Federal Home Loan Bank Membership for Community Development Financial Institutions, 678-704 [E9-31003]

Agencies

• Federal Housing Finance Board
• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 75, Number 2 (Tuesday, January 5, 2010)]
[Rules and Regulations]
[Pages 678-704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-31003]



[[Page 677]]

-----------------------------------------------------------------------

Part VI





Federal Housing Finance Board





-----------------------------------------------------------------------



12 CFR Parts 925 and 944



-----------------------------------------------------------------------





Federal Housing Finance Agency





-----------------------------------------------------------------------

12 CFR Parts 1263 and 1290



-----------------------------------------------------------------------



Federal Home Loan Bank Membership for Community Development Financial 
Institutions; Final Rule

Federal Register / Vol. 75, No. 2 / Tuesday, January 5, 2010 / Rules 
and Regulations

[[Page 678]]


-----------------------------------------------------------------------

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 925 and 944

FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1263 and 1290

RIN 2590-AA18


Federal Home Loan Bank Membership for Community Development 
Financial Institutions

AGENCIES: Federal Housing Finance Board and Federal Housing Finance 
Agency.

ACTION: Final rule.

-----------------------------------------------------------------------

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

DATES: This rule is effective February 4, 2010.

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

SUPPLEMENTARY INFORMATION: 

I. Background

A. Regulatory History

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

B. HERA Amendments

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

C. CDFIs

    CDFIs are private institutions that provide financial services 
dedicated to economic development and community revitalization in 
underserved markets. The CDFIs may be organized as nonprofit or for-
profit entities and comprise diverse institutional structures and 
business lines. The four categories of institutions eligible for CDFI 
certification and CDFI Fund financial support are: (1) Federally 
regulated insured depository institutions and their holding companies; 
(2) credit unions, whether federally or State-chartered; (3) community 
development loan funds, which are unregulated institutions specializing 
in financing of housing, businesses or community facilities that 
provide health care, childcare, educational, cultural, or social 
services; and (4) community development venture capital funds, which 
are unregulated institutions that provide equity and debt-with-equity-
features to small and medium-sized businesses in distressed 
communities.
    The CDFIs serve as intermediary financial institutions that promote 
economic growth and stability in low- and moderate-income communities. 
They provide a unique range of financial products and services, such as 
mortgage financing for low-income and first-time homebuyers; homeowner 
or homebuyer counseling; financing for not-for-profit affordable 
housing developers; flexible underwriting and risk capital for needed 
community facilities; financial literacy training; technical 
assistance; and commercial loans and investments to assist start-up 
businesses in low-income areas. Frequently, CDFIs serve communities 
that are underserved by conventional financial institutions and may 
offer products and services that are not available from conventional 
financial institutions. Although CDFIs are generally small in asset 
size, studies have demonstrated that CDFIs can have meaningful positive 
effects on the low-and-moderate income communities that they serve. One 
common problem facing non-depository CDFIs, however, is that they do 
not have access to long-term funding, which may limit their ability to 
provide housing finance to their communities.
    The CDFI Fund of the US Treasury was created to promote economic 
revitalization and community development through investment in and 
financial and technical assistance to CDFIs. See 12 U.S.C. 4701(b). The 
CDFI Fund promotes these purposes through several programs, including 
the CDFI Program, the New Markets Tax Credit Program, the Bank 
Enterprise Award Program, and Native American Initiatives. See 12 
U.S.C. 4701 et seq. and 12 CFR part 1805. An institution can obtain 
access to those resources by becoming certified by the CDFI Fund and 
then applying to the CDFI Fund to receive awards that are available 
under its programs. See 12 U.S.C. 4704 and 12 CFR 1805.200. In order to 
be certified as a CDFI, an institution must satisfy several statutory 
and regulatory requirements, including that it have a primary mission 
of promoting community development, that it provides development 
services in conjunction with equity investments or loans, and that it 
serves certain targeted areas or populations. The CDFI certification 
requirements are more fully elaborated in the statute and the CDFI

