Conservatorship and Receivership, 35724-35736 [2011-15098]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 76, Number 118 (Monday, June 20, 2011)]
[Rules and Regulations]
[Pages 35724-35736]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15098]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1229 and 1237

RIN 2590-AA23


Conservatorship and Receivership

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final 
rule to establish a framework for conservatorship and receivership 
operations for the Federal National Mortgage Association, the Federal 
Home Loan Mortgage Corporation, and the Federal Home Loan Banks, as 
contemplated by the Housing and Economic Recovery Act of 2008 (HERA). 
HERA amended the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (Safety and Soundness Act) by adding, among other 
provisions, section 1367, Authority Over Critically Undercapitalized 
Regulated Entities. The rule will implement this provision, and will 
ensure that these operations advance FHFA's critical safety and 
soundness and mission requirements. The rule seeks to protect the 
public interest in the transparency of conservatorship and receivership 
operations for the Federal National Mortgage Association (Fannie Mae), 
the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, 
the Enterprises), and the Federal Home Loan Banks (Banks) 
(collectively, the regulated entities).

DATES: Effective Date: This rule is effective July 20, 2011.

FOR FURTHER INFORMATION CONTACT: Frank Wright, Senior Counsel, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552, (202) 414-6439 (not a toll-free number); or Mark D. Laponsky, 
Deputy General Counsel, Federal Housing Finance Agency, Fourth Floor, 
1700 G Street, NW., Washington, DC 20552, (202) 414-3832 (not a toll-
free number). The telephone number for the Telecommunications Device 
for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654, amended the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) 
(Safety and Soundness Act), and the Federal Home Loan Bank Act (12 
U.S.C. 1421-1449) (Bank Act) to establish FHFA as an independent agency 
of the Federal government.\1\ FHFA was established as an independent 
agency of the Federal Government with all of the authorities necessary 
to oversee vital components of our country's secondary mortgage 
markets--the regulated entities and the Office of Finance of the 
Federal Home Loan Bank System.
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    \1\ See Division A, titled the ``Federal Housing Finance 
Regulatory Reform Act of 2008,'' Title I, section 1101 of HERA.
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    The Safety and Soundness Act provides that FHFA is headed by a 
Director with general supervisory and regulatory authority over the 
regulated entities and over the Office of Finance,\2\ expressly to 
ensure that the regulated entities operate in a safe and sound manner, 
including maintaining adequate capital and internal controls; foster 
liquid, efficient, competitive, and resilient national housing finance 
markets; comply with the Safety and Soundness Act and rules, 
regulations, guidelines, and orders issued under the Safety and 
Soundness Act and the authorizing statutes (i.e., the charter acts of 
the Enterprises and the Bank Act); and carry out their respective 
missions through activities and operations that are authorized and 
consistent with the Safety and Soundness Act, their respective 
authorizing statutes, and the public interest.\3\
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    \2\ See sections 1101 and 1102 of HERA, amending sections 1311 
and 1312 of the Safety and Soundness Act, codified at 12 U.S.C. 
4511and 4512.
    \3\ See 12 U.S.C. 4513(a)(1)(B).
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    In addition, this law combined the staffs of the now abolished 
Office of Federal Housing Enterprise Oversight (OFHEO), the now 
abolished Federal Housing Finance Board (Finance Board), and the 
Government-Sponsored Enterprise (GSE) mission office at the Department 
of Housing and Urban Development (HUD). By pooling the expertise of the 
staffs of OFHEO, the Finance Board, and the GSE mission staff at HUD, 
Congress intended to strengthen the regulatory and supervisory 
oversight of the 14 housing-related GSEs.
    The Enterprises, combined, own or guarantee more than $5 trillion 
of residential mortgages in the United States (U.S.), and play a key 
role in housing finance and the U.S. economy. The Banks, with combined 
assets of nearly $850 billion, support the housing market by making 
advances (i.e., loans secured by acceptable collateral) to their member 
commercial banks, thrifts, and credit unions, assuring a ready flow of 
mortgage funding.
    Because FHFA's mission is to promote housing and a strong national 
housing finance system by ensuring the safety and soundness of the 
Enterprises and the Banks, HERA amended the Safety and Soundness Act to 
make explicit FHFA's general regulatory and supervisory authority. To 
this end, section 1311(b)(1) of the Safety and Soundness Act expressly 
makes each regulated entity ``subject to the supervision and regulation 
of the Agency,'' thus amplifying the broad supervisory authority of the 
Director. See 12 U.S.C. 4511(b)(1). Moreover, the Safety and Soundness 
Act underscores the breadth of this authority by

[[Page 35725]]

