(c)(14). The proposed rule would 
explicitly authorize the Banks, at their discretion, to allow two uses 
of AHP subsidy under their competitive application program, which would 
be for revolving loans funds and loan pools. The current rule defines 
the term ``sponsor'' to include certain organizations or public 
entities that have an ownership interest in a rental project, or that 
are integrally involved in an owner-occupied project. See 12 CFR 951.1. 
As noted previously, the proposed rule would expand that definition to 
add revolving loan funds and entities that establish loan pools to the 
list of eligible sponsors. A revolving loan fund is a capital fund that 
makes loans that comply with the requirements of the AHP rule, and then 
uses the proceeds received from principal payments on those loans to 
make additional loans to other borrowers. A loan pool is a group of 
AHP-eligible loans that are purchased, held in trust, and pledged as 
security for a financial instrument, such as a mortgage-backed 
security. Definitions of the two terms would be added in proposed Sec.  
951.1. Such entities that specialize in community development lending 
are able to leverage additional funds for low-income borrowers or bring 
added value to the services provided by non-profit corporations and 
local governments. These entities also may provide technical assistance 
in packaging loans, or may service loans, manage affordable housing 
revolving loan funds, or purchase and sell loans that cannot otherwise 
be sold in the mainstream secondary market due to their unique 
characteristics. Proposed

[[Page 76943]]

Sec.  951.5(c)(13) and (c)(14) would establish limitations on how such 
revolving loan funds and loan pools, respectively, may use the AHP 
subsidies, as described below.
    Use of AHP subsidy by revolving loan funds: Proposed Sec.  
951.5(c)(13). The proposal would authorize the Banks to accept 
applications from members for projects in which the sponsor would use 
the AHP subsidy in a revolving loan fund, which in turn would make AHP 
loans to eligible projects. In order to exercise this authority, a Bank 
first must consult with its Advisory Council and then must adopt 
written policies and procedures governing the disbursement of the AHP 
subsidy through this type of entity. Both the initial loans made by the 
revolving loan fund, as well as any subsequent loans made with amounts 
received from repayments of the initial loans, must meet all of the 
applicable AHP eligibility requirements. The intent in referring to 
``applicable'' AHP eligibility requirements is to make clear that those 
regulatory requirements that apply to AHP applications that involve a 
specific project, such as cost and feasibility requirements, will not 
automatically be applied to an AHP application from a revolving loan 
fund, which may not have identified a specific project at the outset.
    The revolving loan fund also must assure that the initial loans are 
made to projects and households that meet the commitments in the 
approved AHP application and that they will be met for the full AHP 
retention period. Any subsequent lending of repaid AHP subsidy must be 
used for low-or moderate-income households (in the case of owner-
occupied projects) or for rental projects where 20 percent or more of 
the units are occupied by and affordable for very low-income 
households, subject to the AHP retention period, monitoring and 
recapture requirements that the Bank must adopt. As a result of those 
requirements, AHP funds disbursed through a revolving loan fund may not 
be used for other purposes, such as to pay for operating costs or other 
uses unrelated to the purchase, construction, or rehabilitation of 
housing. In general, the Finance Board requests comment on how the 
revolving loan fund authority could be used within the requirements of 
the AHP.
    Use of AHP subsidy in loan pools: Proposed Sec.  951.5(c)(14). The 
proposed rule would authorize a Bank to provide AHP subsidies to its 
members under circumstances in which another entity would receive the 
subsidy and then commit to purchase AHP-eligible loans in order to pool 
them and sell interests in the pool of loans, such as through loan 
participations or a mortgage-backed security. For example, the proposed 
rule would allow a Bank to make a subsidized advance to a member with 
the understanding that the member would make a subsidized loan to 
another entity, which would commit to purchase similarly subsidized 
loans from other originators. In order to exercise this authority, a 
Bank first must consult with its Advisory Council, and then must adopt 
written policies and procedures governing the disbursement of the AHP 
subsidy through this type of arrangement. The proposed rule includes a 
number of provisions that are intended to ensure that subsidies 
disbursed through a loan pool actually benefit AHP-eligible households. 
