Acquired Member Assets, 91674-91690 [2016-30161]
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91674
Federal Register / Vol. 81, No. 243 / Monday, December 19, 2016 / Rules and Regulations
foreign banks, required reserves are
computed by applying the reserve
requirement ratios below to net
transaction accounts, nonpersonal time
deposits, and Eurocurrency liabilities of
Reservable liability
Reserve requirement
Net Transaction Accounts:
$0 to reserve requirement exemption amount ($15.5 million) ..........
Over reserve requirement exemption amount ($15.5 million) and
up to low reserve tranche ($115.1 million).
Over low reserve tranche ($115.1 million) ........................................
Nonpersonal time deposits .......................................................................
Eurocurrency liabilities ..............................................................................
By order of the Board of Governors of the
Federal Reserve System, acting through the
Director of the Division of Monetary Affairs
under delegated authority, October 26, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016–30320 Filed 12–16–16; 8:45 am]
BILLING CODE 6210–01–P
FEDERAL HOUSING FINANCE BOARD
12 CFR Part 955
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Parts 1201, 1267, 1268, and
1281
RIN 2590–AA69
Acquired Member Assets
Federal Housing Finance
Board; Federal Housing Finance
Agency.
ACTION: Final rule.
AGENCY:
The Federal Housing Finance
Agency (FHFA) is issuing this final rule
to reorganize and relocate the current
regulation governing the Federal Home
Loan Banks’ (Banks) Acquired Member
Asset (AMA) programs. More
significantly, as required by the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), it
removes and replaces references in the
current regulation to, and requirements
based on, ratings issued by a Nationally
Recognized Statistical Ratings
Organization (NRSRO). It also provides
a Bank greater flexibility in choosing the
model it can use to estimate the credit
enhancement required for AMA loans.
Additionally, the final rule adds a
provision allowing a Bank to authorize
the transfer of mortgage servicing rights
on AMA loans to any institution,
including a nonmember of the Federal
Home Loan Bank System (Bank System).
The final rule allows the Banks to
acquire mortgage loans that exceed the
conforming loan limits if they are
guaranteed or insured by a department
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SUMMARY:
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the institution during the computation
period.
0 percent of amount.
3 percent of amount.
$2,988,000 plus 10 percent of amount over $115.1 million.
0 percent.
0 percent.
or agency of the U.S. government. The
final rule excludes a proposed provision
that would have eliminated the use of
private, loan-level, supplemental
mortgage insurance (SMI) in the
member credit enhancement structure
required by the AMA regulation, but
does require Banks to establish financial
and operational standards that insurers
must meet to be qualified to provide
insurance on AMA loans. Finally, the
final rule deletes some obsolete
provisions from the current regulation,
and clarifies certain other provisions.
DATES: The final rule is effective January
18, 2017.
FOR FURTHER INFORMATION CONTACT:
Christina Muradian, Principal Financial
Analyst, Christina.Muradian@fhfa.gov,
202–649–3323, Division of Bank
Regulation; or Neil R. Crowley, Deputy
General Counsel, Neil.Crowley@
FHFA.gov, 202–649–3055 (these are not
toll-free numbers), Office of General
Counsel, Federal Housing Finance
Agency, 400 Seventh Street SW.,
Washington, DC 20219. The telephone
number for the Telecommunications
Device for the Hearing Impaired is 800–
877–8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Bank System
The eleven Banks are wholesale
financial institutions organized under
the Federal Home Loan Bank Act (Bank
Act).1 The Banks are cooperatives; only
members of a Bank may purchase the
capital stock of a Bank, and only
members or certain eligible housing
associates (such as state housing finance
agencies) may obtain access to secured
loans, known as advances, or other
products provided by a Bank.2 Each
Bank serves the public interest by
enhancing the availability of residential
credit through its member institutions.
Any eligible institution (generally, a
federally insured depository institution
1 See
2 See
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12 U.S.C. 1426(a)(4), 1430(a), 1430b.
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or state-regulated insurance company)
may become a member of a Bank if it
satisfies certain criteria and purchases a
specified amount of the Bank’s capital
stock.3 As government-sponsored
enterprises (GSEs), the Banks have
certain privileges under federal law,
which allow them to borrow funds at
spreads over the rates on U.S. Treasury
securities of comparable maturity that
are narrower than those available to
corporate borrowers generally. The
Banks pass along a portion of their
funding advantage to their members and
housing associates—and ultimately to
consumers—by providing advances 4
and other financial services at rates that
would not otherwise be available to
their members. Among those financial
services are the Banks’ AMA programs,
under which the Banks provide
financing for members’ housing finance
activities by purchasing mortgage loans
that meet the requirements of the AMA
regulation.
B. Overview of the Existing AMA
Regulation
The current AMA regulation has been
in effect since July 2000. It authorizes
the Banks to acquire certain assets
(principally, conforming residential
mortgage loans) from their members and
housing associates as a means of
advancing their housing finance
mission, and prescribes the parameters
within which the Banks may do so.
The core of the current AMA
regulation is a three-part test, which
establishes the requirements for a
mortgage loan or other asset to qualify
as AMA. The three-part test embodies
the underlying policy regarding the
acquisition of mortgages and other
eligible AMA assets by the Banks. First,
the asset requirement establishes that
assets must be whole conforming
mortgage loans, certain interests in such
loans, whole loans secured by
3 See
12 U.S.C. 1424; 12 CFR part 1263.
are required to pledge specific
collateral, mainly mortgages or other real estate
related assets, to secure any advance taken down
from a Bank. See 12 CFR 1266.7.
4 Members
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manufactured housing, certain state and
local housing finance agency (HFA)
bonds, and certain other assets that
qualify as eligible collateral for a Bank
advance. Second, assets must meet a
member nexus requirement, meaning
that a Bank must acquire the AMA
assets from a member or housing
associate that is a participating financial
institution 5 in the Bank’s AMA program
or that of another Bank. In either case,
the assets acquired by a Bank must be
originated or held for a valid business
purpose by a participating financial
institution (or an affiliate thereof).
Finally, to meet the credit risk-sharing
requirement, a Bank must structure its
AMA products such that a substantial
portion of the associated credit risk of
the acquired asset is borne by a
participating financial institution.
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C. The Proposed Rule
The Federal Housing Finance Board
(Finance Board) 6 adopted the current
AMA regulation in July 2000, and
neither the Finance Board nor FHFA
subsequently has amended the
regulation. FHFA issued the proposed
rule in part to incorporate the AMA
provisions into its own regulations and
in part to give effect to section 939A of
the Dodd-Frank Act, which requires
federal agencies to remove from their
regulations all references to, or
requirements based on, ratings issued by
NRSROs.7 To comply with the DoddFrank Act requirements, the proposed
rule would have eliminated the existing
requirement for the Banks’ members to
credit enhance the AMA assets to
specific NRSRO rating levels. Instead,
the proposal would have required the
Banks to establish a level of credit
enhancement for each AMA product,
using models and methodologies of
their own choosing.
The proposed rule also contemplated
making a number of other substantive
changes, which would have: (1) Added
several credit enhancement modelrelated provisions; (2) allowed for the
transfer of servicing on AMA loans to
5 A participating financial institution is a member
or housing associate approved by a Bank to sell
mortgage loans to the Bank or otherwise participate
in its AMA program.
6 The Finance Board was regulator for the Bank
System prior to the creation of FHFA in 2008, at
which time supervisory and oversight
responsibilities for the Bank System were
transferred to FHFA. By statute, the Finance Board
regulations, including the existing AMA
regulations, remain in effect until such time as
FHFA acts to modify or supersede them. See 12
U.S.C. 4511 note.
7 See 15 U.S.C. 78o–7. Although FHFA cannot
include within its regulations requirements based
on NRSRO ratings, the Dodd-Frank Act does not
prohibit the Banks from using such ratings in
conducting their business.
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nonmembers, so long as the transfer did
not cause the associated mortgage loan
to cease to comply with the
requirements of the AMA rule; (3)
allowed for federal insurance or
guarantees to provide the required
credit enhancement, and eliminated the
requirement for a member to bear the
risk of loss from unreimbursed servicing
expenses; (4) removed the provisions
that allow for the use of SMI or pool
insurance as part of the credit
enhancement structure; (5) generally
prohibited Banks from acquiring loans
made to any insiders of the Bank or of
the selling institution; and (6) added a
new ‘‘grandfather’’ provision to allow a
Bank to continue to hold AMA loans
acquired as AMA products that the
Finance Board or FHFA previously
authorized.
Additionally, FHFA asked for
comments relating to three specific
issues. First, FHFA asked whether the
regulation should continue to limit the
size of AMA loans to those that meet the
conforming loan limits and, more
broadly, on any issues related to a
Bank’s purchase of AMA loans on
properties located in designated highcost areas. Second, FHFA asked whether
FHFA should continue to authorize the
purchase of AMA loans on
manufactured housing that were
deemed to be chattel loans under state
law. Third, FHFA asked for comments
related to the use and importance of
SMI and pool insurance in credit
enhancement structures that were
acceptable under the regulation. FHFA
specifically asked what type of
standards should replace those in the
current AMA regulation, which are
based on an insurer’s NRSRO rating,
and how a Bank might evaluate the
claims-paying ability of an insurer in
the absence of a specific NRSRO credit
rating requirement. FHFA also
requested comments on whether, if it
were to adopt specific requirements in
the rule for SMI providers, such
requirements also should apply to
private mortgage insurance (PMI)
providers.
In developing the proposed rule,
FHFA retained the key policies
underlying the original AMA regulation,
which the Finance Board adopted in
2000, after the courts had upheld the
authority of the Finance Board to permit
the Banks to engage in this activity.8
More specifically, the proposed rule
retained the Finance Board’s
determination that the acquisition of
AMA loans is the functional equivalent
8 See Texas Savings and Community Bankers
Association v. Federal Housing Finance Board, 201
F.3d 551 (5th Cir. 2000) (hereinafter Texas Savings).
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of making advances such that it: (1)
Allows the member or housing associate
to use its eligible assets to access
liquidity for further mission-related
lending; and (2) requires all, or a
material portion of, the credit risk
attached to the mortgage assets to be
borne by the member or housing
associate.
FHFA also carried forward in the
proposed rule the basic tenet of the
current AMA regulation, which is that
the Banks and their members each take
advantage of their respective core
competencies. As such, current AMA
requirements allow members to do what
they do best (manage their customer
relationship) and for the Banks to do
what they do best (manage the interest
rate risk associated with those loans).9
The proposed rule also maintained the
basic AMA credit risk-sharing structure
of the current regulation, which the
Finance Board purposefully designed to
mirror the risk allocation of advances.
Specifically, when a Bank extends an
advance to a member, the member is
exposed to the credit risk (on the
housing assets that the advances
ultimately support), and the Bank is
exposed to the interest rate risk
associated with funding the advance.
Under the current AMA regulation, the
Bank and its member similarly allocate
the interest rate risk and credit risk
associated with funding and holding
mortgage loans whenever a member
sells the Bank an AMA loan.10
The current AMA rule’s ‘‘three-part
test’’ also embodies additional
underlying policy determinations
related to the acquisition of mortgage
assets by Banks. The asset requirement,
i.e., limiting AMA to loans that do not
exceed the conforming loan limit,
addresses mission issues and establishes
a level playing field among the Banks,
Federal National Mortgage Association
(Fannie Mae), and Federal Home Loan
Mortgage Corporation (Freddie Mac)
with respect to the types of residential
mortgages loans eligible for purchase.
The member or housing associate nexus
requirement, i.e., limiting the potential
sellers of AMA to a Bank member or
housing associate, ensures that the
Banks do not extend the benefits of their
GSE status to institutions that are not
part of the Bank System, thus aligning
9 Although the AMA regulation requires the
member to bear a significant amount of the credit
risk (which may be accomplished through a variety
of ways), the Bank remains exposed to some credit
risk from those loans.