expressly conveying ``general regulatory authority'' over the regulated 
entities to the Director. See 12 U.S.C. 4511(b)(2); see also 12 U.S.C. 
4513(a)(1)(B).\4\ In addition, the Safety and Soundness Act, as amended 
by HERA, provides that ``[t]he Agency may prescribe such regulations as 
the Agency determines to be appropriate regarding the conduct of 
conservatorships or receiverships.'' 12 U.S.C. 4617(b)(1).
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    \4\ Other provisions in the Safety and Soundness Act recognize 
the independence and general regulatory authority of the Director. 
Section 1311(c) of the Safety and Soundness Act provides that the 
authority of the Director ``to take actions under subtitles B and C 
[of Title I of HERA] shall not in any way limit the general 
supervisory and regulatory authority granted to the Director under 
subsection (b).'' See 12 U.S.C. 4511(c). Similarly, section 1319G(a) 
of the Safety and Soundness Act provides ample, independent 
authority for the issuance of ``any regulations, guidelines, or 
orders necessary to carry out the duties of the Director under this 
title or the authorizing statutes, and to ensure that the purposes 
of this title and the authorizing statutes are accomplished.'' See 
12 U.S.C. 4519G(a).
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    The Enterprises are currently in conservatorship. FHFA as 
Conservator has been responsible for the conduct and administration of 
all aspects of the operations, business, and affairs of both 
Enterprises since September 6, 2008, the date on which the Director 
placed Fannie Mae and Freddie Mac in conservatorship. As Conservator, 
FHFA is authorized to take such action as may be ``necessary to put the 
regulated entity in a sound and solvent condition'' and ``appropriate 
to carry on the business of the regulated entity and preserve and 
conserve the assets and property of the regulated entity.'' 12 U.S.C. 
4617(b)(2)(D). Similarly, FHFA, as Conservator, may ``transfer or sell 
any asset or liability of the regulated entity in default, and may do 
so without any approval, assignment, or consent with respect to such 
transfer or sale.'' Id. 4617(b)(2)(G).
    The United States Department of the Treasury (``Treasury'') 
facilitated FHFA's decision to utilize its statutory conservatorship 
powers in an effort to restore the Enterprises' financial health by 
agreeing to make funding available to the Enterprises pursuant to 
Senior Preferred Stock Purchase Agreements (``Treasury 
Agreements'').\5\ Pursuant to these Agreements, as subsequently 
amended, Treasury has made available, through the Conservator, capital 
(``Treasury Commitments'') to each of the Enterprises in return for 
senior preferred stock carrying a preference with regard to dividends 
and the distribution of assets of the Enterprise in liquidation. As 
Conservator, FHFA has already drawn on the Treasury Commitments several 
times to prevent a negative net worth position that would trigger 
mandatory receivership of each Enterprise.
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    \5\ The Treasury Agreements and their amendments are available 
to the public for review at https://www.fhfa.gov/webfiles/1099/conservatorship21709.pdf and https://www.financialstability.gov/roadtostability/homeowner.html.
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    Congress authorized the Treasury Agreements in section 1117 of 
HERA, which amended each of the Enterprises' authorizing statutes 
(Fannie Mae, 12 U.S.C. 1716 et seq.; Freddie Mac, 12 U.S.C. 1451 et 
seq.) to empower Treasury to purchase securities of the Enterprises 
subject to certain conditions. These conditions include that Treasury 
``protect the taxpayers'' by taking into consideration, among other 
things, ``[t]he need for preferences or priorities regarding payments 
to the Government'' and ``[r]estrictions on the use of corporate 
resources.'' Pursuant to this statutory mandate, the Treasury 
Agreements imposed several such preferences, priorities, and 
restrictions. For instance, while the Treasury Agreements authorize the 
Conservator to draw on the Treasury Commitment for funds equal to the 
amount by which an Enterprise's liabilities exceed its assets, excluded 
from this calculation are liabilities that the Conservator determines 
shall be subordinated, including ``a claim against [an Enterprise] 
arising from rescission of a purchase or sale of a security issued by 
[an Enterprise] * * * or for damages arising from the purchase, sale, 
or retention of such a security.'' Treasury Agreements Sec.  1, 
definition of ``Deficiency Amount,'' subparagraph (iii). In other 
words, the Conservator may determine to subordinate such a liability, 
with the effect that funds could not be drawn under the Treasury 
Agreements to satisfy it. The Treasury Agreements also contain 
restrictions on the declaration or payment of dividends or other 
distributions with respect to the Enterprises' equity interests; 
redeeming, purchasing, retiring, or otherwise acquiring for value any 
of the Enterprises' equity interests; or selling, transferring, or 
otherwise disposing of all or any portion of the Enterprises' assets 
other than in the ordinary course of business or under other limited 
exceptions. Treasury Agreements Sec. Sec.  5.1 and 5.4. In promulgating 
these regulations, FHFA is required to ``ensure that the purposes of * 
* * the authorizing statutes,'' including the authorizing statutes' 
provisions for stock purchases by Treasury and the preferences, 
priorities, and restrictions attendant to such purchases, ``are 
accomplished.'' 12 U.S.C. 4526(a).
    At the time FHFA established the conservatorships, and on several 
occasions since, FHFA has noted that the conservatorships, combined 
with the Treasury Senior Preferred Stock Agreements described above, 
provide an opportunity for Congress to direct the ultimate resolution 
of the Enterprises.

II. Final Rule

    This final regulation describes, codifies, and implements the 
changes to the statutory regime enacted by HERA, the authorities 
granted to FHFA, and eliminates ambiguities regarding those changes. 
The final rule does not, and the proposed rule, published in the 
Federal Register at 75 FR 39462 (July 9, 2010), did not, recite all 
provisions of law relevant to the regulated entities in conservatorship 
or receivership. It sets out the basic and general framework for 
conservatorships and receiverships, supplementing statutory provisions 
that FHFA believed needed elaboration or explanation. The rule cannot 
be read or applied in isolation, but must be read while also consulting 
the enabling statutes of FHFA and the regulated entities. The 
regulation is part of FHFA's implementation of the powers provided by 
HERA, and does not seek to anticipate or predict future 
conservatorships or receiverships.
    The final rule includes provisions that describe the basic 
authorities of FHFA when acting as conservator or receiver, including 
the enforcement and repudiation of contracts. Reflecting the approach 
in HERA, the rule parallels many of the provisions in the Federal 
Deposit Insurance Corporation (FDIC) receivership and conservatorship 
regulations. The rule necessarily differs in some respects, however, 
from the FDIC regulations, because not all of the regulated entities 
are depository institutions, none is a Federally insured depository 
institution, and their important public missions, reflected in 
congressional charters, differ from those of banks and thrifts.
    The final rule establishes procedures for conservatorship and 
receivership and priorities of claims for contract parties and other 
claimants. These priorities set forth the order in which various 
classes of claimants will be paid, partially or in full, in the event 
that a regulated entity is unable to pay all valid claims.
    The final rule contains several provisions that address whether and 
to what extent claims against the regulated entities by current or 
former holders of their equity interests for rescission or damages 
arising from the purchase, sale, or retention of such equity interests 
will be paid while those entities are in

[[Page 35726]]

conservatorship or receivership. The potential impact of such claims 
may be significant and may jeopardize FHFA's ability to fulfill its 
statutory mission to restore soundness and solvency to insolvent 
regulated entities and to preserve and conserve their assets and 
property.
    The rule clarifies that for purposes of priority determinations, 
claims arising from rescission of a purchase or sale of an equity 
security of a regulated entity, or for damages arising from the 
purchase, sale, or retention of such a security, will be treated as 
would the underlying security that establishes the right to the claim. 
The rule also classifies a payment of these types of claims as a 
capital distribution, which is prohibited during conservatorship, 
absent the express approval of the Director. Moreover, the rule 
provides that payment of securities litigation claims will be held in 
abeyance during a conservatorship, except as otherwise ordered by the 
Director. In the event of receivership, such claims will be treated 
according to the process established by statute and by regulations in 
this part.

A. Comments

    FHFA has considered all of the comments in developing the final 
rule. FHFA accepted some of the commenters' recommendations and has 
made changes in the final rule, although the basic approach adopted in 
the proposed rule remains the same. The changes made in the final rule 
improve upon the basic approach proposed by FHFA by clarifying certain 
provisions and by improving the structure of the rule. Specific 
comments, FHFA's responses, and changes adopted in the final rule are 
described in greater detail below in the sections describing the 
relevant rule provisions.
    FHFA received comments from a variety of sources, including 
shareholders for the Enterprises in conservatorship, counsel for 
shareholder litigants, members of Congress, and the Federal Home Loan 
Banks.