Specifically, the proposal would require that a loan pool sponsor 
demonstrate that its use of the subsidy will meet all applicable 
eligibility requirements under the AHP regulation. The loan pool 
sponsor must provide to the Bank the acceptance standards that it 
intends to use in determining which loans to include in the pool, as 
well as the underwriting characteristics for such loans, and the number 
of eligible households (including their income levels) that have 
obtained loans over a given time period. The proposal would prohibit 
the use of AHP funds for the loan pool's operating costs, for secondary 
market transaction costs, or for providing liquidity to the originators 
or holders of the purchased loans.
    In order to ensure that the AHP subsidy benefits eligible 
households, the proposed rule would require that the manager or trustee 
of the loan pool purchase the loans pursuant to a forward commitment 
that identifies the characteristics of the loans to be originated with 
principal or interest rate reductions, as specified in the approved AHP 
application. Where AHP direct subsidy is being used, the AHP subsidy 
must be used for a standard upfront buy-down of the interest rate or a 
reduction in the principal of the loans in the pool, as specified in 
the approved AHP application. All loans purchased by the loan pool, 
including both the initial loans and any subsequent loans that are 
intended to replace loans that have been paid off, must conform to the 
terms of the forward commitment. In general, the Finance Board requests 
comment on how the loan pool authority could be used within the 
requirements of the AHP. The proposed rule is silent on the length of 
time that a project sponsor would have, as specified in the forward 
commitment, for the sponsor to expend the full amount of the AHP 
subsidy. The Finance Board requests comment on whether it is preferable 
to establish a time limit by regulation and if so, the duration of that 
time limit, or to allow a Bank to establish a time limit as part of its 
AHP Implementation Plan, as proposed.
    In the alternative, the loan pool would be permitted to purchase an 
initial round of loans that are not purchased pursuant to a forward 
commitment, provided that the entities from which the loans are 
purchased are required to use the proceeds from the initial loan 
purchases within time limits specified in the Bank's AHP Implementation 
Plan. The proceeds must assist households that are income-eligible 
under the approved AHP application during subsequent rounds of lending, 
and the assistance must be provided in the form of a principal 
reduction or a below-market AHP subsidized interest rate, as specified 
in the approved AHP application.
    In addition, each AHP-assisted owner-occupied unit receiving AHP 
direct subsidy would be required to be subject to an AHP 5-year 
retention agreement. As currently written, the proposed rule explicitly 
permits the use of AHP subsidy in loan pools backed by owner-occupied 
units. The Finance Board requests comment on whether, in addition to 
loans for AHP-assisted owner-occupied units, rental housing loans 
should also be eligible under the AHP loan pool authority, and if so, 
what kinds of loans and activities, consistent with the AHP 
requirements, should be eligible.
    Out-of-district projects eligibility requirement: Proposed Sec.  
951.5(c)(15). The proposed rule would remove the existing provision 
that allows a Bank, at its discretion, to require as an eligibility 
requirement that a project assisted with AHP subsidy must be located in 
the Bank's district. See 12 CFR 951.5(b)(10)(i)(B). Proposed Sec.  
951.5(c)(17) also would prohibit a Bank from establishing an 
eligibility requirement that a project must be located in the Bank's 
district. See the further discussion of this issue below, under AHP 
projects outside the district.
    Minimum Bank credit product usage requirement: Proposed Sec.  
951.5(c)(15). The current rule authorizes a Bank to require its members 
to have used a minimum amount of the Bank's other credit products 
within the previous 12 months as a condition to applying for additional 
amounts of AHP subsidy. See 12 CFR 951.5(b)(10)(i)(C). The Finance 
Board is proposing to remove this requirement in the belief that AHP 
funding should go, without restriction,

[[Page 76944]]

to applications from members that score highest under a Bank's 
competitive application scoring criteria.