10 The advance and AMA risk-allocation
structures are different from the risk-allocation
structure used by Fannie Mae and Freddie Mac,
whereby they are exposed to the credit risk and sell
the interest rate risk.
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the program with the cooperative
structure of the System. The credit risksharing requirement encourages
members or housing associates to use
sound underwriting practices by
requiring them to retain a material
exposure to the credit risk associated
with the mortgage assets sold to the
Bank.
The underlying policy considerations
embodied in the current and proposed
AMA rule are also closely aligned with
the legal reasoning that supported the
Finance Board’s initial authorization of
the mortgage loan purchase pilot
program, an approval that predated
adoption of the AMA regulation.
Although the Federal Home Loan Bank
Act (Bank Act) does not specifically
authorize a Bank to purchase mortgage
loans, the Finance Board determined
that the authority conferred by section
11(e) of the Bank Act, which authorizes
a Bank to carry out activities that are
incidental to those specifically
authorized by the Bank Act, provided
authority for the Banks to purchase
mortgage loans from their members.11
Certain parties challenged the Finance
Board’s approval of the pilot program,
but the Fifth Circuit Court of Appeals
agreed with the Finance Board that the
incidental powers provision of the Bank
Act provided authority for the mortgage
purchase program and upheld the
Finance Board approval of the
program.12
In reaching its conclusion, the court
considered the Finance Board’s
determination that a Bank’s purchase of
mortgages from its members involved an
activity that was incidental to the
Banks’ housing finance mission and
represented another method by which
the Banks could act as a reservoir of
liquidity for members’ housing finance
lending, albeit in a manner that was
‘‘technically more sophisticated than,
yet functionally similar to, that which
occur[red] when a [Bank] makes an
advance.’’ 13 The court also determined
that the Finance Board had authority to
define the scope of the incidental
powers provision, given its ambiguity,
and that the Finance Board’s
construction of that power with regard
to the mortgage purchase pilot program
was permissible because it was
consistent with the structure and
purpose of the Bank Act. In particular,
the court noted that under the pilot
program, the Banks used their access to
low-cost funds in capital markets in an
effort to improve the level of housing
finance. The basic structure and
11 See
12 U.S.C. 1431(e).
Texas Savings, 201 F.3d at 551.
13 Id. at 554–555.
12 See,
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requirements for the mortgage purchase
pilot program reviewed by the court
later formed the basis for the specific
provisions of the current AMA
regulation, including the core three-part
test.
D. Overview of Comments on the
Proposed Regulation
The proposed rule provided a
comment period of 120 days, which
closed on April 15, 2016. FHFA
received 65 comment letters on the
proposed rule, two of which were not
responsive to issues raised by the
proposed rule. FHFA reviewed every
comment letter and considered all of the
comments in developing the final rule.
Approximately three-quarters of the
commenter letters came from Bank
System members, most of whom filed a
substantively similar letter. The eleven
Banks filed a joint letter. Eight of the
nine Banks that offer the Mortgage
Partnership Finance (MPF) program to
their members also filed a separate joint
letter, which addressed issues beyond
those addressed by the joint letter from
the eleven Banks. FHFA also received
letters from trade associations,
including the American Bankers
Association, five state banking
associations, an association of mortgage
insurers, and one mortgage insurance
company.
Taken as a whole, the comments
requested changes to the proposed rule
that would be at odds with the existing
policy and legal principles underlying
the three-part test. Some commenters
suggested that Banks be permitted to
purchase loans from institutions that are
not Bank System members, which
would effectively extend the benefits of
membership to institutions that cannot
become members and thus cannot
receive advances from the Banks.
Further, some commenters suggested
Banks be permitted to create their own
risk-sharing structures under which
members would not necessarily be
required to retain a meaningful
exposure to the credit risk associated
with the mortgage loans they sold to the
Banks under AMA programs. None of
these comments provided a reasoned
analysis addressing how their proposed
revisions to the proposed rule would be
consistent with the legal and policy
determinations on which the current
regulation is predicated. After
considering these comments, FHFA has
determined not to alter the basic threepart test for AMA, as set forth in the
proposed rule, which remains the most
appropriate means of ensuring that the
AMA programs operate consistently
with the Banks’ legal authority and with
the policy and safety and soundness
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goals established by the Finance Board.
These goals include limiting the benefits
of GSE funding to those institutions that
Congress has authorized for
membership or for housing associate
status, which is consistent with the
cooperative nature of the Bank System,
and that members maintain a degree of
financial ‘‘skin-in-the game’’ with regard
to AMA assets, which helps to ensure
that loans are well underwritten,
protects the Banks against the expected
credit risk associated with the
purchased assets, and is consistent with
the sharing of financial risks that are
present when Banks make advances to
their members.
The comments also generally opposed
FHFA’s proposal to remove the option
of allowing SMI or pool insurance as
part of the credit enhancement
structure, even though no AMA
products currently use that option. They
further opposed the imposition of any
requirements on a Bank’s ability to buy
loans on which any director, officer,
employee, attorney, or agent of a Bank,
or of the selling member institution, was
the borrower. Several commenters
advocated allowing the Banks to buy
AMA loans with principal balances that
exceed the conforming loan limits
applicable to Fannie Mae and Freddie
Mac, while others made a number of
specific technical suggestions for
changes to language of proposed rule
provisions.
The primary comments regarding
each of the substantive aspects of the
proposed rule, as well as FHFA’s
responses to some of those comments,
are discussed below. Comments
addressing specific rule provisions are
discussed in part II of SUPPLEMENTARY
INFORMATION, which describes the final
rule in detail and the ways in which it
differs from the proposed rule.
1. Comments on the Definitions
Commenters recommended that
FHFA make a number of technical
suggestions to several of the definitions
in the proposed rule. Some commenters
suggested that FHFA revise the
proposed definition of ‘‘AMA product’’
to exclude loans that the Banks acquire
and hold temporarily until they
aggregate a sufficient number of loans to
transfer the loans to another entity, such
as is done under certain off-balance
sheet programs.
Other comments suggested that FHFA
revise the proposed definition of
‘‘investment quality’’ to capture the
unique characteristics of the mortgage
loans acquired for the AMA program.
These Banks pointed out that they
acquire AMA loans over time with the
expectation that a certain number of
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such loans will become delinquent or go
into default. Thus, even if credit
enhancements were to allow a Bank to
recoup full repayment of principal for a
particular loan, the payments received
on such a loan may not be ‘‘timely’’ as
required by the proposed definition.
Moreover, the commenters noted that
the models used by the Banks to
calculate the credit enhancement and
pricing for a particular AMA loan
already take into account the expected
delinquencies and defaults for the loan
pool as a whole.
Commenters also suggested that
FHFA revise the proposed definition of
‘‘participating financial institution’’ to
reflect that an institution may
participate in an AMA program in more
than one way, i.e., as a seller, servicer,
or credit enhancer of the AMA assets,
but not necessarily all of these activities.
The proposed definition would have
included only those members that the
Bank had approved to sell loans into an
AMA program and, therefore, would not
have captured the full set of potential
participating financial institutions.
Commenters further suggested that
FHFA change the proposed definition of
‘‘pool’’ to reflect that FHFA has allowed
Banks to offer AMA products for which
they aggregate loans that have been
purchased from different sellers into a
single pool. The proposed definition
had implied that a pool would include
only those loans sold by a single seller
under a single master commitment.
2. Comments on the Authorization of
AMA
Section 1268.2 of the proposed rule
would have authorized the Banks to
invest in assets that qualify as AMA
under the terms of the proposed rule,
but also would have added a provision
regarding ‘‘grandfathered transactions,’’
meaning those authorized under the
current AMA regulation.
Commenters suggested that FHFA
expand the proposed grandfather
provision to include any purchase of
mortgage loans pursuant to any AMA
purchase commitment agreements that
remained open as of the effective date
of any final rule. They suggested that
FHFA make this change to address the
possibility that any of the previously
approved AMA products might not
comply with the requirements of the
final rule. The commenters, however,
did not identify any specific category of
current AMA loans or products to
which these requested changes could
apply, and did not identify which of
FHFA’s proposed changes to the rule
might conceivably cause any active
AMA products or structures to fail to
comply with the final rule.
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A number of commenters urged FHFA
to include within the final rule a
provision allowing the Banks to sell
AMA loans, or participation interests
therein, to other Banks and to Bank
members, including members of other
Bank districts. They also asked FHFA to
allow the sale of AMA loans and pools
or interests in such loans or pools to any
party—not just members. The
commenters noted that any such sales
would reduce a Bank’s exposure to
market risk and free up resources for
additional purchases. Commenters also
asked that FHFA allow the Banks the
flexibility to design other means to
transfer risk associated with AMA
purchase to third parties, apart from
sales of the loans or interests in the
loans. None of these comments
provided specific requirements or
suggestions for structuring such sales or
any analyses of compliance issues that
may arise under other regulatory
requirements that could apply to such
sales, including issues that could arise
under federal securities laws or the risk
retention rule for asset securitizations.14
Given the lack of specifics provided,
FHFA has not altered the proposed rule
in response to any of these comments,
but notes that nothing in the current or
proposed rule would prevent a Bank
from selling AMA loans or developing
a program to transfer risk on those loans
to third parties. Any such transactions,
however, would likely require that the
Banks obtain FHFA approval under the
new business activity regulation, which
would also require that the Banks
demonstrate that they have the legal
authority under the Bank Act to
undertake the proposed activity. Given
that an assessment of the legal authority
and risks associated with any such
proposed transactions is apt to depend
significantly on the particular facts of
each proposal, FHFA does not believe
that it would be appropriate to provide
a general authorization for such as part
of this rulemaking. Instead, FHFA
expects that it would be more
appropriate to identify and assess any
legal, regulatory, or policy issues
associated with such proposals after a
Bank has devoted the time and
resources to develop a specific structure
and identify the market for such
transactions.
3. Comments on the Asset Requirement
The proposed rule at § 1268.3(a)(1)
retained the current prohibition on the
Banks acquiring AMA loans that exceed
the conforming loan limits. In proposing
the rule, FHFA expressly asked for
comments regarding loan size, including
any issues related to a Bank’s purchase
of loans in designated high-cost areas, as
well as whether FHFA should continue
to limit the size of AMA loans to those
that meet the conforming loan limits.15
A few commenters supported allowing
the Banks to acquire loans that exceed
the conforming loan limits, while one
commenter opposed that change, and
others supported the change, provided
that the nonconforming loans were
limited to those that are guaranteed or
insured by a department or agency of
the U.S. government.
The proposed rule would have added
new provisions at §§ 1268.3(a)(3) and (b)
to restrict the Banks from acquiring as
AMA any mortgage loans that had been
made to a director, officer, employee,
attorney, or agent of the Bank or of the
selling institution unless the Bank’s
board of directors specifically approved
such a purchase and FHFA endorsed the
Bank’s resolution. The Bank Act
generally prohibits the Banks from
accepting such mortgage loans as
collateral for advances.16 FHFA had
proposed extending the substance of
that provision to the AMA programs,
reasoning that a statutory prohibition on
taking a security interest in such loans
logically should apply as well to the
purchase of those same loans because
ownership of the loan confers on the
Bank a greater interest in the loan, along
with the attendant risks, than does the
acquisition of a security interest in the
same loan. Nearly every comment letter
FHFA received requested that FHFA
remove the proposed provision from the
final rule. Generally, commenters noted
that participating financial institutions
underwrite loans to such persons to the
same standards as all other AMA loans,
and, therefore, there is little likelihood
that persons employed by the Bank or
its members will obtain mortgage loans
on favorable terms that might expose the
Bank to increased credit risk.
Accordingly, those commenters urged
FHFA to permit the Banks to purchase
the loans without restriction.