B. Final Rule Provisions

1. Comments Relating to Shareholder Claims
    Some of the fiercest objections to the proposed rule were made 
against the provisions that would address the status of shareholder 
claims in conservatorship and receivership. FHFA received several 
comments from Enterprise shareholders, attorneys for shareholders 
engaged in litigation against the Enterprises, and several members of 
Congress, who raised the following concerns:
    Redress for victims of securities fraud.
    Shareholders urged FHFA not to adopt the proposed rule because the 
rule would deny victims of securities fraud any avenue for meaningful 
redress. These commenters also argued that the proposed rule would 
insulate Fannie Mae and Freddie Mac and their management from 
accountability for fraud.
    After full consideration of these comments, FHFA has determined 
their concerns to be unfounded. The reality in any insolvency is that 
there are not enough assets to satisfy everyone with a claim on those 
assets. The priority provisions of 12 U.S.C. 4617(c) and regulations in 
this part simply recognize that reality. In light of the different risk 
profiles that investors and creditors accept when dealing with a 
business entity, subordination is the rule in corporate bankruptcies. 
The comments offer no sound reasons why the public policies supporting 
the rule in bankruptcy are not equally applicable in the context of the 
entities regulated by FHFA. If anything, the policy justifications for 
subordination of shareholder claims relative to the Enterprises 
currently in conservatorship is even greater because of the unique 
arrangements by which the Enterprises are being kept solvent through 
infusions of Treasury funds. If securities litigation claimants were 
treated as ordinary creditors, payment of such a claim against the 
Enterprises would represent a wealth transfer from the taxpayers of the 
United States to certain current and former shareholders of Fannie Mae 
and Freddie Mac. This was not the intent of the Treasury Agreements, 
and subordination avoids this unintended and unfair result.
    FHFA does not intend to allow anyone under its jurisdiction to 
escape accountability for fraud. The rule, however, deals with a 
different issue: The priority of competing claims against a limited 
estate. In the conservatorships of Fannie Mae and Freddie Mac, FHFA 
immediately replaced the management that was in charge of Fannie Mae 
and Freddie Mac at the time plaintiffs in the pending securities cases 
allege the fraud occurred. As set forth in FHFA's 2008 Report to 
Congress, FHFA fundamentally changed Enterprise management and 
governance practices by appointing new CEOs, nonexecutive chairmen, and 
boards of directors to both Enterprises, and by working with both 
Enterprises to establish a new board committee structure with key 
changes in charters and responsibilities.\6\ Therefore, whether 
shareholder plaintiffs can collect on claims or judgments against 
Fannie Mae or Freddie Mac has no connection to and does not further any 
interest plaintiffs may have in holding accountable the alleged 
perpetrators of any fraud. Given the financial situations of the 
Enterprises, the burden of payments on private claims would fall on the 
U.S. taxpayers, who through the Treasury Agreements provide infusions 
of cash to make up any quarterly net worth deficits, not on individuals 
alleged to be responsible for fraud.
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    \6\ FHFA Report to Congress--2008 (May 18, 2009), at 80, 
available at https://www.fhfa.gov/webfiles/2335/FHFA_ReportToCongress2008508rev.pdf.
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    Treatment and subordination of securities fraud claims.
    Shareholder counsel objected to Sec.  1237.9 of the proposed rule, 
which would address, among other things, the priority of securities 
litigation claims in receivership. The proposal reflected a balancing 
of interests based on the sources of claims. Securities fraud claims in 
litigation would not exist but for ownership of the underlying 
security. Therefore, the proposal called for subordinating such claims 
and, as a matter of fundamental fairness, treating them just as any 
other claim based on ownership of the security.
    By permitting recovery by equity-holders only after creditors have 
been paid in full, this rule reflects the longstanding ``general rule 
of equity'' that ``stockholders take last in the estate of a bankrupt 
corporation.'' Gaff v. FDIC, 919 F.2d 384, 392 (6th Cir. 1990); see 
also In re Stirling Homex Corp. (Jezarian v. Raichle), 579 F.2d 206, 
211 (2d Cir. 1978) (``[A]fter all creditors have been paid, provision 
may be made for stockholders. When the debtor is insolvent, the 
stockholders, as such, receive nothing.''). The rationale underlying 
this rule is that ``[b]ecause, unlike creditors and depositors, 
stockholders stand to gain a share of corporate profits, stockholders 
should take the primary risk of the enterprise failing.'' Gaff, 919 
F.2d at 392. Moreover, creditors deal with a corporation ``in reliance 
upon the protection and security provided by the money invested by the 
corporation's stockholders--the so-called `equity cushion.' '' Stirling 
Homex, 579 F.2d at 214.
    The provisions of Sec.  1237.9, confirming that a securities 
litigation claim has the same priority in receivership as the 
underlying security out of which it arises, would harmonize aspects of 
receiverships under the Safety and Soundness Act with the