[[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 State-chartered credit unions without Federal insurance that have 
been certified by the CDFI Fund are now eligible for Bank membership.
    In order for any eligible institution to become a member of a Bank, 
however, it also must comply with certain additional criteria that are 
specified in section 4(a)(1) and (2) of the Bank Act. Specifically, 
section 4(a)(1) of the Bank Act requires each applicant to demonstrate 
that it: (a) Is duly organized under State or Federal law; (b) either 
is subject to inspection and regulation under banking or similar laws 
or is certified as a CDFI under the CDFI Act; and (c) makes such home 
mortgage loans as are, in the judgment of the Director, long-term 
loans. Those three statutory requirements apply to all types of 
institutions that are eligible for membership, including the newly-
eligible CDFIs. In addition, section 4(a)(2) of the Bank Act requires 
that an applicant that is an insured depository institution must: (a) 
Have at least 10 percent of its total assets in residential mortgage 
loans (with certain limited exceptions); (b) be in sound financial 
condition such that a Bank may safely make advances to it; (c) have a 
character of management that is consistent with sound and economical 
home financing; and (d) have a home-financing policy that is consistent 
with sound and economical home financing. 12 U.S.C. 1424(a)(1) and (2).
    Prior to HERA, the Finance Board had adopted detailed regulations 
governing the substantive and procedural requirements for institutions 
seeking to become members of a Bank. Those membership regulations 
applied the financial condition, character of management, and home 
financing policy requirements to insurance company applicants (in 
addition to depository institutions), and established a process for the 
review and approval of all applications for Bank membership. See 12 CFR 
part 925. The regulations included separate provisions governing the 
admission of depository institutions and insurance companies, 
respectively, recognizing that each type of institution operates under 
a different business model and a different regulatory regime. The 
regulations also included provisions dealing with several other 
matters, such as member stock purchase requirements, consolidation of 
Bank members, and withdrawal from Bank membership.

E. Proposed Rule

    The proposed rule would have relocated the membership regulations 
of the Finance Board in their entirety from part 925 of the Finance 
Board regulations to part 1263 of the FHFA regulations, and also would 
have amended various provisions of the relocated regulations to 
implement the CDFI amendments. The proposed rule would have applied 
only to those CDFIs that had not been eligible for membership prior to 
HERA, such as loan funds, venture capital funds, and credit unions with 
State or private insurance. Federally insured depository institutions 
that also have been certified as CDFIs would be required to follow the 
membership regulations applicable to insured depository institutions 
generally, and could not become members under the CDFI provisions.
    The key amendments to be made by the proposed rule related to how 
the Banks were to assess the financial condition of CDFI applicants. 
The proposed rule included two separate provisions relating to the 
financial condition of CDFI applicants. The first provision, which was 
set out in Sec.  1263.11, applied only to CDFI credit unions, which are 
State-chartered credit unions that do not have National Credit Union 
Administration (NCUA) share insurance. The proposed rule would have 
required that the Banks assess the financial condition of all such CDFI 
credit unions under the same provisions that the Banks currently use in 
assessing the financial condition of NCUA-insured credit unions, which 
were eligible for Bank membership prior to HERA by virtue of their 
Federal share insurance. The second provision relating to financial 
condition was set out in 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

[[Page 680]]