The proposed rule at § 1268.3(b)
would have continued to authorize the
Banks to purchase as AMA
manufactured housing loans regardless
of whether such housing qualifies as
real property under state law, which
would include as AMA chattel loans on
manufactured housing. FHFA requested
specific comments on this provision.17
A couple of commenters urged FHFA to
retain this provision in the final rule,
contending that manufactured housing
fulfills a need for affordable housing
15 See
Proposed Rule, 80 FR at 78691.
12 U.S.C. 1430(b); 12 CFR 1266.7(f).
17 See Proposed Rule, 80 FR at 78692.
16 See
14 See
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and that Banks should be able to
continue to support their members’
determinations about how to meet those
needs in their market areas. No
commenters opposed the provision.
The proposed rule at § 1268.3(a),
which is substantively unchanged from
the existing regulation, would have
allowed the Banks to acquire as AMA
any whole mortgage loans that are
eligible to secure advances under
FHFA’s advances collateral regulation.18
One commenter contended that the
Banks should be able to buy as AMA
mortgage loans on multifamily
properties, as well as residential land
acquisition, development and
construction loans, given that these
loans also qualify as collateral for
advances. FHFA notes that the existing
AMA regulation already allows the
Banks to buy those types of loans as
AMA, given that they may qualify as
other real estate-related collateral under
the advance collateral regulation. The
proposed amendments would not
change that authority. Before
commencing a program to buy such
loans as AMA, however, a Bank likely
would have to obtain FHFA approval
under the new business activity
regulation, and would have to
demonstrate that the new AMA product
otherwise satisfied all of the
requirements of the AMA rule.
srobinson on DSK5SPTVN1PROD with RULES
4. Comments on the Member or Housing
Associate Nexus Requirement
Section 1268.4 of the proposed rule
would have retained the member nexus
requirement, which requires that AMA
assets must have been originated or held
for a valid business purpose by a
member or housing associate, and must
be acquired from a member or housing
associate of the acquiring Bank, or from
another Bank. As previously discussed,
the Finance Board originally adopted
this requirement to ensure that the
benefits of Bank System membership are
not extended to nonmembers.
Commenters suggested that FHFA
amend the AMA regulation to authorize
the Banks to acquire mortgage loans
directly from affiliates of their members,
which would include nonmember
institutions.
5. Comments on the Credit Risk-Sharing
Requirement
The Finance Board originally
established the credit risk-sharing
requirement to ensure that members
have a material exposure to the credit
risk associated with the AMA assets that
they sell to their Banks, which was
consistent with the risks undertaken by
18 See
12 CFR 1266.7.
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members when funding loans for their
own portfolios with Bank advances.
FHFA received many comments on
different aspects of the credit risksharing requirement, nearly all of which
generally supported loosening the
requirement in some fashion. The
comments on the individual credit risksharing sections, taken together, would
have the effect of permitting the Banks
to create what they characterized as
their own risk-sharing structures, but
would not necessarily have required
that the Banks structure their AMA
products such that the participating
financial institution actually continued
to have a material exposure to the credit
risk associated with the mortgages they
sell to the Banks. For example, some
commenters asked that the Banks be
allowed to transfer the credit
enhancement obligation to nonmember
institutions, which would have the
effect of eliminating the current
structure under which members bear the
expected losses on the AMA products.
Other commenters requested that FHFA
permit arrangements under which an
affiliate of a member, rather than a
member itself, could satisfy any portion
of the credit enhancement obligation or
that FHFA allow a member to transfer
its credit enhancement obligation to any
other institution that is willing to
assume that obligation.
Some commenters requested that
FHFA allow Banks to create an AMA
structure that would permit
participating financial institutions to
accept a price adjustment for the
mortgage loans, in lieu of providing a
credit enhancement for those loans.
Under such an arrangement, the
participating financial institution would
receive a lesser price from the Bank in
return for the Bank agreeing to bear the
credit risk, and the price adjustment
would vary in proportion to the amount
of credit risk the Bank would bear.
Other commenters requested that a
participating financial institution meet
part, or all, of its credit enhancement
obligation simply by pledging collateral.
Those commenters, however, did not
explain how such an arrangement
would work or how it would differ from
the current enhancement approach used
under the Mortgage Partnership Finance
(MPF) program, in which a participating
financial institution pledges collateral to
secure its obligation to absorb a
specified amount of the credit losses on
mortgage loans sold to the Bank.
The proposed rule also would have
carried over the timing requirements of
the current regulation regarding the date
by which a Bank must calculate a
member’s total credit enhancement
obligation. Thus, the proposal would
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have required that a Bank make that
determination at the earlier of 270 days
from the time a Bank acquires a loan
from the member for a particular pool or
when the pool reaches $100 million.
Commenters asked that the final rule
allow the timing of determining the
final credit enhancement vary based on
the structure of the particular product.
For example, commenters noted that
under products where the member prefunds the credit obligation the Banks
should be able to calculate the required
credit enhancement at the time the pool
closes.
The proposed rule would have added
several model-related requirements at
§ 1268.5(e). Specifically, the proposed
rule would have required a Bank to: (1)
Validate its model and methodology at
least annually and make the results
available to FHFA upon request; (2)
institute and maintain a process for
monitoring model performance that
would include tracking, back-testing,
benchmarking, and stress testing the
model and methodology; (3) inform
FHFA prior to making any material
changes to the model and methodology,
and (4) promptly change its model and
methodology as directed by FHFA.
Commenters generally requested that
the final rule provide general guidance
regarding models and methodologies,
rather than the specific provisions
proposed in the rule, described above.
The proposed rule would have
eliminated the option of allowing
members to use SMI and/or pool
insurance to meet a part of their credit
enhancement for AMA assets. The
current AMA regulation allows the use
of SMI as part of the credit enhancement
if the insurance provider has obtained a
rating from an NRSRO of no lower than
the second highest investment grade.
The regulation also allowed pool
insurance if the insurance were used to
enhance against geographic
concentration or pool size risk.
FHFA proposed to remove the option
of using SMI and pool insurance in the
credit enhancement structure in part
based on the experience during the
financial crisis, when no private
mortgage insurance company was able
to maintain an NRSRO credit rating at
the minimum level required by the
current AMA regulation, and on
concerns that other private mono-line
insurers could face similar problems in
the future. Further, FHFA considered
that the Banks have in place alternate
AMA structures and products that do
not rely on SMI and that eliminating the
use of SMI from authorized credit
enhancement structures would remain
consistent with the intent of the AMA
regulation to require participating
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financial institutions to bear the direct
economic consequences of the credit
risk associated with AMA assets and not
transfer such risk to third parties.19
Finally, because the current AMA
regulation relies on an NRSRO rating to
define eligible insurers, FHFA must
change or delete that provision in order
to comply with section 939A of the
Dodd-Frank Act, which bars federal
regulatory agencies from incorporating
NRSRO ratings requirements into their
regulations.
In the preamble to the proposed rule,
FHFA specifically requested comments
regarding the use and importance of
SMI or pool insurance as part of an
allowable credit enhancement
structure.20 In particular, FHFA
solicited comments on what type of
requirements could replace the specific
credit rating requirement for insurance
providers if it were to retain these
insurance options as part of the credit
enhancement structure. Further, FHFA
requested comments on how a Bank
might evaluate the claims-paying ability
of an insurer in the absence of a specific
credit rating requirement. Finally, FHFA
requested comments on whether, if it
were to adopt in the AMA regulation
specific minimum requirements of SMI
and pool insurance, such requirements
also should apply to PMI providers.
No commenters responded to the
specific questions FHFA posed in the
proposed rule regarding these topics,
but many comments opposed the
elimination of a provision that would
authorize the use of SMI and pool
insurance as part of the credit
enhancement structure, and no
commenters supported the removal of
this option. Commenters generally
argued that FHFA did not articulate a
sound reason for removing the
insurance option from the rule and that
FHFA’s focus on credit ratings for
mortgage insurers ignored the actual
claims paying abilities of these firms.
They also pointed out that mortgage
insurance providers, including those in
run-off, have paid all ‘‘valid’’ claims,
with 96 percent of claims paid in cash
and the remainder due over time.21
Commenters also noted that mortgage
insurers and their regulators have taken
steps to enhance the financial strength
of the insurers, improve regulatory
oversight, and increase clarity and
19 See
Proposed Rule, 80 FR at 78694–95.
id.
21 Payments ‘‘due over time’’ represent
obligations of indefinite duration issued by insurers
that they will pay the remainder of any amounts
owed under a claim at some point in the future. In
many cases, troubled insurers paid only part of
what was owed under a claim (e.g., 50 cents on the
dollar) with the remaining amount due over time.
20 See
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reduce ambiguity in master insurance
policies. At least one commenter noted
that using insurance in the credit
enhancement structure did not
undermine the incentive to sell quality
loans under the AMA regulation
because lower insurance premiums
would be associated with lower-risk
mortgages.
Commenters also noted that use of
SMI and pool insurance provided
important economic benefits to
members that sell AMA loans to the
Banks, by reducing capital charges on
the retained credit enhancement and
transferring risk associated with the
enhancement to third parties. A number
of commenters stated that the Banks
could develop internal ratings for SMI
and pool insurance providers and
pointed to the Enterprises’ Private
Mortgage Insurer Eligibility
Requirements (PMIERS) recently
adopted by Fannie Mae and Freddie
Mac as an example of acceptable
standards, although some commenters
said that PMIERS should not be the only
standard used for qualifying insurance
providers. These commenters suggested
that FHFA could condition use of such
internal standards on a Bank
demonstrating the effectiveness of its
approach prior to introducing products
that use SMI or pool insurance. Some
comments also suggested that the rule
not restrict insurance providers to
mono-line mortgage insurers, although
the current AMA regulation only
requires that insurance be provided by
an insurer. Thus, the AMA regulation
already allows multiline insurers to
provide SMI or pool insurance if they
meet the other requirements in the
regulation.
A number of commenters stated that
FHFA should not impose specific
requirements in the regulation on
providers of borrower-financed PMI and
instead should continue current practice
of letting the Banks identify acceptable
providers. Other commenters said that if
FHFA wished to add such a
requirement, it should require the PMI
provider to meet PMIERS. Still other
commenters urged FHFA to consider a
broader range of insurance products as
part of the credit enhancement structure
and allow a member to rely on
insurance to cover the entire credit
enhancement obligation rather than just
the amount in excess of the member
required direct enhancement, as under
the current regulation.
6. Comments on Mortgage Servicing
Rights
No commenter objected to FHFA’s
proposal to allow a participating
financial institution to transfer servicing
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91679
rights on AMA loans to any institution
approved by the Bank, regardless of
whether it was a member. Some
commenters objected to a related change
that would have relieved a participating
financial institution of the responsibility
for paying the unreimbursed servicing
expenses on loans guaranteed or insured
by a federal department or agency as a
means of meeting its credit
enhancement obligation for such loans.
FHFA had proposed that change in
order to facilitate the transfer of
mortgage servicing rights on federally
insured or guaranteed AMA loans to a
nonmember institution, because for
such loans the responsibility for
unreimbursed servicing expenses
transfers with servicing rights. The
commenters disagreed with FHFA’s
statement that requiring a member to
retain exposure to unreimbursed
servicing expenses on loans guaranteed
or insured by a department or agency of
the U.S. government was unlikely to
substantially affect the underwriting for
such loans, given the requirements and
standards already imposed by the
provider of the federal guarantee or
insurance. They believed that the
proposed change would alter the
underlying premise for AMA in the case
of such federally guaranteed or insured
loans—namely that members needed to
have ‘‘skin in the game’’ for loans sold
to the Banks. The commenters did not
address why continuing to allow SMI or
pool insurance would not similarly be
contrary to this aspect of the AMA
program.