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bankruptcy regime that applies to most publicly traded corporations. In 
aligning the priority of securities litigation Claims in receivership 
with their treatment in bankruptcy, FHFA follows in the path of a 
number of Federal circuit courts that have looked to the U.S. 
Bankruptcy Code for guidance on relative priorities of shareholder 
claims as well as other issues arising in receiverships of financial 
institutions. See, e.g., Gaff, 919 F.2d at 393-96; Office and 
Professional Employees Int'l Union v. FDIC, 962 F.2d 63, 68 (D.C. Cir. 
1992) (Ruth Bader Ginsburg, J.); First Empire Bank-New York v. FDIC, 
572 F.2d 1361, 1368 (9th Cir. 1978).
    The shareholder counsel contend that the Supreme Court's decision 
in Oppenheimer v. Harriman National Bank & Trust Co. et al., 301 U.S. 
206 (1937), mandates that securities fraud claims be treated as 
creditor claims unless the statute includes specific language akin to 
section 510(b) of the Bankruptcy Code. They assert that the majority of 
courts have rejected subordination of securities litigation claims in 
financial institution receiverships, and that the legislative history 
of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, from which much of the structure of HERA's conservatorship and 
receivership regime was drawn, contradicts FHFA's proposed 
interpretation of HERA, citing cases such as FDIC v. Jenkins et al., 
888 F.2d 1537 (11th Cir. 1989), Howard v. Haddad, 916 F.2d 170 (4th 
Cir. 1990), and Hayes v. Gross, 982 F.2d 104 (3d Cir. 1992).
    FHFA disagrees. Oppenheimer is not controlling, fundamentally 
because it involved a receivership under a different statute. 
Furthermore, it did not hold that subordination of shareholder claims 
is inappropriate in all receiverships, or that a statute must use 
``magic words'' to provide or allow for subordination. As one court has 
explained, Oppenheimer's holding was heavily dependent on the fact that 
the rescinding shareholder previously satisfied his statutory 
obligation to creditors under then-existing ``double liability'' laws. 
Northwest Racquet Swim & Health Clubs, Inc. v. Resolution Trust Corp. 
(RTC), 927 F.2d 355, 361 n.17 (8th Cir. 1991) (rejecting attempt by 
holder of failed thrift's subordinated debt to rescind for alleged 
fraud and thereby recover on par with general creditors).
    The courts' decisions in Jenkins, Howard, and Hayes do not address 
subordination of securities litigation claims in relation to competing 
creditors of an institution. They address the priority of FDIC claims 
against a failed bank's officers and directors relative to the claims 
private plaintiffs have against those same defendants. The proposed 
rule and final rule do not address the priority that FHFA's claims 
against officers and directors of the Enterprises have versus private 
plaintiff claims. This rule confirms and clarifies the priority among 
competing claims against the Enterprises themselves. The Jenkins, 
Howard, and Hayes decisions do not reach that issue or contradict the 
proposed rule. For example, in Jenkins the court observed that section 
510(b) of the Bankruptcy Code provides for subordination of shareholder 
``claims against the debtor or an affiliate of the debtor,'' but noted 
that ``[i]n the present case, however, the shareholders are not 
attempting to collect on assets of the failed bank. Rather, they are 
proceeding against solvent third-parties in non-derivative shareholder 
suits,'' a different situation than is addressed by section 510(b). 888 
F.2d at 1545.
    Prohibiting capital distributions and payment of securities 
litigation judgments.
    Shareholder counsel also asserts that HERA does not grant FHFA as 
conservator the authority to prohibit capital distributions or payment 
of securities litigation claims. In one of their comments, shareholder 
counsel argued that the agency could not assert the authority to define 
securities litigation claims as capital distributions and to prohibit 
such distributions absent an express statutory grant of such authority.
    FHFA rejects this argument, as it ignores the fact that the Safety 
and Soundness Act and HERA grant FHFA broad authority as Conservator to 
manage the conservatorship estate, including the authority to restrict 
capital distributions that would cause a regulated entity to become 
undercapitalized. As one of the primary objectives of conservatorship 
of a regulated entity would be restoring that regulated entity to a 
sound and solvent condition, allowing capital distributions to deplete 
the entity's conservatorship assets would be inconsistent with the 
agency's statutory goals, as they would result in removing capital at a 
time when the Conservator is charged with rehabilitating the regulated 
entity. Under the Safety and Soundness Act and HERA, FHFA has a 
statutory charge to work to restore a regulated entity in 
conservatorship to a sound and solvent condition, and to take any 
action authorized by this section, which FHFA determines to be in the 
best interests of the regulated entity or FHFA. This express statutory 
grant of authority grants FHFA as Conservator authority to address 
capital distribution and other claims against the conservatorship 
estate in the manner that it deems appropriate.
    Shareholder counsel also asserts that HERA does not authorize the 
Conservator to defy or disregard a Federal court judgment. They suggest 
that this alleged lack of authority for proposed Sec. Sec.  1237.12 and 
1237.13 is underscored by the fact that 12 U.S.C. 4617(b)(11)(C), which 
forbids attachment or execution of receivership assets, does not apply 
during conservatorship, which means a judgment creditor could seize an 
Enterprise's assets during conservatorship using conventional execution 
remedies.
    FHFA believes that this comment misperceives both the nature of a 
money judgment and the role of a conservator. In Federal court, ``[a] 
money judgment `is not an order to the defendant; it is an adjudication 
of his rights or liabilities.' '' 12 Wright & Miller, Federal Practice 
& Procedure, Sec.  3011 at 94 (2d ed. 2010) (quoting D. Dobbs, Handbook 
of the Law of Remedies (1971)). ``[W]hen a party fails to satisfy a 
court-imposed money judgment, the appropriate remedy is a writ of 
execution, not a finding of contempt.'' Combs v. Ryan's Coal Co. Inc., 
785 F.2d 970, 980 (11th Cir. 1986); accord Shuffler v. Heritage Bank, 
720 F.2d 1141, 1147-48 (9th Cir. 1983). Thus, not voluntarily writing a 
check to cover a money judgment out of a limited estate does not 
constitute ``defiance'' or ``disregard'' of that judgment. Moreover, 
because the essential function of a conservator is to preserve and 
conserve the institution's assets, courts are loath to require a 
conservator to make any particular expenditure out of the 
conservatorship estate. See, e.g., Rosa v. RTC, 938 F.2d 383, 398 (3d 
Cir. 1991) (reversing injunction requiring bank in conservatorship to 
make pension contributions required by the Employee Retirement Income 
Security Act because ``implementation of the injunctive provisions 
would clearly require the distribution of the assets of City Savings 
and thereby encroach on the power of the conservator (now receiver) to 
preserve and dispose of those assets within its control. * * * [and] 
could result in forcing City Savings to accord the [pension] trustee, 
and therefore the beneficiaries of the plan, a preference over other 
creditors'').
    Validity of final rules issued by FHFA.
    Counsel for shareholder litigants raised a further objection to the 
proposed rule, arguing that any final rule issued by FHFA would be 
fundamentally flawed and invalid

[[Page 35728]]