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

II. Summary of Comments

    FHFA received 79 comment letters on the proposed rule. The 
preponderance of the comments came from the CDFI sector, which was 
represented by three national CDFI associations, a sign-on letter with 
134 organizational signatures, and letters from nonprofit organizations 
and individuals. FHFA also received comments from nine Banks, three 
credit union associations, and two bank trade associations.
    The comments from the CDFI sector were supportive of the general 
direction of the proposed rule but offered recommendations on specific 
membership standards, particularly those establishing thresholds for 
financial condition. Several commenters also recommended changes to 
current regulations as they relate to advances and collateral. The 
proposed rule sought to amend only the membership regulations and the 
community support regulations, and did not propose any revisions to the 
advances and collateral regulations. As a result, FHFA does not have 
the authority under the Administrative Procedure Act to amend those 
provisions as part of this rulemaking. To the extent that the 
collateral and advances regulations may need to be revised to better 
accommodate CDFI members, FHFA would undertake those changes as part of 
a separate rulemaking.
    A number of commenters urged FHFA to establish a CDFI membership 
goal for each Bank, i.e., require each Bank to admit a certain number 
of CDFIs as members each year, and requested that FHFA publicly release 
the number of CDFIs that become members, the amount of advances made to 
by CDFIs, and the reasons for the denial of any CDFI membership 
applications. At present, the number of members by type of institution 
is made available through the Federal Home Loan Banks' Combined 
Financial Report, and in the future, the number of CDFIs that become 
members each year should be included in the report for that year. FHFA 
also intends to release the number of CDFI members through its Public 
Use Data Base.
    The final rule does not establish goals for CDFI membership. 
Whether any institution may become a member of a Bank depends on 
whether the institution has satisfied the statutory and regulatory 
requirements for membership. Because each application must be evaluated 
individually, FHFA does not believe that it is appropriate to establish 
membership goals, which suggest that CDFIs should be granted membership 
without regard to those requirements.
    In a similar fashion, the final rule does not require the Banks to 
disclose the reasons for denying membership to a CDFI. Generally 
speaking, the Banks may deny an application only if an institution does 
not satisfy the statutory or regulatory requirements for membership, 
and the Banks do not disclose the reasons for the denial of individual 
applications. FHFA expects that the Banks will deny applications from 
CDFIs only in those circumstances, and further believes that releasing 
reasons for the denial of a membership application might result in 
reputational harm to the applicant with no public benefit. FHFA intends 
to monitor the Banks' implementation of the final rule, to ensure that 
they carry out the intent and spirit of the HERA amendments authorizing 
CDFIs to become members.
    With respect to advances, neither FHFA nor the Banks track the use 
of member advances, and the final rule does not impose that requirement 
for advances made to CDFI members. With the exception of Community 
Investment Program Funds (12 U.S.C. 1430(i)), Bank advances to their 
members are not project-specific. As is the case with any member, the 
proceeds of advances are fungible and can be used by the CDFIs for 
overall asset-liability management, to enhance liquidity, and for other 
purposes.
    Bank and depository institution commenters, in general, expressed 
concern that CDFI membership would compromise safe and sound lending 
practices and have an adverse financial impact on the Banks. Those 
concerns appear to be more closely related to risks of lending to a 
member, rather than to the key issue of this rulemaking, which relates 
to whether particular CDFIs have satisfied the statutory and regulatory 
requirements for membership. FHFA finds that these comments reflect a 
perception of risk that is not warranted by the performance of the CDFI 
sector or the asset size of these institutions.\1\ The Banks are 
protected from the risks of doing business with their members through 
stock purchase requirements, sound underwriting, and collateral 
requirements. Moreover, CDFIs are small institutions. In 2008, the 
average size of a non-depository CDFI was $21,000,000, which suggests 
that, in the case of any single CDFI member the dollar amount of 
advances outstanding to that member is apt to be comparatively modest. 
Thus, even if a non-depository CDFI were to fail, the financial impact 
on a Bank would likely not be material. Notwithstanding those safety 
and soundness concerns, Congress has unambiguously spoken on the matter 
of CDFI membership and has determined that CDFIs that satisfy the 
requirements for membership are entitled to become Bank members. FHFA 
also is confident that CDFIs will bring added value to the Federal Home 
Loan Bank System (Bank System) consistent with the Banks' mission and 
without compromising their safety and soundness and it expects the 
Banks to be proactive in educating themselves about the CDFIs' lines of 
business and risk profiles.
---------------------------------------------------------------------------

    \1\ See Social Funds Community Investment Center, ``Community 
Investing'' (https://www.communityinvest.org/overview/index.cfm. 
Accessed on 7/27/09). According to this study, between 2003 and 
2005, loan loss ratios among CDFIs were less than one percent. 
Through their tax exempt status not-for-profit CDFIs can address 
risk through patient investments, equity capital, risk-sharing 
arrangements, charitable contributions and private investments.
---------------------------------------------------------------------------

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

III. The Final Rule

A. General

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

[[Page 681]]