7. Comments on Administrative
Transactions and Agreements Between
Banks
Section 1268.8 of the proposed rule
addressed the delegation of
administrative AMA program duties
(i.e., back-office operations) and the
ability to terminate AMA agreements
between Banks. FHFA made no
substantive changes to this section of
the rule when it proposed the
amendment. Commenters asked FHFA
to make two changes to this section.
First, commenters asked to add
regulatory language to the delegation of
administrative duties provisions to
allow a Bank to contract with other
parties (including other Banks) to
provide services related to
administration of its own or its
delegated AMA program without having
to disclose such delegation to
participating financial institutions.
Second, commenters asked to add
regulatory language to the delegation of
pricing provision to allow Banks to
specify that a Bank that has delegated its
AMA pricing function to another Bank
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may retain its right to refuse to acquire
AMA at certain prices pursuant to
contractual provisions among the
parties.
8. Comments on Other FHFA
Regulations
FHFA received comments requesting
that it consider two other regulations—
those pertaining to Bank housing goals
and new business activities—as part of
its review of the AMA rule, even though
FHFA had not proposed to address
either of those matters as part of this
rulemaking. FHFA believes that the
issues raised by commenters pertain to
matters that are beyond the scope of this
rulemaking and are best considered as
part of FHFA rulemakings related to the
other regulations.
As to the matter of Bank housing
goals, these commenters called on
FHFA to align the AMA regulation and
the new housing goals regulation.
Without providing specific examples,
the commenters suggested that the AMA
regulation should provide flexibility for
the Banks to offer AMA products and
purchase AMA loans as one means to
satisfy the housing goals regulation
requirements. FHFA also received many
comments asking it to address FHFA’s
current new business activity
regulation, as it may be applied to the
Banks’ AMA programs. The majority of
commenters believed that the new
business activity filings were
burdensome and resulted in significant
delays to the Banks’ ability to improve
their programs. More specifically, they
sought to exclude from the new
business activity review process certain
types of modifications or expansions to
existing AMA programs and products.
These suggestions are much the same as
those received in response to a separate
rulemaking in which FHFA had
proposed certain amendments to the
existing new business activity
regulation, and which FHFA will
consider as part of that rulemaking.
II. Section-by-Section Analysis of the
Final Rule
srobinson on DSK5SPTVN1PROD with RULES
A. Definitions—§ 1268.1
The proposed rule included
definitions for four new terms to be
used in the AMA regulation, which are:
‘‘AMA product,’’ ‘‘AMA program,’’
‘‘participating financial institution,’’
and ‘‘pool.’’ FHFA intended for these
terms to help simplify and clarify other
provisions in the regulation and, with
the exception of revisions made in
response to certain comments, as
discussed below, is adopting those
definitions as proposed. FHFA has
expanded the proposed definition of
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‘‘participating financial institution’’ to
reflect the fact that a participating
financial institution may be approved to
sell AMA loans to a Bank, but also
could be approved (either in
conjunction with or apart from its role
as a seller of loans) to service those
loans, or provide a credit enhancement
for them. FHFA has also clarified the
wording for the definition of ‘‘pool’’ to
reflect the fact that FHFA has
authorized some Banks to aggregate
AMA pools, which requires that the
definition make clear that a pool may
contain loans sold by more than one
member or other source.
FHFA has also modified somewhat
the proposed definition of ‘‘AMA
product’’ to make clear that while each
Bank may develop and establish
different AMA products and structures,
all such products and structures must
comply with the provisions of the AMA
regulation. This change was based on
language suggested by the comments.
FHFA did not, however, alter the
definition to specifically exclude loans
held by a Bank on its balance sheet for
a short time prior to transferring them
to another entity, as some commenters
requested. Generally speaking, mortgage
loans purchased under the Banks’ offbalance sheet programs are not intended
to qualify as AMA, and thus do not have
all of the features that are necessary for
a mortgage loan to qualify as AMA.
Therefore, such loans would not come
within the new definition of ‘‘AMA
product’’, which specifically includes
only those loans that comply with all of
the requirements of the AMA
regulation.22 In light of that fact, there
is no need to specifically exclude these
loans from the definition.
In response to issues raised by the
commenters, FHFA is also adding new
definitions in the final rule for the terms
‘‘AMA investment grade’’ and
‘‘qualified insurer.’’ The term ‘‘AMA
investment grade’’ modifies and
replaces the proposed definition of
‘‘investment quality.’’ FHFA developed
the definition of ‘‘AMA investment
grade’’ based on comments received on
the proposed definition of ‘‘investment
quality.’’ The term ‘‘qualified insurer’’ is
used in provisions that FHFA is adding
back to § 1268.5, which will allow
Banks to use pool and loan-level
insurance as part of an eligible credit
22 In approving most of these off-balance sheet
products, FHFA specifically recognized that the
loans did not qualify as AMA loans. The one
exception was the MPF Government MBS product.
However, in that case, part of FHFA’s reasoning for
approving the product was that the Bank would
purchase loans that qualified as AMA and would
treat the loans as AMA loans while it accumulated
them on its balance sheet.
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enhancement structure for AMA
products. FHFA addresses these new
definitions in more detail below, in its
discussion of § 1268.5 of the final rule.
FHFA is also adopting, without further
change, its proposed amendments to the
definitions of ‘‘expected losses’’ and
‘‘acquired member assets’’ in 12 CFR
part 1201.23
B. Authorization for Acquired Member
Assets—§ 1268.2
FHFA is adopting § 1268.2 as
proposed.24 This section generally
authorizes the Banks to invest in AMA,
subject to the requirements of FHFA’s
AMA and new business activity
regulations. This section also includes a
‘‘grandfather’’ provision that authorizes
a Bank to continue to hold as AMA any
loans that FHFA or the Finance Board
previously authorized for purchase,
even if the loan would not meet one or
more of the requirements of the final
rule. The grandfather provision covers
all loans that were previously
authorized for purchase by any
regulation, order, or other agency action,
such as waiver of particular
requirements that allowed a Bank to
purchase the loan.25 The grandfather
provision at § 1268.2(b), however, does
not allow a Bank to continue to
purchase new loans that do not meet the
requirements of the final rule after the
rule becomes effective.
One commenter requested that FHFA
expand the grandfather provision to
include any purchase of mortgage loans
pursuant to any open commitment as of
the effective date of the final rule. The
commenter stated that this would assure
the Banks could fulfill any existing
commitments to purchase loans if any of
the existing Bank AMA products did not
meet the requirements of the final rule.
FHFA noted in proposing the rule,
however, that it believed that all
currently active AMA products would
23 See Proposed Rule, 80 FR at 78690–91. FHFA
also made non-substantive changes to the wording
of the definition of ‘‘expected losses’’ to clarify the
meaning of the term, but these changes were not
intended to alter the scope of the proposed
definition.
24 Section 1268.2 carries over the substance of the
general Bank authority to purchase and hold AMA
now found at 12 CFR 955.2. As part of the final
rule, however, FHFA is moving the loan type,
member nexus, and credit-enhancement
requirements also now found in current 12 CFR
955.2 to §§ 1268.3, 1268.4, and 1268.5. FHFA is also
making other changes to these provisions.
25 For example, on August 5, 2011, FHFA waived
the ratings requirement for SMI providers in the
current regulation to allow Banks to continue to buy
loans that used SMI as part of the credit
enhancement structure, even though no SMI
provider met the ratings requirement. This
grandfather provision would allow the Banks that
bought loans pursuant to that waiver to continue to
hold those loans.
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meet the requirements of the proposed
rule.26 The commenter did not provide
an example of an active AMA product
that would not meet the requirements of
the proposed rule. As a consequence,
FHFA has not revised the proposed
grandfather provision in response to the
comment. In the unlikely event that a
Bank determines that an existing AMA
product would not meet all of the
requirements under this final rule,
FHFA would allow the Bank to continue
to honor any contractual obligations it
had entered into under a commitment
that had been entered into prior to the
effective date of this rule and that
complied in all respects with the
requirements of the existing AMA
regulation.
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C. Asset Requirement—§ 1268.3
1. Asset Types
Section 1268.3 of the final rule sets
forth the four categories of asset types
that are eligible for purchase as AMA.
As adopted, it closely follows current 12
CFR 955.2(a), although the final rule
also incorporates specific authority for
Banks to acquire as AMA certain
certificates representing interests in
AMA-qualified whole loans, which is
based on a Finance Board approval of a
similar transaction in 2002. The first of
these categories allows a Bank to
acquire as AMA any whole loans that
are eligible to secure advances to
members under FHFA’s advances
regulation, at 12 CFR 1266.7. These
assets include: (1) Fully disbursed,
whole first mortgage loans on improved
residential real property not more than
90 days delinquent; (2) mortgages or
other loans, regardless of delinquency
status, to the extent that they are
insured or guaranteed by the United
States or any agency thereof, and such
insurance or guarantee is for the direct
benefit of the holder of the mortgage or
loan; (3) loans that qualify as ‘‘other real
estate-related collateral,’’ which requires
that such loans also have a readily
ascertainable value, can be reliably
discounted to account for liquidation
and other risks, can be liquidated in due
course, and in which the Bank can
perfect a security interest; and (4) loans
acquired from community financial
institution (CFI) members or their
affiliates, for small business, small farm,
small agri-business, or community
development purposes, and which are
fully secured by collateral other than
real estate, or securities representing a
whole interest in such secured loans.
Such CFI collateral also must have a
readily ascertainable value, be able to be
26 See
Proposed Rule, 80 FR at 78691.
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reliably discounted to account for
liquidation and other risks, and be able
to be liquidated in due course.
As under current 12 CFR 955.2(a),
§ 1268.3 of the final rule authorizes a
Bank to purchase as AMA manufactured
housing loans regardless of whether
such housing constitutes real property
under state law. FHFA specifically
requested comment on whether it
should continue to authorize the
purchase of manufactured housing loans
as AMA if relevant state law considers
the loans to be chattel loans. FHFA
received only a few comments in
response to this request, which
supported retaining the current
regulatory text, citing, among other
things, the importance of manufactured
housing in meeting affordable housing
needs in certain markets. As a result,
FHFA has determined not to change the
scope of existing authority and the final
rule will continue to allow Banks to
purchase as AMA manufactured
housing loans regardless of whether
state law considers them to be real
property or chattel loans. The third
category of asset types is state and local
housing finance agency bonds, which is
unchanged from the corresponding
provision of the current regulation.
FHFA received no comments advocating
for changes to this provision.
The fourth category of asset types
pertains to certain certificates that
represent interests in loans that qualify
as AMA. This category of assets is not
addressed by the current regulation, but
the Finance Board had previously
approved a Bank’s request to acquire
such assets as AMA. The effect of
including this provision in the final rule
is to codify the previous Finance Board
determination that such assets may
qualify as AMA. When the Finance
Board adopted the current AMA
regulation, it noted, in response to
comments, that the rule would allow the
Banks to buy structured products as
AMA, provided the products met
certain identified conditions.27 Section
1268.3(d) incorporates these conditions,
which require that any such certificate
must: (i) Be backed by loans that
themselves qualify as AMA and that
meet the member nexus requirement;
(ii) Meet the requirement that the
certificate is enhanced to AMA
investment grade; (iii) Be issued
27 Currently, this authority is set forth in a
discussion in the SUPPLEMENTARY INFORMATION of
the Federal Register release originally adopting the
AMA regulation. See Final Rule: Federal Home
Loan Bank Acquired Member Assets, Core Mission
Activities, Investments and Advances, 65 FR at
43974, 43977 (July 17, 2000) (hereinafter 2000 Final
AMA Rule). The Finance Board approved one AMA
product under this authority (in December 2002),
which is now inactive.
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pursuant to an agreement between the
Bank and the participating financial
institution under which the
participating financial institution shares
credit risk as required by the regulation;
and (iv) Are acquired substantially by
the initiating Bank or Banks.