    Counseling requirement: Proposed Sec.  951.5(c)(15)(ii). The 
proposed rule would authorize a Bank to require homebuyer or homeowner 
counseling as an optional eligibility requirement for owner-occupied 
projects under the competitive application program. Under such a 
requirement, the Banks could limit AHP subsidies to owner-occupied 
projects that provide this resource for low- or moderate-income 
households. Such counseling can contribute to successful, long-term 
homeownership, which the Finance Board has recognized in supporting 
such counseling for low- or moderate-income households receiving home 
purchase assistance under the AHP homeownership set-aside program. See 
12 CFR 951.5(a)(2)(ii).
    Prohibited use of AHP subsidy: prepayment fees: Proposed Sec.  
951.5(c)(16)(i). The current rule allows a project to use AHP subsidy 
to pay prepayment fees imposed by a Bank on a member if the member 
prepays a subsidized advance, provided that the project continues to 
comply with the terms of the approved AHP application for the duration 
of the original retention period and any unused AHP subsidy is returned 
to the Bank and made available for other AHP projects. See 12 CFR 
951.5(b)(4)(i). The proposed rule would eliminate this provision, 
consistent with the principle that AHP funds should be used for 
purchase, construction, or rehabilitation of housing.
    Changes to the scoring system: Proposed Sec.  951.5(d). The 
proposed rule would retain the current provisions that require each 
Bank to adopt written scoring guidelines for its AHP applications and 
to allocate 100 points among 9 scoring criteria. See 12 CFR 
951.6(b)(4). The proposal would not make any substantive changes to 
those criteria, except for those relating to disaster areas and out-of-
district projects, but would make a number of technical revisions to 
the current rules and would codify certain staff interpretations.
    The proposed rule would retain the provisions relating to fixed-
point and variable-point scoring criteria, but would make technical 
changes to the latter, the effect of which would be to codify a current 
staff interpretation that allows a Bank to implement variable-point 
scoring criteria either through a fixed scale or on a scale relative to 
the other applications that are to be scored in the same funding round. 
See 12 CFR 951.6(b)(4)(iii). That provision would be located at Sec.  
951.5(d)(3)(ii) of the proposed rule.
    Section 951.5(d)(5)(iii)(A) of the proposed rule would remove a 
provision of the existing rule, which allows a Bank to score rental 
projects according to the targeting commitments made by the project to 
a governmental or tax-credit allocating entity that provides funds or 
tax credits, respectively, to the project. See 12 CFR 
951.6(b)(4)(iv)(C)(1). That provision would no longer be necessary 
because of other proposed changes to the rule, to be located at Sec.  
951.7(a)(2)(ii)(B), discussed further below, which would allow a Bank 
to rely on monitoring by governmental or tax-credit monitoring 
agencies.
    The proposed rule also would clarify regulatory practice relating 
to the scoring criterion for income targeting in owner-occupied 
projects. That provision, which would be located at Sec.  
951.5(d)(5)(iii)(B), would clarify that a Bank may determine in its AHP 
Implementation Plan how to award scoring points on a declining scale, 
taking into consideration the percentages of units and targeted income 
levels.
    Disaster areas and displaced households scoring criterion: Proposed 
Sec.  951.5(d)(5)(vi)(E). The current regulation permits the Banks to 
award scoring points to the financing of housing that is located in 
federally declared disaster areas. See 12 CFR 951.6(b)(4)(iv)(F)(5). 
Because disasters may displace families from their homes, the Finance 
Board believes that this criterion should be expanded to address such 
situations. Accordingly, in order to accommodate families that have 
been displaced from a disaster area, Sec.  951.5(d)(5)(vi)(E) of the 
proposed rule would permit a Bank to award scoring points for 
applications that would provide housing for persons located in a 
disaster area, as well as for applications proposing to provide housing 
for low- or moderate-income households that have been displaced from a 
federally declared disaster area due to a disaster, irrespective of the 
household's current residential location.