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

B. Definitions--Subpart A

    Section 1263.1--Definitions. The proposed rule would have carried 
over into part 1263 without substantive change to nearly all of the 
existing definitions from the Finance Board regulations, but would have 
revised certain definitions and added a number of new definitions to 
implement the statutory amendments regarding CDFI members. Except as 
described below, the final rule adopts the definitions from the 
proposed rule without further change.
    Community development financial institution or CDFI (holding 
companies). Section 1263.1 of the proposed rule defined ``community 
development financial institution'' and ``CDFI'' to include any 
institution that is certified by the CDFI Fund of the US Department of 
the Treasury, but excluded any bank or savings association that is 
insured under the Federal Deposit Insurance Act (12 U.S.C. 1811 et 
seq.) or a credit union that is insured under the Federal Credit Union 
Act (12 U.S.C. 1751 et seq.). The proposal excluded federally insured 
depository institutions and credit unions because they already were 
eligible for membership under the pre-HERA law. The final rule retains 
those aspects of the proposed definition, and also adds a new provision 
relating to bank or savings and loan holding companies that have been 
certified as CDFIs. The proposal did not include CDFI holding companies 
among the entities eligible for membership under the HERA amendments, 
and sought comment on that issue. One holding company, that has been 
certified as a CDFI and that controls a depository institution that is 
a member of a Bank, favored allowing similarly situated holding 
companies to become members in addition to the membership of their 
depository institution subsidiaries. That view was endorsed by another 
commenter, but several other commenters opposed allowing a bank or 
savings and loan holding company to obtain its own membership via the 
CDFI provisions. As a matter of general policy, FHFA believes that the 
benefits of Bank membership are best conveyed through depository 
institutions that have direct relationships with the communities in 
which they do business, and has decided not to allow depository 
institution holding companies to become Bank members at this time. FHFA 
intends to monitor the implementation of the CDFI membership provisions 
and is open to reconsidering this issue at a later date. FHFA notes, 
however, that there may be certain practical impediments to any holding 
company becoming a member, in addition to its depository institution 
subsidiaries, because a holding company would have to purchase its own 
membership stock in the Bank, in addition to any Bank stock owned by 
its subsidiaries. Moreover, the additional membership for the holding 
company would not necessarily provide any additional borrowing capacity 
beyond that already available to the subsidiary depository institution 
because current law allows a member to borrow against collateral owned 
and pledged by an affiliate. In the final rule, the definition of CDFI 
has been revised to make clear that holding companies for depository 
institutions cannot obtain membership via the CDFI membership 
provisions.
    Community financial institutions. The proposed rule also carried 
over without change from the Finance Board regulations the definition 
of ``community financial institution.'' The Bank Act defines CFIs as 
FDIC-insured members that have average total assets of $1 billion or 
less, as adjusted annually for inflation. Section 1211 of HERA amended 
the Bank Act to allow CFIs to obtain long-term advances for the purpose 
of funding ``community development activities'' and further allowed 
CFIs to pledge secured loans for ``community development activities'' 
as collateral for their advances. As HERA authorized CDFIs to become 
members and separately authorized CFIs to pledge community development 
collateral, the proposal requested comment on whether there was any 
basis in the legislative history to HERA that would allow FHFA to 
construe the new CFI provisions as applying to CDFIs as well as to 
CFIs. Commenters addressing this issue overwhelmingly favored allowing 
CDFI members to be deemed to be CFIs so they could take advantage of 
the HERA amendments relating to community development collateral for 
CFIs, although no commenters identified anything in the legislative 
history to support that view. In the absence of any such evidence of 
Congressional intent, FHFA must give effect to the language that 
Congress actually has used in the Bank Act. That language allows an 
institution to be designated as a CFI, and thus benefit from the 
expanded collateral available to CFIs, only if it has FDIC deposit 
insurance and also has total assets less than the statutory amount. 
Because none of the newly-eligible CDFIs are insured by the FDIC, they 
cannot be CFIs and thus cannot either pledge community development 
loans as collateral or obtain long-term advances to support community 
development purposes. Accordingly, the final rule does not change the 
existing definition of CFI.
    FHFA did not propose any revisions to the definitions of ``home 
mortgage loan,'' ``long-term,'' ``manufactured housing,'' or 
``residential mortgage loan.'' Nonetheless, a number of commenters 
suggested that FHFA amend each of those provisions in certain respects 
to bring them more in line with the business of CDFIs generally or with 
the business of the commenters. Those provisions are discussed 
separately below.
    Home mortgage loan. Some commenters asked that FHFA expand the 
definition of ``home mortgage loan'' to include certain other types of 
loans, such as loans secured by second liens, community acquisition 
loans (loans made to manufactured home communities), or pre-development 
or construction bridge loans. The Bank Act defines both ``home 
mortgage'' and ``home mortgage loan'' and FHFA cannot adopt a 
regulation that would include loans that would be precluded by the 
statutory definitions. The Bank Act defines a ``home mortgage loan'' as 
a loan made by a member upon the security of a home mortgage. It 
further defines a ``home mortgage'' as a mortgage upon real estate 
(held either in fee simple or a leasehold) on which one or more homes 
is located, and includes first mortgages and other types of first liens 
commonly used in the State where the real estate is located. 12 U.S.C. 
1422(4) and (5). FHFA believes, for purposes of meeting the Bank Act 
standard, that an applicant must make long-term mortgage loans the 
existing definition of ``home mortgage loan'' in Sec.  1263.1 is 
sufficiently expansive to accommodate loans typically made by CDFIs. 
Such loans as loans on one-to-four family properties, multifamily 
properties, residential properties that are partially used for business 
or farm purposes, or interests in long-term mortgages and mortgage 
pass-through securities backed by such mortgages qualify as home 
mortgage loans. FHFA is confident that most CDFIs would be able to meet 
the home mortgage loan eligibility requirements in the Bank Act.