By incorporating the substance of the
Finance Board’s earlier approval into
the regulatory text, FHFA would clarify
that such programs are possible under
the amended regulation and would
bring all relevant authority into a single
provision within the regulatory text.
FHFA would interpret the provisions of
§ 1268.3(d) of the final rule to permit the
use of a third party to securitize the
whole loans, as that arrangement would
merely represent the use of a vehicle to
invest in certain types of AMA under
more favorable terms. However, if any
such certificates were to have been
created as a security that initially was
available to investors generally, they
would not qualify as AMA under this
provision.28
2. Restrictions on Certain Loans
Although, as discussed above, whole
loans eligible to secure advances may
qualify as AMA, both the current
regulation and the proposed rule
explicitly excluded from AMA any
single-family home mortgage loans that
exceed the conforming loan limits and
any loans made to an entity, or secured
by property, that is not located in a
state. The final rule carries over without
change the existing exclusion for loans
not located in a state, and modifies the
conforming loan provision, as described
below. In proposing the rule, FHFA
specifically requested comments on
whether the final rule should continue
to limit AMA loans to those that meet
the conforming loan limits more
generally.29 Some commenters
suggested that FHFA remove the limits
for all loans, while other commenters
suggested loans that are guaranteed or
insured by a department or agency of
the U.S. government be allowed to
exceed the conforming loan limits.
After considering the comments,
FHFA has decided that it would be
appropriate to allow the Banks to
acquire as AMA loans guaranteed or
insured by a department or agency of
the U.S. government without regard to
the conforming loan limit, while
continuing to apply the limit to other
types of loans. FHFA considers the
conforming loan limit, which is a
statutory requirement, to be an
appropriate public policy guide in
determining how the GSE subsidy that
28 Id.
29 See
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accrues to the Banks should be used to
support the housing finance efforts of
their members when making loans
without any federal guarantee or
insurance. Because other federal statutes
separately authorize certain agencies or
departments of the U.S. government to
insure or guarantee mortgage loans that
exceed the conforming loan limit, FHFA
views those provisions as evidence that
public policy would favor allowing the
Banks to also support those market
segments, and to do so in a manner that
is consistent with the limits of those
programs. Accordingly, § 1268.3(a)(1) of
the final rule will carry forward the
existing AMA rule provision that
excludes from AMA those single-family
mortgages where the loan amount
exceeds the conforming loan limits
established pursuant to 12 U.S.C.
1717(b)(2), but will also exempt from
that prohibition loans that are insured
or guaranteed by a department or agency
of the U.S. government.30
As discussed earlier, the proposed
rule would have barred a Bank from
purchasing as AMA any home mortgage
loans on which a director, officer,
employee, attorney, or agent of a Bank
or of the selling member institution was
the borrower, unless the board of
directors of the Bank specifically
approved such purchase.31 As
commenters point out, in the current
mortgage market any loans made to such
‘‘insiders’’ should meet the same AMA
underwriting standards that the member
or other originator would apply to all of
AMA-eligible loans and thus would not
have a different risk profile from those
other loans. Commenters also contended
that such a requirement would present
significant operational difficulties. For
example, because of the breadth of the
proposal, it would effectively require
the Banks to screen out of their AMA
pools not only those loans that had been
made to a member’s executives, but also
to any of its rank and file employees.
FHFA is persuaded that the costs to the
Banks of implementing this provision
would likely outweigh whatever
benefits might accrue from it. FHFA also
recognizes that the statutory language to
which FHFA looked in proposing this
provision was likely intended to address
the risks associated with particular
practices that are less of a concern in
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30 For
loans not guaranteed or insured by a
department or agency of the U.S. government, the
rule allows loans on properties located in
designated ‘‘high-cost areas,’’ where the conforming
loan limit is adjusted in accordance with the
criteria established in 12 U.S.C. 1717(b)(2), to
remain eligible for purchase as AMA as long as the
loan value is within the adjusted conforming loan
limit.
31 See Proposed Rule, 80 FR at 78691–92.
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today’s mortgage marketplace. The
original statutory provision, which
pertains only to the acceptance of such
loans as collateral and dates to the
original Bank Act, likely was intended
to prevent the Banks from accepting as
collateral mortgage loans that savings
and loan association members had made
to their ‘‘insiders’’ and which may not
have been underwritten as rigorously as
their other loans. Given that today’s
mortgage markets are much more
uniform, in terms of underwriting
practices, than was the case in the
1930s, it is unlikely that removing the
prohibition would create any significant
risks for the Banks.
While the final rule adopts or retains
specific restrictions on certain loans, it
does not limit the total amount of AMA
assets a Bank may acquire. Nevertheless,
FHFA expects each Bank’s board of
directors to establish a prudential limit
on its maximum holdings of AMA,
which should be governed by the Bank’s
ability to manage the risks inherent in
funding and holding such mortgage
loans.
D. Member or Housing Associate Nexus
Requirement—§ 1268.4
Section 1268.4 of the proposed rule
would have carried forward without
substantive change the member nexus
requirement of the current AMA
regulation, found at 12 CFR 955.2(b).
After considering the issues raised by
the commenters, described below,
FHFA has decided to adopt this
provision of the final rule without any
substantive differences from the
proposed rule. Under this ‘‘member
nexus’’ provision, an asset may be
eligible for purchase as AMA only if the
participating financial institution has
originated or issued the assets or has
held it for a valid business purpose. The
‘‘valid business purpose’’ provision was
intended to recognize the fact that some
members may conduct their mortgage
lending operations through both the
origination and purchase of mortgage
loans, which may include the
acquisition of loans from nonmember
institutions as part of the normal course
of business, and may then wish to sell
both categories of loans to their Bank.
The Finance Board and FHFA have
interpreted this provision as excluding
any loans that merely pass from a
nonmember through a member to a
Bank, because such arrangements would
have the effect of extending the benefits
of membership to the nonmember.32
32 See Proposed Rule: Federal Home Loan Bank
Acquired Member Assets, Core Mission Activities,
Investments and Advances, 65 FR 25676, 25681
(May 3, 2000) (hereinafter 2000 Proposed AMA
Rule).
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Commenters suggested that FHFA
amend the AMA rule to allow Banks to
acquire loans directly from the affiliates
of a Bank member, which they contend
would streamline the process of
acquiring loans. The Banks believe that
the current requirement is inefficient
because it requires the use of a two-step
process whereby a nonmember affiliate
that originates a mortgage loan must
first assign the loan to its affiliated
member prior to the member is able to
sell the loan to the Bank. FHFA
acknowledges that the current process
may be inefficient for such members,
but believes that the Finance Board
struck an appropriate balance when it
first adopted the AMA rule between the
need for operational efficiency and the
need to ensure that the benefits of Bank
membership are made available only to
institutions that are eligible for
membership. Accordingly, FHFA
decided to adopt the provision generally
as proposed.
The reference in § 1268.4(a) of the
final rule to assets issued ‘‘through, or
on behalf of the participating financial
institution’’ carries over from the
current regulation, and is intended to
address the terms under which HFA
bonds may qualify as AMA. As under
the current regulation, this provision
allows HFA bonds issued by an
underwriter for the participating
financial institution, i.e., a housing
finance agency that has become a
housing associate of the Bank, to qualify
as AMA.33 In § 1268.4(b), FHFA is also
carrying over without substantive
change the provisions of the current
regulations that address the process
through which a Bank may purchase
HFA bonds as AMA from a housing
associate of another Bank. Under this
provision, a Bank may acquire initialoffering taxable HFA bonds from out-ofdistrict associates, provided the Bank in
whose district the HFA is located (local
Bank) has a right of first refusal to
purchase, or negotiate the terms of, a
particular bond issue. If the local Bank
refuses, or does not respond within
three business days, the HFA may then
offer the bonds to an out-of-district
Bank.
E. Credit Risk-Sharing Requirement—
§ 1268.5
1. Overview
FHFA proposed to reorganize the
current credit risk-sharing requirements
from two provisions of the Finance
Board regulations, 12 CFR 955.2(c) and
955.3, into a single provision of the final
rule, § 1268.5. The proposed rule would
33 Id.
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have carried over several of the credit
risk-sharing provisions without
substantive changes, including the
requirement that all AMA loans carry a
credit enhancement and the design
requirement for the credit enhancement
structure to ensure that the participating
financial institution retained a material
economic incentive to reduce actual
losses on any AMA loans.34 To comply
with Dodd-Frank Act mandates that
generally bar regulatory agencies from
incorporating NRSRO credit rating
requirements into their regulations,
FHFA also proposed to amend those
provisions of the current AMA
regulation that were based on or
referenced NRSRO ratings, including
allowing the Banks flexibility to use a
non-NRSRO methodology and model for
calculating the credit enhancement
obligation. Finally, FHFA had proposed
to delete existing provisions that
authorize the use of private SMI or pool
insurance as part of the credit
enhancement structure and, as a
consequence, also remove provisions
from the current regulation requiring
eligible SMI providers to maintain
specific NRSRO ratings.
FHFA has made several changes to
the credit enhancement provisions of
the proposed rule in response to
comments, including restoring to the
rule provisions allowing the use of SMI
or pool insurance as part of the credit
enhancement structure. Related to that
provision, and as addressed in more
detail below, FHFA is also adding to the
final rule a requirement that a Bank
must develop and maintain written
financial and operational standards
under which it will review and approve
insurers as eligible to provide mortgage
insurance on AMA loans. This
requirement replaces the provisions of
the current regulation, which had
required the Banks to use NRSRO
ratings for evaluating mortgage insurers.
The final rule will carry over from the
current rule the requirements that all
AMA loans be covered by a memberprovided credit enhancement, and that
such credit enhancement on loans other
than those loans covered by a federal
guarantee or insurance bear the direct
economic consequences of losses from
the first dollar up to expected losses, or
immediately following expected losses
but in an amount that is equal to or
exceeding the expected losses.35
34 See
2000 Final AMA Rule, 65 FR at 43976–77.
FHFA noted in proposing the new AMA
rule, the credit risk-sharing requirements provide
that participating financial institutions selling
mortgages must retain a substantial portion of the
credit risk, given their expertise in underwriting
mortgages. In requiring the participating financial
institution to have such financial ‘‘skin in the
35 As
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2. Determining Credit Enhancements on
AMA pools
Section 1268.5(b)(1) of the final rule
sets forth the general requirements for
how a Bank is to determine the total
credit enhancement that a participating
financial institution must provide for an
asset or pool to qualify as AMA. Unlike
under the current rule, the final rule
does not require that Banks calculate the
credit enhancement for AMA using
NRSRO models and methodologies, or
that the credit enhancement raises the
credit quality of an asset or pool to a
level that is equivalent to a specific
NRSRO-determined rating. Instead, the
final rule requires the Banks to
determine and document that AMA
assets are enhanced at least to ‘‘AMA
investment grade.’’ The rule defines
‘‘AMA investment grade’’ as:
. . . a determination made by the Bank with
respect to an asset or pool, based on
documented analysis, including
consideration of applicable insurance, credit
enhancements, and other sources for
repayment on the asset or pool, that the Bank
has a high degree of confidence that it will
be paid principal and interest in all material
respects, even under reasonably likely
adverse changes to expected economic
conditions.
The term ‘‘AMA investment grade,’’
as well as its definition, represents a
change from the proposed rule that
FHFA made in response to comments
received on the proposal. The proposed
rule would have required that the
enhancement on AMA assets raise them
to at least ‘‘investment quality,’’ which
would have been defined by reference to
the definition of that term that is used
in the Bank investment regulation, at 12
CFR 1267.1. Commenters pointed out,
however, that the term ‘‘investment
quality’’ as used in the investment
regulation generally applies to debt
securities and that, unlike when Banks
purchase debt securities, Banks buy
AMA assets with the knowledge and
expectation that some of those assets
will default, and become delinquent.36
Thus, as commenters further noted, the
fact that the definition of ‘‘investment
quality’’ in the Bank investment rule
references expectations of ‘‘full and
timely payment of principal and
interest’’ means the definition cannot be
readily applied to individual mortgages
or mortgage pools purchased as AMA.
game,’’ the rule provides them an incentive to sell
high-quality loans to the Banks and the opportunity
to benefit financially from good underwriting
practices. See Proposed Rule, 80 FR at 78693.