because FHFA's head is not a validly appointed officer. They contend 
that the absence of a Senate-confirmed Director for FHFA means that the 
Appointments Clause of the U.S. Constitution \7\ has not been met 
satisfied which makes it impossible for FHFA to issue binding 
regulations. FHFA's statute provides for a presidentially designated 
and Acting Director, without Senate confirmation. FHFA is led by such 
an Acting Director designated by the President in September 2009. 
Nonetheless, shareholder counsel argues that the Appointments Clause 
only permits such acting officials to serve temporarily, and not for an 
extended or indefinite period of time. They also assert that the 
designation and appointment of FHFA's Acting Director is invalid unless 
the appointee succeeds a Senate-confirmed Director because HERA only 
allows the Acting Director to carry out the duties of a Director. 
Shareholders' counsel argues that the Acting Director's authority is 
only derivative of the preceding FHFA Director, a Senate-confirmed 
Director of a predecessor agency who served as Director of FHFA as 
provided by statute rather than by a Senate-confirmed appointment to 
the position. Therefore, according to shareholders' counsel, the Acting 
Director has no authority because his predecessor had no authority 
without a Senate confirmation.
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    \7\ U.S. Const. Art. II, Sec.  2, cl. 2.
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    The argument is without foundation. FHFA's Acting Director, was 
properly designated by the President as Acting Director pursuant to 12 
U.S.C. 4512(f), which does not require Senate confirmation. Nor does 
the U.S. Constitution require Senate confirmation for an official 
designated to serve in an acting capacity. The former Director was the 
incumbent Director of OFHEO and properly took office pursuant to HERA's 
transitional provision, 12 U.S.C. 4512(b)(5), when OFHEO's functions 
were transferred to FHFA as its successor agency. Any alleged question 
about the validity of the former Director's service would not, in any 
event, impair the President's subsequent designation of FHFA's Acting 
Director. Finally, neither the U.S. Constitution nor the statute limits 
the time period for which FHFA's Acting Director may serve. 
Accordingly, the Acting Director is properly serving as Acting Director 
and FHFA has the power to issue this final rule.
2. Joint Comment by the Federal Home Loan Banks
    The twelve Federal Home Loan Banks (Banks) submitted a joint 
comment in response to the proposed rule that introduced a number of 
concerns about the proposed rule.
    Differences between the Banks and the Enterprises.
    The Banks commented that the proposed rule did not address the 
unique differences between the Banks and the Enterprises, as required 
by section 1201 of HERA.\8\ They assert that the final rule should 
apply only to the Enterprises and that FHFA should issue a separate 
proposed rule specific to the Banks.
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    \8\ 12 U.S.C. 4513, as amended.
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    According to the Banks, the proposed rule failed to account for 
their banking activities, including the rights of depositors and the 
treatment of assets held in safekeeping arrangements, trust or 
custodial accounts, and other third-party assets. The Banks assert that 
this failure is highlighted by a few words in the proposed rule's 
Supplementary Information stating that the ``GSEs are not depository 
institutions,'' \9\ noting that the statement is untrue with respect to 
the Banks. While the Banks do take deposits from members, they are not 
insured depository institutions and such deposits are not a significant 
funding source for them. Consolidated obligations (``COs'') are their 
principal funding source. FHFA continues to believe, after 
consideration of the statutory factors, that the regulations in this 
part are appropriate to both the Enterprises and the Banks. The joint 
comment also notes that the proposed rule does not include provisions 
contained in FDIC conservatorship and receivership regulations, such as 
provisions addressing qualified financial contracts, treatment of 
financial assets transferred in connection with a securitization or 
participation, post-insolvency interest, or various policy statements 
issued by the FDIC with respect to conservatorship and receiverships. 
The joint comment suggests that these provisions provide certainty for 
parties seeking to do business with depository institutions regulated 
by the FDIC, and suggests that FHFA consider whether these issues 
should be addressed in connection with the proposed rule.
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    \9\ 75 FR 39462, 39464. The entire sentence in Supplementary 
Information to the proposed rule reads: ``The proposed regulation 
necessarily differs in some respects, however, from the FDIC 
regulations, because the GSEs are not depository institutions, and 
their important public missions differ from those of banks and 
thrifts.''
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    FHFA believes that the proposed rule adequately accounts for the 
unique differences between the Banks and the Enterprises and does not 
require special provisions relating to one or the other. Section 1145 
of HERA amended section 1367 of the Safety and Soundness Act to 
establish a comprehensive and overarching conservatorship and 
receivership process for both the Enterprises and the Banks. The 
proposed rule was not, and the final rule is not, intended to codify in 
regulations the entirety of the statutory conservatorship and 
receivership regime. The final rule must be read in its context as 
elaborating on, not substituting for or replacing, statutory text. 
Moreover, while the proposed rule sought to develop and expand a 
regulatory framework that parallels the FDIC approach to 
conservatorships and receiverships, the goal of the proposed rule was 
never to create a regulatory framework that precisely mirrored the FDIC 
regulatory regime. This is partly due to differences between the 
enabling statutes of FHFA and the FDIC, and to the important 
differences between the regulated entities and the depository 
institutions insured by the FDIC. The agency has elected to address 
these issues, to the extent it may become necessary to do so, through 
policy statements, policy guidances, and decisions by the agency, the 
conservator or the receiver.
    The statutory provisions for conservatorship and receivership, as 
explained below, provide the guidance necessary for matters that the 
Banks contend were ignored in the proposed rule. The Banks' comment 
boils down to an objection that the proposed rule does not recite the 
statute or does not seek to embellish clear statutory language that 
applies to them, but might not apply to the Enterprises.
    The statutory provisions for conservatorship and receivership 
provide that ``[t]he rights of the conservator or receiver appointed 
under this section shall be subject to the limitations on the powers of 
a receiver under sections 402 through 407 of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (FDICIA).\10\ Section 402 
of the FDICIA defines ``depository institution,'' ``net entitlement,'' 
``net obligation,'' and ``netting contract,'' as they apply to banking 
transactions. 12 U.S.C. 4402(6), (12), (13) and (14). Section 403 of 
the FDICIA (``Enforceability of security agreements'') requires:
---------------------------------------------------------------------------

    \10\ 12 U.S.C. 4402-4407.

    The provisions of any security agreement or arrangement or other 
credit enhancement related to one or more netting contracts between 
any 2 financial institutions shall be enforceable in accordance with 
their terms (except as provided in section 561(b)(2) of Title 11) 
[relating to bankruptcy], and shall

[[Page 35729]]

not be stayed, avoided, or otherwise limited by any State or Federal 
law (other than section 1821(e) of this title [relating to the 
FDIC's authority to affirm a conservator's and receiver's authority 
with respect to certain types of contracts], section 1787(c) of this 
---------------------------------------------------------------------------
title, and section 78eee(b)(2) of Title 15).

12 U.S.C. 4403(f) (emphasis added).

    Section 1367(b)(5)(D) of the Safety and Soundness Act (``Authority 
to Disallow Claims'') covers the receiver's authority to disallow any 
portion of any claim by a creditor or claim of security, preference, or 
priority that is not proven to the satisfaction of the receiver. 
Section 1367(b) also limits the scope of a receiver's authority to 
disallow claims with respect to ``(I) any extension of credit from any 
Federal Reserve Bank, Federal Home Loan Bank, or the United States 
Treasury; or (II) any security interest in the assets of the regulated 
entity securing any such extension of credit.'' 12 U.S.C. 
4617(b)(5)(D)(iii) (emphasis added).
    Consolidated obligations and joint and several liability.
    The Banks argued that the proposed rule did not adequately address 
the joint and several liability of the Banks for COs that they issue. 
FHFA does not believe that COs require separate treatment in the rule, 
as opposed to policy statements or discretionary decisions in the 
context of specific conservatorships and receiverships.
    The Banks note that, under 12 CFR 966.9(a), each Bank, individually 
and collectively, has an obligation to make full and timely payment of 
all principal and interest on COs when due. Based upon this joint and 
several liability structure, the Banks contend that if a Bank were 
placed in conservatorship or receivership and could not make required 
payments on its COs, this would trigger the requirement that one or 
more other Banks make the principal and interest payments on the COs on 
a continuing basis. They noted that this obligation is subject to a 
right of reimbursement by the non-paying Bank. According to the Banks, 
the proposed rule's infirmity is its failure to explain how this 
reimbursement right, including the right to receive interest, would be 
treated by the conservator or receiver. However, they offered no 
explanation for why the rule should address these obligations as 
distinct from any others.
    FHFA does not believe that specific provisions are needed in this 
regulation to address COs and the Banks' joint and several liability on 
them. Unpaid COs of a defaulted Bank would be general-creditor 
obligations of that Bank's receivership. In such a case, the Director 
might well direct other Banks to make payments on those COs to ensure 
that investors in them received timely payment and market confidence in 
the Bank System was maintained. The Director has authority to do that 
under current regulation,\11\ which regulations in this part do not 
affect. Under that regulation, the Banks that paid COs on which a 
defaulted Bank was primarily liable would have a claim for 
reimbursement against the defaulted Bank,\12\ and that claim would be a 
general-creditor obligation of the defaulted Bank. None of these 
outcomes require special provision in this rule. As a practical matter, 
a troubled Bank might be resolved without creating receivership claims 
based on COs. In the case of a Bank placed in conservatorship, the Bank 
would likely continue to pay on its COs as the payments came due. 
Similarly, if a Bank were closed and the COs transferred to a limited-
life regulated entity (LLRE), that LLRE would likely also continue to 
pay on those COs as the payments came due. In addition, in the case of 
a Bank that was closed and its assets and liabilities transferred to 
one or more acquiring Banks, those transactions would plausibly include 
assignment and apportionment of the failed Bank's COs to and among the 
acquiring Banks, which would continue to pay on those COs as the 
payments came due. Therefore, the priority of receivership claims 
relating to COs would be relevant only in a case of a Bank placed in a 
liquidating receivership. As stated above, FHFA believes that the 
situation can be addressed by regulations in this part without making 
specific provision for COs.
---------------------------------------------------------------------------