[[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 case-by-case basis, rather than by revisions to the 
regulatory definitions. In each such case, however, the inquiry will be 
the same, i.e., whether the loan at issue is secured by a mortgage 
instrument, whether that instrument creates a first lien on real 
estate, and whether there are one or more homes or other dwelling units 
on the real estate at the time the loan is made and the security 
interest is created. If each of those questions can be answered in the 
affirmative, then the particular types of loans made by a CDFI 
applicant could qualify as ``home mortgage loans.'' To the extent that 
issues may arise about whether a particular type of loan made or held 
by a CDFI applicant in fact qualifies as a home mortgage loan, FHFA 
staff can assist the Banks and CDFI applicants in resolving that 
question on a case-by-case basis.
    Long-term. The proposed regulation retained the existing definition 
of ``long- term,'' which meant a term-to-maturity of five years or 
greater. Some CDFI commenters noted that many CDFIs make short-term 
pre-development or construction bridge loans and requested that the 
definition of ``long-term'' be changed to accommodate these loan types. 
The phrase ``long-term'' appears only in four provisions of the 
proposed rules, just two of which--Sec. 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 pre-development or construction bridge loans are 
unsecured or are secured by property that has no homes on it, those 
loans would not qualify as home mortgage loans under the Bank Act 
irrespective of their maturity. Accordingly, the final rule does not 
change the definition of ``long-term.''
    Manufactured housing. The existing regulation defines 
``manufactured housing'' to mean a manufactured home as defined in 
section 603 of the National Manufactured Housing Construction and 
Safety Standards Act of 1974. This provision establishes safety and 
quality standards for the housing units. Some commenters proposed 
expanding the definition of ``manufactured housing'' and the 
definitions of ``one-to-four family property'' and ``multifamily 
property'' in Sec.  1263.1 to accommodate real property loans for such 
uses as resident-owned manufactured housing cooperatives in which the 
land is owned in common or rented, and, to include real estate loans 
used to finance community facilities, infrastructure, and access roads 
within a manufactured housing complex. FHFA finds that for purposes of 
meeting the requirement in Sec.  1263.9, the existing definitions of 
``home mortgage loans,'' ``multifamily property,'' and ``one-to-four 
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 regulations--Sec. Sec.  1263.6(b) and 1263.10--both of which 
relate to the statutory requirement that federally insured depository 
institutions must have at least 10 percent of their assets in 
residential mortgage loans in order to become a member of a Bank. That 
10 percent requirement applies only to depository institutions and thus 
is not relevant for CDFI members. Because any amendments to this 
definition would have no effect on the newly-eligible CDFIs, the final 
rule does not amend that provision.

C. Eligibility Requirements--Subpart C

    The proposed rule would have carried over into part 1263 all of the 
existing provisions from Subpart C of the Finance Board regulations, 
which established the various eligibility requirements for Bank 
membership. Subpart C is made up of 13 separate sections, and the 
proposed rule would have carried over six of those sections without any 
substantive changes. The final rule adopts each of those six sections 
without any substantive change. Those unchanged provisions are 
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 newly-eligible CDFI 
applicants (which are not federally insured depository institutions) to 
the 10 percent requirement, nor does the final rule.
    Certain other commenters asked that FHFA revise 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