36 The Banks take account of these expected
defaults and delinquencies and related losses when
determining pricing for their purchases of AMA
loans and in structuring the AMA products.
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FHFA agrees with the comments and
has revised the proposed definition to
address those commenters’ concerns. In
particular, the definition of ‘‘AMA
investment grade’’ that is adopted in the
final rule replaces the references to
expectations that a Bank will receive
‘‘full and timely payment of principal
and interest’’ with language suggested
by commenters, i.e., that a Bank has a
high degree of confidence that ‘‘it will
be paid principal and interest in all
material respects.’’ The change
recognizes that Banks will, upon
purchase of the AMA asset, expect
certain levels of payment defaults and
delinquencies. The final definition
continues to require that the Bank’s
analysis of the possibility for repayment
take account of adverse stress to future
expected economic conditions and that
the Bank should consider such adverse
stresses in their analysis, to the extent
that such adverse changes could
reasonably occur given current
economic conditions and outlooks.
While the proposed rule would not
have changed the existing requirement
that a Bank determine the necessary
credit enhancement on a pool at the
earlier of 270 days from the date of the
Bank’s acquisition of the first loan in a
pool or the date at which the pool
reaches $100 million in assets,
§ 1268.5(b)(1) of the final rule has
revised those provisions such that a
Bank now must determine the total
credit enhancement obligation no later
than 30 calendar days after a pool closes
or the Bank completes the purchase of
an AMA asset.37 FHFA made this
change based on comments that the rule
should allow a Bank to calculate the
credit enhancement in a manner that is
consistent with the terms of specific
loan funding commitments.
Commenters provided as an example
the Mortgage Partnership Program
(MPP) for which calculating the credit
enhancement at the time the pool closes
would bring more certainty to
participating financial institutions as to
their ongoing financial obligations.
FHFA believes that the change in the
final rule will provide Banks sufficient
flexibility to meet the concerns raised
by commenters while still ensuring that
all AMA pools are enhanced to levels
37 As FHFA previously noted, some AMA eligible
assets would be in the form of a security or
certificate, such as an HFA bond or a certificate of
security representing interest in a pool of whole
loans. For those AMA products that involve a
Bank’s purchase of a single security or instrument,
and not the purchase of a pool of individual loans,
the relevant date for applying this provision would
be the date the purchase of the instrument is
completed.
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consistent with the terms and
conditions of the specific AMA product.
Under § 1268.5(b)(1), the Bank could
continue to specify, as part of the terms
and conditions for a particular AMA
product, that a participating financial
institution must provide a credit
enhancement greater than that needed
to enhance the asset or pool to AMA
investment grade. The final rule further
provides that a Bank must make its
credit enhancement determinations
using a model and methodology of the
Bank’s choosing, subject to the
requirements of § 1268.5(f), which
requires the Banks to provide
information about their model and
methodology to FHFA upon request,
and which reserves FHFA’s right to
require changes to a Bank’s model or
methodology. As FHFA noted in the
proposed rule, a Bank may continue to
use the same NRSRO model it currently
uses for making credit enhancement
determinations under the final rule, and
in such a case, would not need to alter
the credit enhancement levels it
currently requires, unless FHFA directs
it to do so or its estimated enhancement
levels otherwise do not comply with the
rule.38 For example, a Bank would need
to increase credit enhancement levels if
it determined that the credit
enhancement currently estimated by its
NRSRO model was not sufficient for an
asset or pool to be AMA investment
grade under the definition of that term.
FHFA is adopting as proposed the
requirement that a Bank document the
basis for its conclusion that the
contractual credit enhancement
required for a particular pool is
sufficient to meet the required credit
enhancement obligation for a particular
AMA product, given the Bank’s chosen
model’s relevant stress scenarios.39 This
provision is located at § 1268.5(b)(2) of
the final rule, and that information will
help FHFA monitor the Banks’ use of
their models and the adequacy of the
specific credit enhancement structures
used in each AMA product.
Section 1268.5(c) of the final rule
addresses the credit risk-sharing
structure for AMA products. As is the
case under existing regulations, this
provision generally requires that the
participating financial institution
providing the credit enhancement bear
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38 See
Proposed Rule, 80 FR at 78693.
requirement replaces 12 CFR 955.3(b) and
(c) which state that a Bank had to obtain the NRSRO
verifications with regard to the adequacy of the
credit enhancement structure and Bank’s use of the
NRSRO model for estimating the required
enhancement in each AMA product. Given that
under the amendments made by this final rule,
FHFA no longer requires a Bank to use NRSRO
models, the NRSRO verification requirements are
obsolete, and FHFA has removed them.
39 This
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the direct economic consequences of
actual credit losses on the assets from
the first dollar of loss up to expected
losses, or immediately following
expected losses in an amount equal to
or exceeding expected losses.40 This
requirement would not apply to
federally insured or guaranteed
mortgage loans.41
As noted previously by the Finance
Board, this requirement helps ensure
that a participating financial institution
bears the direct consequences of the
credit quality of the asset or pool, and
thereby has the incentive to maintain
high underwriting standards for any
AMA loans sold to a Bank.42 The
participating financial institution
cannot transfer this responsibility to an
affiliate or nonmember entity.
While the current regulation defines
‘‘expected losses’’ as the base loss
scenario in the methodology of an
NRSRO applicable to a particular AMA
asset, the final rule amends this
definition to refer to the loss on the
particular AMA asset or pool given the
expected future economic and market
conditions in the model or methodology
used by the Bank to calculate the credit
enhancement for an AMA product. This
change results from the fact that the
final rule no longer requires a Bank to
use an NRSRO model, and also
accommodates the potential for a Bank
to adopt a model that applies a
methodology that differs from that used
in the Banks’ current models.
Otherwise, FHFA believes that this
change does not alter the substance of
what is currently required by the AMA
rule; nor is it intended to alter how a
Bank would calculate ‘‘expected losses’’
if the Bank continues to use its current
model.
Section 1268.5(c) also continues to
require that the credit enhancement
remain in place at all times, i.e., for the
40 The
economic responsibility of the expected
credit losses may be borne by the member or
housing associate in a variety of ways. For instance,
under the product developed by the Chicago Bank
known as MPF 100, a Bank establishes an account
to absorb credit losses. As the Bank incurs losses,
the member reimburses the Bank through the
reduction of credit enhancement fees paid to the
member by the Bank and, therefore, is exposed to
the credit risk of the loans starting with the first
dollar of loss. Essentially, the fees paid to the
member are contingent upon the performance of the
asset. Also, the rule allows for a member-provided
credit enhancement to be positioned after expected
losses. Authorizing this structure in the rule allows
for the existing MPF Original product.
41 As is discussed below, FHFA is amending the
requirement that for government insured or
guaranteed loans the members or housing associates
must bear responsibility for unreimbursed servicing
expenses up to the amount of expected losses for
the loan to qualify as AMA.
42 See 2000 Proposed AMA Rule, 65 FR at 25683;
see also, 2000 Final AMA Rule, 65 FR at 43976.
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life of the asset or pool.43 This
requirement effectively prohibits the
Banks from using structures, for
example, that comply with the credit
rating requirement during in the first
year, but that then scale back the
amount of the member’s credit
enhancement in subsequent years so
that the pool would no longer be credit
enhanced to a level that is consistent
with the terms and conditions of the
AMA product.44
Section 1268.5(c)(1)(ii) of the final
rule also will retain the existing
requirement that a participating
financial institution must secure fully
its credit enhancement obligation, and
that it do so in the same manner that a
member must secure its obligation to
repay an advance under part 1266 of the
FHFA advances regulations. This
provision is intended to prevent a Bank
from being exposed to any additional
credit risk as a result of a member’s
failure to comply with its contractual
obligation to absorb a specified portion
of the credit losses on its AMA loans.
While some commenters asked FHFA to
delete this requirement so that the
Banks could have added flexibility in
designing different types of credit
enhancement structures, FHFA believes
that the collateral requirement provides
a necessary level of protection for the
Banks should a participating financial
institution be unable to fulfill its credit
enhancement obligation, and also is
consistent with the legal rationale for
the AMA programs, which views the
acquisition of AMA loans as being
functionally equivalent to the extension
of credit via an advance, which
members must fully secure with eligible
collateral.
3. Transfer of Credit Enhancement
Obligation
The final rule will carry over, with
some modifications, the provisions of
the existing regulations that establish
alternative means by which a member
may provide the credit enhancement for
its AMA loans, including a transfer of
the enhancement obligation to certain
parties, subject to certain limitations.
The revised provision would be located
at § 1268.5(c)(2) of the final rule. The
use of these structures requires the
approval of the Bank, which could do so
either by establishing the required form
of credit enhancement in the terms of a
particular AMA product, or by
43 Where the Bank returns the credit enhancement
to a participating financial institution, it would
only do so if the credit quality of the asset or pool
continues to meet the terms and conditions of the
AMA product.
44 See 2000 Final Rule, 65 FR at 43976.
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providing specific approval for the
transfer.
Specifically, § 1268.5(c)(2)(i)
authorizes a participating financial
institution to transfer its credit
enhancement obligation to its insurance
affiliate, but only where the insurance
provided by the affiliate is positioned
after the participating financial
institution bears the financial losses on
the AMA loan in an amount at least
equal to the expected losses. Similarly,
the final rule carries over the substance
of two provisions of the current
regulations, which allow a participating
financial institution to transfer its credit
enhancement obligation to another
participating financial institution,
which may be either a member of the
same Bank or, subject to certain
conditions, a member of another Bank.
Those provisions are located at
§ 1268.5(c)(2)(iv) and (v) of the final
rule. These provisions remain consistent
with the existing regulations, as well as
with current Bank practice with regard
to AMA product structures and
permissible transfers of the credit
enhancement obligations.
As already discussed, FHFA had
proposed eliminating provisions of the
existing regulation that allow a
participating financial institution to
meet part of its credit enhancement
obligation through the purchase of loanlevel SMI or pool insurance. After
considering the comments on this issue,
however, FHFA has determined to
retain those provisions, which are
located at § 1268.5(c)(2)(ii) and (iii) of
the final rule. Thus, a participating
financial institution can continue to
provide part of its credit enhancement
obligation by purchasing loan-level SMI,
but only if the SMI is positioned in the
credit enhancement structure to cover
losses remaining after the participating
financial institution has borne the direct
economic consequences of the actual
credit losses, as required by
§ 1268.5(c)(1)(i). Similarly, the
participating financial institution can
continue to purchase pool insurance,
but only where such insurance covers
that portion of the credit enhancement
obligation attributable to the geographic
concentration or size of the pool and is
positioned last in the credit
enhancement structure.
The provisions pertaining to the use
of SMI or pool insurance generally carry
over the substance of the existing
regulations, with one significant
exception related to the rating
requirement for insurance providers.
The existing AMA regulations require
that insurance be maintained at all
times with an insurer that has been
assigned a rating from an NRSRO that is
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at least equal to the second highest
investment grade NRSRO rating.