    AHP projects outside the district: Proposed Sec. Sec.  951.5(c)(17) 
and 951.5(d)(5)(vii). Under the current regulation, a Bank may, at its 
discretion, deny consideration of applications to the AHP competitive 
application program from members proposing to fund projects located 
outside a Bank's district. Another provision of the current rule 
permits a Bank to give scoring point preference to the creation of 
housing located within the Bank's district. See 12 CFR 
951.5(b)(10)(i)(B) and 951.6(b)(4)(iv)(F)(12). The proposed rule would 
rescind the Banks'' authority to prohibit or restrict applications to 
fund projects located outside a Bank's district. This authority may 
have been appropriate when all Bank members did business only within 
the boundaries of a state within the Bank's district. As a result of 
interstate branching, however, many members now do business in 
communities outside their Bank district. The authority to restrict AHP 
projects to the Bank's district, if exercised, would limit a member's 
ability to support otherwise eligible AHP projects in certain of the 
communities that it serves solely because those communities were 
located outside the Bank's district boundaries.
    The Bank Act does not set up the AHP as a geographically targeted 
program. Rather, it requires each Bank to establish a program to 
provide subsidized funding to its members. See 12 U.S.C. 1430(j)(1). 
Restrictions on out-of-district projects can disadvantage members with 
geographically dispersed operations to the extent the Bank limits 
funding of projects outside of its boundaries, irrespective of the 
market areas served by its members. Such restrictions could also serve 
to disadvantage communities that are served by financial institutions 
headquartered in a state located in a different Bank district. The 
Finance Board believes that AHP projects should be awarded funds based 
on the merits of each particular application. If an application has 
sufficient merit to compete successfully, it should be awarded AHP 
funds irrespective of the project location, so long as the project is 
within a community served by a member.
    Finally, the existing authority in the current AHP regulation has 
not been extensively invoked by the Banks. In 2004, only one Bank 
prohibited the use of AHP funds for out-of-district projects and only 
two Banks elected to give scoring preference to in-district projects. 
Nor has there been a significant outflow of AHP funds as a result of 
member financing of projects outside the district. Out of 10,391 AHP 
projects funded since the beginning of the program in 1990, only 323 
projects, or 3.1 percent, have been located outside a Bank's district. 
These findings support a conclusion that funding of out-of-district 
projects has a minimal impact on the AHP. Therefore, a prohibition 
against out-of-district projects or a preference for projects within a 
district may not be warranted.
    As a result of all these considerations, the proposed rule would 
eliminate the two provisions in the existing regulation

[[Page 76945]]

that preclude or limit the ability of a member to receive AHP subsidies 
for projects located outside its district, and proposed Sec.  
951.5(c)(17) would expressly prohibit a Bank from requiring that a 
project be located within its district. In addition, proposed Sec.  
951.5(d)(5)(vii) would prohibit a Bank from adopting as its Second 
District Priority a scoring preference for projects located in the 
Bank's district. See 12 CFR 951.6(b)(4)(iv)(G).
    Modifications of approved applications: Proposed Sec.  951.5(f). 
The proposed rule would codify current practice by adding a requirement 
that a Bank must document in writing its analysis and justification for 
any modification of a previously approved project. See 12 CFR 951.7(a).
    Progress towards use of AHP subsidies: Proposed Sec.  951.5(g)(2). 
The proposed rule would require each Bank to establish policies and 
procedures, such as time limits, for determining whether progress is 
being made towards drawdown and use of AHP subsidies by approved 
projects, and whether to cancel an application approval for lack of 
such progress. Progress requirements must be included in the Bank's AHP 
Implementation Plan. Affordable housing projects often may encounter 
delays due to changes in funding, legal, or community challenges, or 
other events. These delays may affect the ability of a project to 
progress towards its scheduled drawdown and use of the AHP subsidy. The 
current AHP regulation requires a Bank to specify a time period in its 
AHP Implementation Plan for the drawdown and use of the AHP subsidy. If 
a project does not do so within such period, the Bank must cancel its 
approval of the application. See 12 CFR 951.8(c)(1). The rigidity of 
this requirement sometimes has impaired the ability of the Banks to 
determine whether the delays are significant enough to affect a 
particular project's ability to draw down and use the subsidy. While 
the Banks have extended the time period for certain projects in an 
effort to take into account such delays, the requirement that a fixed 
time period be stated in the AHP Implementation Plan limits a Bank's 
ability to manage this process. Accordingly, the proposed rule would 
give the Banks greater capacity to manage this process by requiring 
them to adopt policies and procedures that address how they will make 
such determinations.