[[Page 683]]

independent financial evaluation of the CDFI applicants, FHFA does not 
believe that they should be included within the provisions for de novo 
depository institutions.
    With respect to each of the seven other sections located within 
Subpart C, the proposed rule included some substantive revisions, all 
of which were intended to implement the HERA amendments. In the final 
rule, FHFA is adopting certain of those provisions as proposed, but is 
revising other provisions in response to comments received on the 
proposed rule. Each of those sections is described separately below.
    Section 1263.6--General Eligibility Requirements. Section 1263.6 of 
the proposed rule closely followed the requirements of section 4(a) of 
the Bank Act, which established the eligibility requirements for Bank 
membership. 12 U.S.C. 1424(a). That statutory provision lists the types 
of entities that are eligible to apply for membership, and then 
establishes several requirements that each entity must satisfy in order 
to be approved for membership. Certain of those statutory requirements 
apply to all applicants. Those requirements are located at section 
4(a)(1)(A) through (C) and require that an applicant: (1) Is duly 
organized under Federal or State law; (2) is subject to inspection and 
regulation under Federal or State banking laws, or is a certified CDFI; 
and (3) makes long-term home mortgage loans. The other statutory 
requirements apply only to federally insured depository institutions, 
although the Finance Board also had long applied them to insurance 
company applicants, based on its authority to oversee the Banks to 
ensure that they operate in a safe and sound manner and carry out their 
housing finance mission. See 12 CFR 925.6(a)(4) to (6). Those other 
statutory provisions are located at section 4(a)(2)(B) through (C) and 
require that an applicant: (1) Be in sound financial condition so that 
a Bank may safely make advances to it; and (2) have a character of 
management and a home financing policy that are consistent with sound 
and economical home financing. That Finance Board regulation also 
included a requirement that any applicant that is not an insured 
depository institution must have mortgage-related assets that reflect a 
commitment to housing finance, as determined by the Bank in its 
discretion. 12 CFR 925.6(c).
    In 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 
mortgage-related 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 mortgage-related assets that reflect 
a commitment to housing finance, FHFA is also retaining that provision 
in the final rule without change. The term ``mortgage-related assets'' 
is not defined, and FHFA believes that the term can be construed 
broadly in considering whether a CDFI applicant meets this requirement. 
Moreover, the regulations do not require that a CDFI applicant's assets 
be exclusively, or even predominantly, oriented to traditional housing 
finance. What is required is that the CDFI applicant has assets that, 
when viewed in the overall context of the applicant's business and how 
it provides products and services to its targeted markets, can be 
fairly said to support housing finance. Because CDFI applicants are apt 
to have asset profiles that differ from those that the Banks typically 
review, FHFA expects that the Banks will consider the assets of CDFI 
applicants in light of their unique products and mission. Thus, 
although a CDFI may be able to demonstrate its commitment to housing 
finance through traditional means, such as by originating mortgage 
loans or otherwise to supporting the development or acquisition of 
housing, it also may demonstrate its commitment through other means. 
Examples of such other means would include, but are not limited to, 
loans related to manufactured housing (regardless of whether the unit 
is deemed to be real estate), pre-development or construction loans for 
real estate that will become or include residential property, or loans 
secured by subordinated liens on residential real estate.
    Section 1263.7--Duly Organized Requirement. Section 4(a)(1)(A) of 
the Bank Act requires an applicant to be duly organized under the laws 
of any State or of the United States. 12 U.S.C. 1424(a)(1)(A). The 
regulations of the Finance Board provided that an applicant would be 
deemed to be duly organized if it is chartered by a State or Federal 
agency as one of several types of entities eligible for Bank 
membership. In the proposed rule, FHFA retained the existing language 
from the Finance Board regulation and added new language providing that 
being incorporated under State law would be sufficient for a CDFI to 
demonstrate that it is duly organized. As noted in the prior section, 
several commenters asked that FHFA also allow CDFIs that are organized 
under Tribal law to be deemed to be duly organized, and the final rule 
includes an additional reference to Tribal law to clarify that a CDFI 
that is incorporated under State or Tribal law is deemed to satisfy the 
statutory requirement.
    Section 1263.8--Subject to Inspection and Regulation Requirement. 
Section 4(a)(1)(B) of the Bank Act generally requires an applicant for 
membership to be subject to inspection and regulation under State or 
Federal banking or similar laws. In the case of a CDFI, the statute 
imposes an alternative requirement, which is that the applicant be 
certified by the CDFI Fund. See 12 U.S.C. 1424(a)(1)(B). The proposed 
rule simply carried over the language from the Finance Board 
regulations without any changes. Nonetheless, several commenters asked 
that the final rule make clear that a CDFI applicant is not subject to 
the inspection and regulation requirement because of the alternative 
requirement noted above. FHFA agrees that clarification of this issue 
is appropriate and has addressed that