    \11\ 12 CFR 966.9(d)(1).
    \12\ 12 CFR 966.9(d)(2).
---------------------------------------------------------------------------

    The Banks argued that their joint and several liability for COs 
could result in a troubled Bank being merged with another Bank under 
section 26 of the Bank Act, as amended by section 1209 of HERA. 12 
U.S.C. 1446.\13\ They urged FHFA to delay issuing a conservatorship and 
receivership rule that covers the Banks until it first publishes 
proposed rules on Bank voluntary mergers. FHFA does not make any 
speculation on whether such mergers might result from the Banks' joint 
and several liability on COs, and does not consider either this rule on 
conservatorship and receivership or a rule on voluntary mergers of the 
Banks as dependent on each other. In any event, the rule on voluntary 
mergers has already been proposed,\14\ and work is proceeding on the 
final rule.
---------------------------------------------------------------------------

    \13\ Section 1209 of HERA (``Voluntary Mergers Authorized'') 
amended section 26 of the Bank Act, and provides, in part, that any 
Bank may, with the approval of the Director of FHFA and the boards 
of directors of the Banks involved, merge with another Bank.
    \14\ 75 FR 72751 (Nov. 26, 2010).
---------------------------------------------------------------------------

    Administrative expenses.
    The Banks raised an issue about claims for administrative expenses 
that receive heightened priority in a resolution. They argued that, in 
the event a Bank were in a troubled condition, or in default or in 
danger of default, one or more other Banks could voluntarily provide 
(or be required to provide by court order, or by FHFA direction or 
otherwise) some form of managerial, financial, or other assistance to 
the Bank. They asserted that, because of the Banks' joint and several 
liability for COs issued by any of the Banks, the final rule should 
address the priority of a Bank's claim for repayment from another Bank, 
when the latter Bank is placed into conservatorship or receivership. 
The determination of whether an expense incurred, either before or 
during receivership, is entitled to priority as an administrative 
expense of the receiver, is vested in the discretion of the receiver. 
FHFA does not believe that the statute requires, or that prudence 
counsels in favor of, advance prescriptive determination that certain 
specific types of claims, even those based on providing financial 
support for a troubled institution, always will be administrative 
expenses.
    The Banks observe that the FDIC has a regulation stating that 
``administrative expenses of the receiver * * * shall include both pre-
failure and post-failure obligations that the receiver determines are 
necessary and appropriate to facilitate the smooth and orderly 
liquidation or other resolution of the institution.'' \15\ FHFA does 
not believe that further elaboration of that type is needed in FHFA's 
regulation, because section 1367(c)(3) of the Safety and Soundness Act 
already defines ``administrative expenses'' to include ``any 
obligations that the receiver determines are necessary and appropriate 
to facilitate the smooth and orderly liquidation or other resolution of 
the regulated entity.'' 12 U.S.C. 4617(c)(3).
---------------------------------------------------------------------------

    \15\ 12 CFR 360.4.
---------------------------------------------------------------------------

    Priority of expenses and unsecured claims.
    The Banks suggested FHFA add clarifying language to Sec.  1237.9 of 
the proposed rule, which states that the lowest priority of claim is 
accorded to ``[a]ny obligation to current or former shareholders or 
members arising as a result of their current or former status as 
shareholders or members, including without limitation, any Securities

[[Page 35730]]