    Compliance upon disbursement: Proposed Sec.  951.5(g)(3). Section 
951.5(g)(3) of the proposed rule would require a Bank to establish 
policies and procedures for determining, prior to initial disbursement 
of AHP subsidy, and prior to subsequent disbursement if the need for 
AHP subsidy has changed, whether the project continues to meet the 
applicable eligibility requirements and all obligations committed to in 
the approved AHP application. The Bank's requirements must be included 
in its AHP Implementation Plan. Under the current AHP regulation, a 
Bank is required to verify compliance with eligibility requirements and 
application commitments prior to each disbursement of AHP subsidy. See 
12 CFR 951.8(c)(2). The requirement to repeatedly verify project 
compliance during every stage of the disbursement process may be more 
than is necessary to ensure compliance with the rules, and effectively 
precludes a Bank from using its best judgment to determine whether the 
circumstances of a particular AHP project warrant repeated verification 
of compliance with the rules. The proposed amendment would give the 
Banks greater latitude in determining when it is appropriate to verify 
compliance prior to disbursing AHP funds.
    Bank board of directors duties and delegation: Proposed Sec.  
951.5(h). The proposed rule would set forth the Bank board of 
directors' various duties regarding establishment and implementation of 
the competitive application program requirements in one section, 
proposed Sec.  951.5(h), and would reiterate that the Bank's board 
cannot delegate these responsibilities to Bank officers or other Bank 
employees.

F. Homeownership Set-Aside Program: Proposed Sec.  951.6

    The proposed rule would reorganize the existing regulation, 
generally by combining various homeownership set-aside program 
provisions into one section, to be located at proposed Sec.  951.6.
    Eligible applicants: Proposed Sec.  951.6(b). The existing AHP 
regulations permit a Bank to accept applications for homeownership set-
aside program subsidies from an institution that is not a member of the 
Bank, but which has pending an application for membership. See 12 CFR 
951.6(a). The proposed rule would eliminate this provision and would 
require an applicant to be a member of the Bank at the time that it 
submits an AHP application. The rationale for this revision was 
discussed in connection with a similar amendment that is proposed for 
the competitive application program.
    Timing of household income-eligibility determination: Proposed 
Sec.  951.6(c)(2)(i). Section 951.6(c)(2)(i) of the proposed rule would 
clarify that a household's income eligibility is to be determined at 
the time that it is enrolled in the set-aside program. This change is 
intended to address confusion with respect to the income eligibility, 
for example, of a household that is enrolled in a matched savings 
account program, an Individual Development Account program, a Welfare-
to-Work program, or any other similar empowerment program designed to 
assist low-income households accumulate assets. The existing regulation 
has been interpreted by some Banks as requiring that the household's 
income qualification for purposes of the AHP be determined at the time 
that the household is qualified for a loan. See 12 CFR 951.1 and 
951.5(a)(2)(i). The proposal would permit income eligibility to be 
determined at the time that the household is accepted by the member and 
the Bank to enroll in the AHP set-aside program, even though at that 
time the household may not qualify for a mortgage. This clarification 
is consistent with existing Finance Board policy and reflects the 
Finance Board's understanding that the purpose of these programs is to 
prepare households for homeownership. Activities designed to qualify 
low- or moderate-income households for mortgages should be encouraged. 