[[Page 684]]

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 1263.9--Makes Long-Term Mortgage Loans Requirement. As 
noted previously, section 4(a)(1)(C) of the Bank Act requires that 
every applicant for membership, including CDFIs, must make such home 
mortgage loans that the Director determines to be ``long-term loans.'' 
12 U.S.C. 1424(a)(1)(C). The regulations of the Finance Board presumed 
that an applicant had satisfied that requirement if the regulatory 
reports that it filed with its regulator showed that it originates or 
purchases long-term home mortgage loans. Section 1263.9 of the proposed 
rule carried over the substance of the Finance Board regulation, with 
some modifications to accommodate CDFI applicants. Under that provision 
of the proposed rule, a CDFI applicant also would have been presumed to 
have satisfied that requirement if it provides to the Bank other 
documentation showing that the applicant originates or purchases long-
term home mortgage loans.
    In the final rule, FHFA is adopting this provision without change. 
Because certain commenters sought FHFA guidance on how the Banks are to 
apply this provision, as well as the other provisions relating to an 
applicant's home financing policy and its commitment to housing 
finance, FHFA is providing such guidance in this preamble. Although it 
is clear that a CDFI applicant must originate or purchase long-term 
home mortgage loans in order to become a member, the Bank Act and the 
implementing regulations do not set a minimum threshold for the amount 
of home mortgage loans that an applicant must make in order to satisfy 
that requirement. Similarly, neither the statute nor the regulations 
characterize this as an ongoing requirement for membership.
    Given the differences between the business of a typical depository 
institution and that of a typical CDFI, the amount of home mortgage 
loans that a CDFI applicant originates or purchases will likely be 
considerably less than the amount that a similarly sized depository 
institution would originate or purchase. FHFA expects that in assessing 
a CDFI applicant's compliance with this ``makes long-term home mortgage 
loans'' requirement the Banks will view the extent to which the CDFI 
originates or purchases long-term home mortgage loans in light of their 
unique mission and community development orientation, and thus will 
deem such applicants to have satisfied this requirement if they in fact 
have originated or purchased home mortgage loans and can document that 
fact. Moreover, an applicant's compliance with this provision need be 
assessed only at the time that a CDFI applies for membership. This 
approach is consistent with how the Banks assess compliance with 
section 4(a)(2)(A) of the Bank Act, which requires certain insured 
depository institution applicants to have at least 10 percent of their 
assets in ``residential mortgage loans.''
    In an earlier portion of this preamble FHFA discussed in some 
detail the definitions of the terms ``home mortgage loan'' and ``long-
term'' as they are used in the context of the membership regulations. 
As discussed earlier, FHFA believes that for purposes of meeting the 
``makes long-term home mortgage loans'' requirement the definition of 
home mortgage loans in Sec.  1263.1 is sufficiently expansive to 
accommodate loans typically made by CDFIs, such as loans on one-to-four 
family properties, multifamily properties, residential properties with 
business components, interests in long-term mortgages, and mortgage 
pass-through securities backed by such mortgages.
    Section 1263.11--Financial Condition Requirement for Depository 
Institutions and CDFI Credit Unions. The proposed rule included two 
separate provisions for evaluating the financial condition of CDFI 
applicants: 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 State-chartered credit unions that 
have been certified as CDFIs but do not have Federal share insurance. 
Because the Finance Board had previously adopted regulations for 
evaluating the financial condition of all depository institution 
applicants, including State-chartered credit unions with NCUA share 
insurance, FHFA proposed to require CDFI credit unions to comply with 
the same regulations under which all other depository institution 
applicants are evaluated. In brief, the proposal would require the 
Banks to evaluate the financial condition of CDFI credit unions based 
on information in the regulatory financial reports they file with their 
applicable regulators, their audited financial statements, and the 
examination reports prepared by their regulators. Although CDFI credit 
unions do not file financial regulatory reports with the NCUA, they do 
file comparable reports with their appropriate State regulator, and 
FHFA believes that those documents may be used to assess the financial 
condition of the CDFI credit unions. The proposed rule would have 
amended the Finance Board's regulatory text in two respects--by adding 
CDFI credit unions to the list of institutions that are subject to 
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 State-chartered 
credit unions, objected to the provisions of the proposed rule that 
would have required all CDFI credit union applicants to meet certain 
performance trend criteria. For all other depository institution 
applicants, those performance trend criteria apply only if the 
applicant has received a composite regulatory examination rating of 
``2'' or ``3.'' FHFA did not receive comments from any prospective CDFI 
credit union member on this proposal. As was stated in the proposed 
rule, CDFI credit unions are not subject to oversight by the NCUA and 
have not previously been eligible for membership. As a result, the 
Banks may be less familiar with State examination processes and 
ratings, and FHFA believes that it is prudent to require all CDFI 
credit unions to demonstrate that their earnings, nonperforming assets, 
and allowance for loan and lease losses are consistent with the 
existing performance criteria. Thus,