Because the Dodd-Frank Act requires
that FHFA remove such ratings-based
provisions from its regulations, FHFA is
replacing this requirement with a
requirement that the participating
financial institution may obtain its SMI
or pool insurance only from an
institution that at all times is a
‘‘qualified insurer,’’ as defined by the
final rule.45 To implement this
‘‘qualified insurer’’ requirement, FHFA
is adopting as part of the final rule a
new provision, to be located at
§ 1268.5(e)(1), which directs a Bank to
develop and maintain a written
financial and operational standards that
it will apply in approving an entity as
a ‘‘qualified insurer.’’ That provision
also makes clear that a Bank can rely on
another provision of the final rule,
§ 1268.8, to delegate to another Bank or
group of Banks the responsibility for
developing and applying these
standards. The provision will allow a
group of Banks to develop a common
policy and common list of qualified
insurers for AMA programs if they
choose.
The rule allows a Bank one year to
develop these new insurance provider
standards. The FHFA expects that Banks
will develop the new standards and
qualify under these standards any
mortgage insurers with which the Banks
intend to do business under their AMA
programs within this one-year
timeframe. Until the end of this oneyear grace period, Banks can continue to
do business with the insurance
counterparties that it currently allows to
provide insurance on AMA assets or can
add new insurance counterparties based
on existing standards that the Banks
may have in place.46 Once the new
standards are in place, § 1268.5(e)(1)
also requires that a Bank review
qualified insurers at least once every
two years and verify that they continue
to meet the Bank’s standards.47
45 FHFA also has adopted in § 1268.1 a definition
for ‘‘qualified insurer,’’ which includes any
insurance company that a Bank approves in
accordance with § 1268.5(e) to provide any form of
mortgage insurance on assets and pools purchased
under an AMA program. Consistent with
suggestions by commenters, this definition does not
restrict potential qualified insurers just to monoline mortgage insurance providers, but could
include any insurance company.
46 The grandfather provision in § 1268.2(b) allows
a Bank to continue to hold loans purchased prior
to the end of the phase-in period for adopting the
qualified insurer standards even if the PMI or other
insurance on those loans is provided by an entity
that does not meet the Bank’s new standards.
47 Section 1268.8 of the final rule allows a Bank
to delegate the administration of its AMA program
to another Bank, which would allow a Bank to
delegate the responsibility for conducting this
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FHFA expects that any standards a
Bank adopts under § 1268.5(e)(1) will be
rigorous and will set minimum financial
and operating standards that an insurer
must meet to help ensure that the
insurer will have the financial resources
to fulfill its obligations under insurance
policies on AMA assets. While the rule
does not provide specific requirements
that the Banks must meet in developing
these standards, FHFA notes that the
PMIERS recently implemented by the
Enterprises represent a good model of
the type of analytical approach that
FHFA would expect of the Banks’
standards under this provision. FHFA
expects to review a Bank’s qualified
insurer standards as part of its regular
supervisory examination and off-site
monitoring of Bank activities. FHFA
also expects Banks periodically to
review their qualified insurer standards,
and to revise them as appropriate.
In order to ensure a degree of
uniformity with respect to the financial
condition of entities that may provide
insurance in connection with the AMA
programs, FHFA is also adopting new
§ 1268.5(e)(2), which will allow only
those entities that are ‘‘qualified
insurers’’ to provide either the loanlevel or pool insurance policies allowed
as part of the credit enhancement
structure under § 1268.5(c)(2)(ii) and
(iii) or the private mortgage insurance
on loans purchased as AMA. In
proposing this rule, FHFA specifically
requested comments on whether any
eligibility requirements for providers of
SMI or pool insurance should also apply
to PMI providers.48 Few commenters
responded to this request, but the
commenters generally expressed the
view that FHFA should not impose
specific requirements on PMI providers
and, instead, should continue to allow
Banks to adopt their own standards for
those providers. One of the commenters
noted, however, that if the FHFA did
impose requirements, PMI providers
should be required to meet PMIERS.
After consideration of these comments,
FHFA has determined to apply the
‘‘qualified insurer’’ requirements of
§ 1268.5(e)(1) to providers of PMI, SMI
and pool insurance. By requiring that
providers of all types of mortgage
insurance used in AMA products meet
rigorous financial and operational
standards, this provision helps assure
that Banks engage in sound
counterparty risk management and
maintain strong safety and soundness
measures for their AMA programs.
Moreover, given that § 1268.5(e)
required periodic review to another Bank or Banks
should it so wish.
48 See Proposed Rule, 80 FR at 78695.
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provides the Banks with latitude to
develop their own standards for what
constitutes a ‘‘qualified insurer,’’ the
application of this provision to PMI
providers should not represent a
significant change from the existing
approach.
4. Loans Guaranteed or Insured by a
Department or Agency of the U.S.
Government
Section 1268.5(d) of the final rule
addresses the purchase of federally
insured or guaranteed mortgage loans as
AMA. The existing regulatory text
allows a portion of the credit
enhancement to be provided through
the purchase of loan-level insurance,
including insurance provided by a
federal mortgage insurance or guarantee
program. Although the federal insurance
or guarantee generally eliminates the
credit risk to the member selling
mortgage loans to its Bank, the Finance
Board had determined that the
member’s potential liability to bear the
unreimbursed servicing expenses on
such loans served the same purpose of
providing an economic incentive for the
member to sell only well-underwritten
loans to the Bank. The final rule carries
over much of the substance of current
agency policy, and simply states that a
participating financial institution may
provide the required credit
enhancement by purchasing loan-level
guarantees or insurance from
departments or agencies of the U.S.
government, provided that the guarantee
or insurance remains in effect for
however long the Bank owns the loan.
The requirement that the guarantee or
insurance remain in effect does not
require that the Bank member be the
party that maintains the guarantee or
insurance for that period, which would
allow any other entity servicing the loan
to maintain the guarantee or insurance.
The final rule differs from the existing
regulations, however, in that it does not
require loans guaranteed or insured by
a department or agency of the U.S.
government to meet the specific credit
enhancement structure requirements,
i.e., wherein the member must bear the
first dollar of losses for a loan or pool
up to the amount of expected losses or
must bear losses immediately following
the expected losses in an amount that
equals or exceeds expected losses.49
Even under this new provision,
however, the federal guarantee or
insurance must be sufficient so that the
underlying asset or pool meets the
required credit enhancement specified
as part of the terms and conditions that
49 FHFA is readopting these requirements as
§ 1268.5(c)(1) of this final rule.
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the Bank has established for the relevant
AMA product.
As already noted, the Finance Board
has described the purpose of the AMA
credit enhancement structure
requirement as being to ensure that
participating financial institutions,
‘‘when responsible for such losses, [had]
incentive to seek ways to achieve better
than expected performance [for the
loans sold as AMA].’’ 50 As the Finance
Board explained, for a participating
financial institution to meet this
structure requirement with respect to
federally guaranteed or insured loans,
given that losses eventually would be
covered by the guarantee or insurance,
the participating financial institution
would have to bear the economic
responsibility of all unreimbursed
servicing expenses associated with
those loans, up to the amount of the
expected losses.51 As a result, under the
current regulation the member’s credit
enhancement obligation for AMA
government loans is tied closely to its
servicing obligations. An unintended
consequence of tying the credit
enhancement obligation to the servicing
obligation is that such a requirement
effectively limits a participating
financial institution’s ability to transfer
the mortgage-servicing rights for any
AMA government loans to nonparticipating financial institutions. In
addition, as FHFA noted in proposing
the rule, after having had the
opportunity to review the Banks’ AMA
programs since 2000, FHFA has come to
the conclusion that requiring a member
to retain an obligation to cover
unreimbursed servicing expenses for
AMA government loans provides no
meaningful additional incentive to
improve underwriting to achieve better
than expected loan performance.52
A small number of commenters
objected to this proposed revision.
These comments noted that the
proposed change would have altered
one of the key underlying premises for
AMA with regard to government loans,
namely that the members need to have
‘‘skin in the game’’ to assure high
quality underwriting. After considering
these comments in light of its own
experience in monitoring the Banks’
AMA programs, FHFA has concluded
that, with regard to federally guaranteed
or insured loans, the underwriting
standards imposed by the relevant
50 2000
Final AMA Rule, 65 FR at 43977.
In the supplementary information section of
the original rule, the Finance Board explained how
loans guaranteed or insured by a department or
agency of the U.S. government would meet the
credit enhancement requirements of the original
AMA rule.
52 Proposed Rule, 80 FR at 78695.
51 Id.
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government department or agency
address the same policy objective of the
credit enhancement requirements,
which is to encourage the members to
underwrite the loans to a high level.
Therefore, FHFA finds that requiring the
participating financial institution to also
remain responsible for unreimbursed
servicing expenses would add little, if
any, incentive to underwrite its
mortgage loans to a materially different
level above the already high level
required by the federal guarantor or
insurer. At the same time, FHFA
believes that the ability to transfer the
servicing rights on federally insured or
guaranteed loans is important in the
current marketplace. Thus by carrying
over to the final rule a provision that
would prevent participating financial
institutions from transferring servicing
rights on such loans FHFA could
negatively affect members’ ability to use
the AMA program to obtain liquidity to
support this segment of the mortgage
market.53 FHFA, therefore, is adopting
§ 1268.5(d), as proposed.
5. Model and Methodology
Section 1268.5(f) of the final rule
addresses the model and methodology
that a Bank uses to estimate the required
credit enhancement, and has been
simplified in response to certain
recommendations from the commenters.
The final rule requires a Bank to
establish a model and methodology for
estimating the required member credit
enhancements for AMA loans that a
participating financial institution sells
to a Bank.54 The new provision,
consistent with the Dodd-Frank Act
requirements, no longer requires a Bank
to use an NRSRO model.55 The final
rule does require a Bank to provide to
FHFA upon request any information
about the Bank’s model and
methodology including results of any
model runs and testing performed by
the Bank. While the final rule does not
require that FHFA approve the model
53 As FHFA noted when it proposed this rule, the
flexibility allowed in transferring mortgageservicing rights under the amended provision
would prove beneficial for many smaller or medium
sized members. These members, in particular,
might wish to sell their AMA government loans into
AMA government products but may lack the ability
to perform the servicing obligations, as now
required by the AMA regulation. In addition, given
changes in the mortgage industry, Banks may find
it increasingly difficult to find member institutions
willing to take on the servicing obligations for AMA
government loans. Id.
54 The provision was proposed as § 1268.5(e). See
Proposed Rule, 80 FR at 78698.
55 Nothing in the final rule, however, prohibits a
Bank from continuing to use an NRSRO model to
estimate the credit enhancement requirement,
provided that the Bank otherwise complies with
§ 1268.5(f).
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and methodology that a Bank uses to
estimate the required credit
enhancement, it specifically reserves to
FHFA the right to direct a Bank to make
changes to its model and methodology
and further requires that a Bank
promptly implement any such changes
once FHFA directs it to do so.
As noted above, FHFA has altered the
final version of § 1268.5(f) from what it
proposed based on the comments
received, a number of which thought
that the proposed provision was too
prescriptive and would hinder the
Banks’ ability to adjust their models and
methodologies in response to advances
in technologies and methods. These
commenters believed that it would be
more appropriate for the final rule to
provide only general guidance relating
to the models and methodologies, and
rely on advisory bulletins and other
forms of supervisory guidance with
regard to specific practices on
evaluating and monitoring performance.
The commenters also noted that FHFA
generally follows their suggested
approach with regard to Banks’ use of
models in other areas.
FHFA agrees with the comments, and
has note included as part of the final
rule the proposed requirements related
to a Bank’s validation and monitoring of
its model, or that requiring a Bank to
inform FHFA prior to making any
material changes to its model and
methodology. Instead, FHFA will
address these items through its
supervisory process, and will issue
guidance to the Banks on these topics as
the need arises. FHFA, however,
continues to expect a Bank to have risk
management policies and procedures
commensurate with the complexity of
the model and methodology. Effective
model risk management should entail a
comprehensive approach in identifying
risk throughout the model lifecycle and
should be consistent with any
applicable FHFA guidance.