Litigation Claim.'' They argue that members, or former members, of a 
Bank may have a wide range of transactions and relationships with a 
failed Bank that could result in obligations that constitute creditor 
rather than equity holder claims against the receivership. They 
asserted that members can maintain deposits with a Bank, or enter into 
transactions under which they are otherwise treated as a creditor of a 
Bank. These obligations, transactions and relationships arise, because 
of the nature of the Bank System, from the shareholder status of the 
member or former member. But, the Banks maintain these types of member 
transactions and relationships are distinct from a member's, or former 
member's, ownership of capital stock. They urged FHFA to exempt from 
Sec.  1237.9(a)(4) of the proposed rule obligations of a failed Bank to 
members or former members arising from transactions or relationships 
other than the ownership of capital stock in that Bank, so that those 
obligations would be treated the same as similar claims by nonmembers.
    FHFA is persuaded that the organizational uniqueness of the Bank 
System requires a clarification to Sec.  1237.9(a)(4) of the final 
rule. The final rule clarifies that, with respect to members of a 
failed Bank, the lowest priority position does not apply to claims 
arising from transactions or relationships distinct from the claimant's 
past or present ownership, purchase, sale or retention of an equity 
security of the Bank.
    The Banks also commented that eleven of the twelve Banks operate 
under capital plans adopted under 12 U.S.C. 1426, and approved by the 
Finance Board. They stated that these capital plans, in accordance with 
the Bank Act and implementing regulations, may provide for different 
priorities among holders of various forms of capital stock of a Bank 
and recommend that FHFA further amend Sec.  1237.9(a)(4) of the 
proposed rule to address this issue of competing priorities. FHFA 
agrees that when a regulated entity has issued multiple classes of 
capital stock, priority as between holders of those different classes 
should be determined by the capital plans or other underlying corporate 
instruments, even though all are within Sec.  1237.9(a)(4). Thus, there 
may be multiple subpriorities within Sec.  1237.9(a)(4). The Safety and 
Soundness Act establishes the general priorities, including claims of 
capital stock owners. 12 U.S.C. 4617(c). Within the fourth priority of 
claims, the priority inhabited by stockholders' claims, FHFA intends to 
recognize the different stock priorities that may exist among classes 
and categories of stock, including preferred and common stockholders, 
and has added language to this effect to Sec.  1237.9(a)(4).
    Perfected security interests, safekeeping, and other trust 
holdings.
    The Banks contend that perfected security interests (including 
exceptions for preferences and fraudulent conveyances), safekeeping, 
and other trust holdings should be addressed specifically in the final 
rule to ensure that the interests and legitimate legal rights of third-
parties are recognized.
    FHFA considered the comment and concludes that no revision of the 
proposed rule is necessary to address the concerns the Banks have 
raised. Protection of security interests, with appropriate exceptions 
for preferential and fraudulent transfers, is provided in 12 U.S.C. 
4617(d)(12). The avoidance of fraudulent transfers also is covered in 
12 U.S.C. 4617(b)(15). Property held in trust and in custodial 
arrangements generally is not considered a part of a receivership 
estate available to satisfy general creditor claims. To the extent 
appropriate, FHFA expects to follow FDIC and bankruptcy practice in 
giving effect to this concept in a receivership of a regulated entity.
    Period for contract repudiation.
    The Banks objected to the provision of the proposed rule that would 
create an 18-month period for the conservator or receiver to determine 
whether to repudiate burdensome contracts of a troubled regulated 
entity. In their joint comment, the Banks suggested that FHFA instead 
adopt a six-month period for repudiation determinations, or address 
such matters on a case-by-case basis. While maximizing the discretion 
of a conservator or receiver by remaining silent as to the reasonable 
time for repudiation may have some appeal, FHFA does not believe that 
either a six-month or an open-ended period is appropriate.
    FHFA has considered whether to revise that provision of the 
proposed rule, and has determined that the 18-month period should 
remain in the final rule. In the proposed rule, FHFA explained that 
FHFA's experiences as conservator for Fannie Mae and Freddie Mac have 
shown that it could take at least 18 months for a conservator or 
receiver to obtain the facts needed to make accurate determinations 
about its rights of repudiation. Due to the complexity of the contracts 
and commercial relationships of the regulated entities, FHFA believes 
that an 18-month period adequately and appropriately balances the need 
to fully assess the state of a troubled institution, the need for 
repudiation and the interests of contractual counterparties. 
Subsequently, experiences as Conservator have given FHFA no reason to 
change that decision. Moreover, the interests of contractual 
counterparties are protected by provisions such as 12 U.S.C. 
4617(d)(7)(B), which mandates that payments to a counterparty for 
performance that a conservator or receiver accepts under a pre-
conservatorship or -receivership contract for services before making a 
determination to repudiate the contract shall be treated as an 
administrative expense of the conservatorship or receivership.
    Distinctions between FHFA as conservator and FHFA as receiver.
    The Banks' joint comment suggests that Sec.  1237.3 of the proposed 
rule failed to properly distinguish between actions FHFA is authorized 
or directed to take in its capacity as conservator from those that the 
agency is authorized or directed to take as receiver. Specifically, the 
joint comment notes that Sec.  1237.3 of the proposed rule would 
provide FHFA as receiver with the authority to continue the missions of 
the regulated entity; ensure that the operations and activities of each 
regulated entity foster liquid, efficient, competitive and resilient 
national housing markets; and ensure that each regulated entity 
operates in a safe and sound manner. The Banks contend that this 
authority is limited exclusively to the actions of FHFA as conservator, 
because FHFA is required to liquidate a regulated entity in 
receivership.
    The ultimate responsibility of FHFA as receiver is to resolve and 
liquidate the existing entity. A conservator's goal is to continue the 
operations of a regulated entity, rehabilitate it and return it to a 
safe, sound and solvent condition. While operating an entity in 
conservatorship, continuation of the mission of the institution and 
fostering liquid, efficient, competitive and resilient national housing 
markets may be in the regulated entity's best interest, and are 
consistent with the Safety and Soundness Act's provisions governing 
operating entities. These activities of a conservator may not be 
aligned with the ultimate duty of a receiver, although in the process 
of finally resolving a regulated entity FHFA will need to strike the 
proper balance between continuing certain operations pending 
liquidation and terminating other operations. This balance may include 
temporarily operating in support of the failed institution's mission. 
FHFA agrees with the Banks that some activities appropriate in 
conservatorship are less consistent with a receivership. Section 1237.3 
of the final rule has been

[[Page 35731]]