[[Page 685]]

the final rule adopts the language of the proposed rule on this issue 
without change.
    Section 1263.12--Character of Management Requirement. The proposed 
rule carried over all of the substance of the Finance Board regulation 
relating to the character of management standard and added a separate 
paragraph for assessing the management of all CDFI applicants other 
than CDFI credit unions. Under the proposed rule, the character of a 
CDFI applicant's management would be deemed to be consistent with sound 
and economical home financing if the applicant provides the Bank with 
an unqualified written certification that neither the applicant nor its 
senior officials are subject to any enforcement actions, criminal, 
civil or administrative proceedings, or criminal, civil or 
administrative monetary liabilities, lawsuits or judgments. The 
proposed rule would have required CDFI credit unions to comply with the 
existing provisions applicable to depository institutions generally, 
but would have imposed slightly different standards on other types of 
CDFIs, such as loan funds and venture capital funds, because they are 
not regulated and thus are not subject to regulatory examinations or 
administrative enforcement actions. This provision of the proposed rule 
did not generate any significant comments and is being adopted in final 
form without change.
    Section 1263.13--Home Financing Policy Requirement. Section 
4(a)(2)(C) of the Bank Act provides that any insured depository 
institution applicant must have a home financing policy that is 
consistent with sound and economical home financing. Although the Bank 
Act applies this requirement only to depository institutions, the 
Finance Board regulations have applied it to all entities applying for 
Bank membership. See 12 CFR 925.6(a)(6). The Finance Board regulations 
provide that an insured depository institution applicant may be deemed 
to have satisfied the statutory requirement if it has a satisfactory 
Community Reinvestment Act (CRA) rating, but requires that applicants 
not subject to the CRA file with the Bank a written justification 
showing how and why their home financing policy is consistent with the 
housing finance mission of the Bank System. Id. at 925.13.
    FHFA did not propose any changes to the Finance Board regulation, 
and stated that CDFI applicants would be required to provide a written 
justification, acceptable to the Bank, explaining how and why their 
home financing policy is consistent with the Bank System's housing 
finance mission. Certain commenters asked that CDFI applicants be 
presumed to comply with this requirement by virtue of their 
certification from the CDFI Fund. Although some certified CDFIs may in 
fact have a housing finance orientation that would satisfy this 
requirement, that will not necessarily be the case for every CDFI that 
is certified by the CDFI Fund, given the potential variety of 
activities in which a CDFI may engage. Because not all CDFIs will have 
the same degree of involvement in housing finance activities, FHFA 
believes that the better approach is to have the Banks assess the 
housing finance policies of the CDFI applicants on an individual basis, 
which is what the proposed rule required. Accordingly, a CDFI applicant 
must provide to the Bank a written narrative describing the manner in 
which the CDFI supports housing finance generally, which may include 
direct support such as originating loans, as well as indirect support 
through other investments, activities, or services. FHFA believes that 
this should not be a burdensome requirement for most CDFI applicants, 
as they are likely to have some direct or indirect nexus to housing 
finance in their communities. Thus, FHFA expects that most CDFI 
applicants can readily demonstrate that their business operations and 
housing finance policies are consistent with the mission of the Bank 
System, which includes both traditional housing finance as well as 
other community investment activities.
    Section 1263.16--Financial Condition Requirement for Insurance 
Company and Certain CDFI Applicants. In the proposed rule, FHFA 
included new provisions for evaluating the financial condition of CDFI 
applicants. The provisions for evaluating CDFI credit unions were 
located in 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 a