Such programs, however, require careful administration by a Bank and 
the participating member and should be subject to reasonable Bank 
policies and procedures on the timely use of AHP subsidy. Moreover, it 
is the Finance Board's expectation that Bank policies will preclude use 
of the program by individuals whose low- or moderate-income eligibility 
is a temporary condition, such as students, who would ordinarily have a 
reasonable prospect for a substantial increase in income upon entering 
the workforce.
    Counseling: Proposed Sec.  951.6(c)(2)(ii). Under the existing 
regulation, all households receiving AHP funds under a Bank's 
homeownership set-aside program must complete a homeowner or homebuyer 
counseling program. See 12 CFR 951.5(a)(2)(ii). The Finance Board is 
proposing to make this an option rather than a requirement, for 
obtaining subsidies under the homeownership set-aside program. As a 
practical matter, not all households will necessarily require such 
counseling. Moreover, there are some areas of the country in which such 
counseling may not be readily available, and the quality of the 
counseling can also vary. Accordingly, Sec.  951.6(c)(2)(ii) of the 
proposed rule would allow each Bank to determine whether to include 
counseling as an eligibility requirement in its AHP Implementation 
Plan. These

[[Page 76946]]

revisions are consistent with the proposed change that would allow a 
Bank to adopt such a counseling requirement under its competitive 
application program, which is located at proposed Sec.  
951.5(c)(15)(ii). Notwithstanding the change, the Finance Board 
encourages the Banks to consider requiring homeowner and homebuyer 
counseling when they believe it to be appropriate. Proposed Sec.  
951.6(c)(8) would retain the current provision that allows 
homeownership set-aside funds to be used to pay for the costs of 
obtaining such counseling for those homebuyers that actually purchase 
an AHP-assisted unit. See 12 CFR 951.5(a)(7).
    Member financial incentives: Proposed Sec.  951.6(c)(6). The 
proposed rule would revise the existing regulation by requiring a Bank 
to establish incentives for members to provide financial or other 
assistance in connection with providing the homeownership set-aside 
subsidy. Under existing Sec.  951.5(a)(6), a member that provides 
mortgage financing to a participating household under the set-aside 
program must also provide financial or other incentives in connection 
with the mortgage financing. See 12 CFR 951.5(a)(6). Some Banks have 
observed that this requirement may place small members, such as those 
located in rural areas, at a disadvantage and may encourage them to 
pass the AHP subsidy to a larger institution, which may or may not be a 
member of that Bank. The existing requirement may thus place a greater 
obligation to provide subsidized financing on a member than on a 
nonmember mortgage provider and may result in a disincentive for member 
financing. The Finance Board specifically requests comment on: (1) 
Whether it should require all originators of AHP-assisted mortgage 
loans to provide financial or other incentives in connection with the 
mortgage financing, irrespective of whether the originator is a member 
or nonmember; (2) whether the current financial incentive requirement 
should remain as a mandatory requirement or be made a matter of 
discretion for the Bank, as a preferential selection criterion for its 
homeownership set-aside program(s); and (3) whether additional 
incentives should be required, such as a matching funds requirement, 
member-provided financing, or preference to a member working in 
partnership with a nonprofit sponsor assisting first-time homebuyers to 
qualify for a mortgage.
    Financing costs: Proposed Sec.  951.6(c)(7). Section 951.5(a)(6) of 
the current regulations requires that the rate of interest, points, 
fees, and other charges imposed by the member not exceed a reasonable 
market rate. See 12 CFR 951.5(a)(6). As currently worded, the 
requirement applies only to situations in which the member provides the 
financing, but not if a third party does so. The Finance Board is 
concerned that the existing language has the potential to create 
opportunities for using AHP funds in conjunction with the origination 
of loans with interest rates, points, fees, and other charges that 
exceed a reasonable market rate, if the loans are originated by a 
nonmember. In order to avoid that possibility, Sec.  951.6(c)(7) of the 
proposed rule would revise the regulation to state that such charges 
that are ``used directly or indirectly in conjunction with the AHP 
direct subsidy'' must not exceed a reasonable market rate. That