revised to recognize the receiver's responsibility to liquidate an 
entity in receivership.
    Treatment of certain types of contracts and commercial agreements.
    The Banks' joint comment raises questions about the possible 
treatment of several types of contracts and commercial agreements in 
conservatorship and receivership, including the treatment of completed 
sales of certain assets and liabilities between individual Banks and 
third-parties, standby letters of credit issued on behalf of Bank 
members and housing associates, subsidies provided under a Bank's 
Affordable Housing Program, or contracts for services provided to one 
or more other Banks. The Banks suggest that the treatment of these 
various contracts and agreements be addressed in the rule, and ask that 
FHFA state that it will not use its powers of repudiation as 
conservator or receiver to set aside or repudiate these obligations and 
transactions.
    FHFA has considered whether to make a declaration about the status 
of those and other contracts in this rule, and has determined that this 
rulemaking is not the appropriate vehicle for such an announcement. 
This rule is not designed and FHFA has declined to limit the discretion 
of the agency as a future conservator or receiver. The circumstances of 
any future conservatorship and receivership can vary greatly, and it is 
necessary for FHFA to preserve the flexibility for the agency as 
conservator or receiver to make decisions based upon the specific 
issues facing that troubled regulated entity.
    Expedited determination of claims.
    The Banks observed that Sec.  1237.7 of the proposed rule provides 
that FHFA, as receiver, will determine whether or not to allow a claim 
within 180 days from the date the claim is filed. They contend, 
however, that the Safety and Soundness Act requires FHFA to establish a 
separate procedure for expedited relief and claim determination within 
90 days after the date of filing for certain claimants. The Banks 
suggest that the rule should establish the expedited claims process.
    Although section 1367(b)(8) of the Safety and Soundness Act 
requires FHFA to ``establish a procedure for expedited relief outside 
of the routine claims process * * * [in section 1367(b)(5)]'' and a 90-
day determination period for certain claims, the statute does not 
require a regulation establishing the expedited procedures. In fact, 
the statutory text is so explicit that codifying regulatory procedures 
for expedited claims is more likely to confuse than clarify processing. 
FHFA believes that implementing these specific provisions is best left 
to internal operating procedures that can be adjusted quickly as needed 
to provide consistent notice to claimants and set up internal processes 
for handling expedited claims separately from routine claims. The 
purpose of the rule is not to recite the statute, and in this instance 
the statute is sufficient.
    Alternate resolution procedures.
    Section 1237.8 of the proposed rule provides that claimants seeking 
``a review of the determination of claims may seek alternative dispute 
resolution [(``ADR'')] from [FHFA] as receiver in lieu of a judicial 
determination.'' The Banks asserted that Congress intended ADR to be an 
alternative to the normal process established under 12 U.S.C. 
4617(b)(5) for the receiver to make the initial determination on a 
claim. Therefore, referring to 12 U.S.C. 4617(b)(7)(A)(i), they contend 
that FHFA is limited to offering claimants a choice of both non-binding 
ADR that does not bar subsequent judicial review or binding ADR that 
precludes judicial review.
    FHFA believes that the Banks' interpretation of the statute is 
excessively narrow and ignores the broad authority and command to the 
agency. Section 1367(b)(7) of the Safety and Soundness Act provides 
that ``[t]he Agency shall establish such alternative dispute resolution 
processes as may be appropriate for the resolution of claims filed 
under paragraph (5)(A)(i) [i.e., the routine claims allowance/
disallowance provision].'' 12 U.S.C. 4617(b)(7)(A)(i). This language 
unambiguously leaves to FHFA the determination of appropriateness. The 
statute is expressly optional with respect to whether binding or non-
binding ADR should be used and that the choice to participate in ADR 
cannot be forced by one party. 12 U.S.C. 4617(b)(7)(A)(iii). FHFA has 
determined that ADR is appropriate if all parties agree to it and 
accept that a condition of ADR is that it is in lieu of seeking 
judicial relief. Specific procedures and processes are left to 
development ``by order, policy statement, or directive,'' as provided 
in Sec.  1237.8 of the proposed rule. No change in the proposal is 
required or warranted.
    Limited-Life Regulated Entities.
    The Banks raised numerous issues regarding proposed rule Sec. Sec.  
1237.10 and 1237.11 with respect to the establishment and operation of 
a LLRE. They objected that the proposed rule failed to identify or 
address the wide range of issues that could arise in the context of an 
LLRE, including the impact of such an entity on members of the Bank in 
receivership, holders of Bank COs, and other creditors and 
counterparties of the Bank in receivership. The Banks asked whether a 
``LLRE Bank'' would be considered a new Bank that would cover the same 
district, and have the same membership, that was served by the Bank in 
receivership or whether a new permanent Bank would be established to 
serve that district contemporaneously with the LLRE; whether the LLRE 
Bank would assume some or all of the primary obligations on COs of the 
Bank in receivership or on the contracts of the failed Bank; whether it 
could fund its operations by becoming a primary obligor on new Bank 
System COs (and, if so, how would such primary obligations be treated 
upon the termination of the LLRE Bank); and how the existence of the 
LLRE Bank would impact the Securities and Exchange Commission 
disclosure obligations of the related Bank for FHFA reporting purposes.
    FHFA responds that there is no requirement for the establishment of 
an LLRE in the case of a failed Bank, unlike in the case of a failed 
Enterprise. Further, reasons for and details of the operation and 
establishment of an LLRE are likely to vary based on the specific 
reasons for failure, the nature of the failed institution's assets and 
liabilities, and the resolution methodology selected by the receiver. 
The specificity the Banks suggested, if contained in regulatory text, 
could restrict the receiver's ability to structure the resolution of a 
failed institution and leverage its assets and liabilities for the best 
interests of the Bank System. To the extent that statutory language 
does not provide answers to the Banks questions, FHFA does not believe 
it appropriate to limit the resolution tools available to it through a 
regulation.
    Such flexibility is consistent with the statutory framework. For 
example, section 1367(i)(1)(B)(i) of the Safety and Soundness Act 
provides that a LLRE may ``assume such liabilities of the regulated 
entity that is in default or in danger of default as the Agency may, in 
its discretion, determine to be appropriate. * * *'' 12 U.S.C. 
4617(i)(1)(B)(i). Subparagraph (B)(ii) authorizes the LLRE to 
``purchase such assets of the regulated entity that is in default, or 
in danger of default, as the Agency may, in its discretion determine to 
be appropriate.'' Subparagraph (B)(iii) authorizes the LLRE to 
``perform any other temporary function which the Agency may, in its 
discretion, prescribe in accordance with this section.'' The statutory 
discretion vested in the agency

[[Page 35732]]

is significant and necessary. FHFA declines to restrict the discretion 
Congress vested in it to unnecessarily tie its hands when resolving 
failed institutions in the future.
    The Banks also suggest that the language in Sec.  1237.13(b) of the 
proposed rule, stating that no shareholder or creditor of a regulated 
entity shall have any right or claim against the charter of that 
regulated entity once FHFA has been appointed receiver for the 
regulated entity and a limited-life regulated entity has succeeded to 
the charter, does not appear to apply to a Bank in receivership, since 
12 U.S.C. 4617(i)(1)(A)(i) provides for FHFA to grant a temporary 
charter to a limited-life regulated entity for a Bank in receivership.
    FHFA does not agree with this comment. The charters are not 
entities in receivership against which claims can be asserted, nor are 
the charters assets of a receivership estate from which claims can be 
paid.
3. Comments From Other Sources
    In addition to the comments received from shareholders for the 
Enterprises in conservatorship, counsel for shareholder litigants, 
members of Congress, and Banks, FHFA received comments from various 
other parties, who raised the following concerns:
    The conservatorships of Fannie Mae and Freddie Mac.
    The Mortgage Bankers Association (MBA) commented that the proposal 
was too theoretical, preferring a rule that more specifically addressed 
the issues associated with the current conservatorships of Fannie Mae 
and Freddie Mac. The MBA suggested that a rule should answer questions 
such as the specific treatment of subordinated and senior debtholders, 
and could identify the operations and departments of the Enterprises 
that are likely to be retained in receivership.
    The MBA suggested that FHFA should have used the rulemaking process 
to explain to the public the criteria that FHFA might use in deciding 
whether to place the Enterprises into receivership. In their view, 
announcing in advance the factors or milestones that would trigger 
receivership would prevent that determination from appearing arbitrary. 
Finally, the MBA suggested that FHFA could use the rule to set forth 
the agency's goals in a receivership. They argued that this would give 
FHFA a chance to explain how several of the possible roles for 
receivership--a least-cost resolution of the Enterprises, maintaining 
ongoing support of the housing market by protecting the infrastructure 
of the Enterprises, or using the assets of the Enterprises to lay the 
foundation for a new secondary housing market structure--would be 
applied by FHFA as receiver.
    Bank of America also recommended that any final rule issued by FHFA 
clearly, narrowly, and carefully define the goals of conservatorship or 
receivership, and other commenters also noted that the proposed rule 
did not provide a specific model for Fannie Mae and Freddie Mac after 
the end of the conservatorships and the absence of a detailed 
restructuring plan for the Enterprises. Other commenters also argued 
that the proposed rule failed to address the treatment of Fannie Mae or 
Freddie Mac preferred shareholders in an Enterprise receivership or the 
potential for harm to shareholders by diminishing or extinguishing the 
value of their equity interests.