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F. Servicing of AMA Loans—§ 1268.6
Section 1268.6 of the final rule
addresses the servicing of AMA loans,
which FHFA is adopting as proposed.
This provision incorporates current
FHFA positions, as set forth in a recent
regulatory interpretation, on the rights
of the Banks to allow for the transfer of
mortgage servicing rights from the
participating financial institution that
originally sold the AMA loans to the
Bank.56 FHFA received no comments on
this provision.57
56 See Regulatory Interpretation, 2015–RI–01
(June 23, 2015).
57 As discussed previously, FHFA received
comments objecting to amendments that would
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Thus, § 1268.6 allows for the transfer
of servicing rights on AMA loans,
including federally guaranteed or
insured loans, to any institution,
including a non-Bank System member.
The provision specifically provides that
any such transfer cannot result in the
AMA loan failing to meet any other
AMA requirement, including the credit
enhancement requirement.58 Section
1268.6 also requires the approval of
each Bank that has any ownership
interest in the underlying loans, no
matter how small that interest may be,
prior to the transfer of the servicing
obligation. Finally, § 1268.6 states that
the Banks must have policies and
procedures that ensure the transfer of
servicing would not negatively affect the
credit enhancement on the underlying
loans or substantially increase the
Bank’s exposure to risk. As it noted
when proposing the rule, FHFA expects
such policies and procedures
specifically to address transfers to nonBank System member servicers and
provide contingency plans to address a
case in which a large servicer fails or is
otherwise unable to continue to service
a Bank’s AMA portfolio.59
G. Administrative Arrangements
Between Banks—§ 1268.8
Proposed § 1268.8 would have carried
over without substantive change the
provisions of § 955.5 of the current
regulation, which addresses
administrative transactions and
agreements between Banks involving
AMA. This provision allows Banks to
delegate to another Bank the
administration of its AMA program, but
requires the delegating Bank to disclose
to a participating financial institution
the existence of the delegation or the
possibility of such delegation, in its
AMA-related agreements with the
participating financial institution.
Commenters requested technical
changes to the proposed rule to clarify
that Banks can contract with third
parties, including another Bank, to
provide services for their AMA
programs separate and apart from the
administrative delegation contemplated
in this provision without triggering
additional disclosure obligations. They
eliminate the requirement that members bear the
unreimbursed servicing expenses for U.S.
government insured loans as part of their AMA
credit enhancement obligation. These comments
were addressed in the section above addressing
credit enhancement requirements.
58 As FHFA noted in proposing the rule, this
means that a member cannot transfer any part of the
credit enhancement obligation on a non-U.S.
government insured loan to a non-member
institution as part of the transfer of servicing rights.
See Proposed Rule, 80 FR at 78696.
59 Id.
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also suggested a change in wording to
make clear that a Bank may, by contract,
define specific parameters on its
delegation of pricing authority for its
AMA program to another Bank. FHFA
agrees that the suggested changes
appropriately clarify the scope of the
requirements in § 1268.8 and raise no
safety and soundness or other concerns.
Therefore, FHFA has incorporated the
Banks’ suggested language into the final
rule. Otherwise, proposed § 1268.8 is
adopted as final without further
changes.
H. Other Provisions—§ 1268.7
As proposed, FHFA is carrying over
without change the current rule’s data
reporting requirements for AMA, which
would be located at § 1268.7. FHFA
received no comments on that
provision. Also as proposed, FHFA is
deleting from the AMA rule the
provision that had established riskbased capital requirements for AMA,
which has been superseded by the
statutory risk-based capital requirement
and thus has no continuing
applicability.60 FHFA received no
comments on its proposal to delete this
provision.
III. Consideration of Differences
Between the Banks and the Enterprises
When promulgating regulations
relating to the Banks, section 1313(f) of
the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 requires the Director to consider
the differences among the Federal
National Mortgage Association and the
Federal Home Loan Mortgage
Corporation (together, 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.61 The amendments made by
this rulemaking apply exclusively to the
Banks. In preparing the proposed and
final rules the Director considered the
differences between the Banks and the
Enterprises as they relate to the above
factors, and the proposed rule requested
public comments on the extent to which
the rule might implicate any of the
statutory factors. FHFA received a
comment suggesting that the continued
use of the conforming loan limit for
Bank AMA purchases would not
appropriately take into account the
differences between the Banks and the
Enterprises. As already discussed above,
in connection with the section of the
60 Id.
61 See
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final rule relating to the conforming
loan limits, the Director has considered
this comment and has determined that
it is appropriate to continue to refer to
the conforming loan limit as a policy
guide for establishing reasonable limits
on the use of the Banks’ GSE subsidy in
connection with their purchase of nonfederally insured or guaranteed
mortgage loans.
12 CFR Part 1268
IV. Paperwork Reduction Act
The information collection, entitled
‘‘Federal Home Loan Bank Acquired
Member Assets, Core Mission Activities,
Investments and Advances’’ contained
in current 12 CFR part 955 of the
regulations that is transferred to 12 CFR
part 1268 by this final rule has been
assigned control number 2590–0008 by
the Office of Management and Budget
(OMB). The final rule does not
substantively or materially modify the
current, approved information
collection.
Authority and Issuance
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires that a
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified the regulation will not have
a significant economic impact on a
substantial number of small entities. 5
U.S.C. 605(b). FHFA has considered the
impact of the final rule under the
Regulatory Flexibility Act.
FHFA certifies that the final rule will
not have a significant economic impact
on a substantial number of small entities
because the regulation is applicable
only to the Banks, which are not small
entities for purposes of the Regulatory
Flexibility Act.
List of Subjects
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12 CFR Part 955
Community development, Credit,
Federal home loan banks, Housing,
Reporting and recordkeeping
requirements.
Acquired member assets, Credit,
Federal home loan bank, Housing,
Nationally recognized statistical rating
agency.
12 CFR Part 1281
Credit, Federal home loan banks,
Housing, Mortgages, Reporting and
recordkeeping requirements.
For reasons stated in the
SUPPLEMENTARY INFORMATION,
and under
the authority of 12 U.S.C. 1430, 1430b,
1431, 4511, 4513, 4526, FHFA is
amending subchapter G of chapter IX
and subchapters A, D, and E of chapter
XII of title 12 of the Code of Federal
Regulations as follows:
CHAPTER IX—FEDERAL HOUSING
FINANCE BOARD
Subchapter G—[Removed and Reserved]
1. Subchapter G, consisting of part
955, is removed and reserved.
■
CHAPTER XII—FEDERAL HOUSING
FINANCE AGENCY
Subchapter A—Organization and
Operations
PART 1201—GENERAL DEFINITIONS
APPYING TO ALL FEDERAL HOUSING
FINANCE AGENCY REGULATIONS
2. The authority citation for part 1201
continues to read as follows:
■
Authority: 12 U.S.C. 4511(b), 4513(a),
4513(b).
3. Amend § 1201.1 by revising the
definition of ‘‘Acquired member assets’’
to read as follows:
■
§ 1201.1
Definitions.
*
*
*
*
*
Acquired member assets or AMA
means assets acquired in accordance
with, and satisfying the applicable
requirements of, part 1268 of this
chapter.
*
*
*
*
*
Subchapter D—Federal Home Loan Banks
PART 1267—FEDERAL HOME LOAN
BANK INVESTMENTS
4. The authority citation for part 1267
continues to read as follows:
12 CFR Part 1201
Administrative practice and
procedure, Federal home loan banks,
Government-sponsored enterprises,
Office of Finance, Regulated entities.
■
12 CFR Part 1267
Community development, Credit,
Federal home loan bank, Housing,
Reporting and recordkeeping
requirements.
■
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Authority: 12 U.S.C. 1429, 1430, 1430b,
1431, 1436, 4511, 4513, 4526.
§ 1267.2
[Amended]
5. Amend § 1267.2 in paragraph (a) by
removing ‘‘955 of this title’’ and adding
in its place ‘‘1268 of this chapter’’.
■ 6. Part 1268 is added to subchapter D
to read as follows:
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PART 1268—ACQUIRED MEMBER
ASSETS
Sec.
1268.1 Definitions.
1268.2 Authorization for acquired member
assets.
1268.3 Asset requirement.
1268.4 Member or housing associate nexus
requirement.
1268.5 Credit risk-sharing requirement.
1268.6 Servicing of AMA loans.
1268.7 Reporting requirements for acquired
member assets.
1268.8 Administrative transactions and
agreements between Banks.
Authority: 12 U.S.C. 1430, 1430b, 1431,
4511, 4513, 4526.
§ 1268.1
Definitions.
As used in this part:
Affiliate means any business entity
that controls, is controlled by, or is
under common control with, a member.
AMA investment grade means a
determination made by the Bank with
respect to an asset or pool, based on
documented analysis, including
consideration of applicable insurance,
credit enhancements, and other sources
for repayment on the asset or pool, that
the Bank has a high degree of
confidence that it will be paid principal
and interest in all material respects,
even under reasonably likely adverse
changes to expected economic
conditions.
AMA product means a structure that
is defined by a specific set of terms and
conditions that comply with this part
1268 and that is established by a Bank
for purposes of governing the Bank’s
purchase of AMA-eligible loans.
AMA program means a Bankestablished program to buy mortgage
loans that meet the requirements of this
part, which may comprise multiple
AMA products.
Expected losses means the loss on the
asset or pool given the expected future
economic and market conditions in the
model or methodology used by the Bank
under § 1268.5 and applicable to an
AMA product.
Participating financial institution
means a member or housing associate of
a Bank that is authorized to sell, credit
enhance, or service mortgage loans to or
for its own Bank through an AMA
program, or a member or housing
associate of another Bank that has been
authorized to sell, credit enhance, or
service mortgage loans to or for the
other Bank pursuant to an agreement
between the Bank acquiring the AMA
product and the Bank of which the
selling institution is a member or
housing associate.
Pool means a group of loans acquired
under one or more loan funding
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commitments, contractual agreements,
or similar arrangements.
Qualified insurer means an insurer
that a Bank approves in accordance with
§ 1268.5(e)(1) to provide any form of
mortgage insurance coverage on assets
and pools purchased under an AMA
program.
Residential real property has the
meaning set forth in § 1266.1 of this
chapter.
§ 1268.2 Authorization for acquired
member assets.
(a) General. Each Bank is authorized
to invest in assets that qualify as AMA,
subject to the requirements of this part
and part 1272 of this chapter.
(b) Grandfathered transactions.
Notwithstanding paragraph (a), a Bank
may continue to hold as AMA assets
that were previously authorized by the
Federal Housing Finance Board or
FHFA for purchase as AMA, provided
that the assets were purchased, and
continue to be held, in compliance with
that authorization.
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§ 1268.3
Asset requirement.
Assets that qualify as AMA shall be
limited to the following:
(a) Whole loans that are eligible to
secure advances under § 1266.7(a)(1)(i),
(a)(2)(ii), (a)(4), or (b)(1) of this
chapter, excluding:
(1) Single-family mortgage loans
where the loan amount exceeds the
limits established pursuant to 12 U.S.C.
1717(b)(2), unless the loan is guaranteed
or insured by an agency or department
of the U.S. government, in which case
the limits in 12 U.S.C. 1717(b)(2) do not
apply; and
(2) Loans made to an entity, or
secured by property, not located in a
state;
(b) Whole loans secured by
manufactured housing, regardless of
whether such housing qualifies as
residential real property under
applicable state law;
(c) State and local housing finance
agency bonds; or
(d) Certificates representing interests
in whole loans if:
(1) The loans qualify as AMA under
paragraphs (a) or (b) of this section and
meet the nexus requirement of § 1268.4;
and
(2) The certificates:
(i) Meet the credit enhancement
requirements of § 1268.5;
(ii) Are issued pursuant to an
agreement between the Bank and a
participating financial institution to
share risks consistent with the
requirements of this part; and
(iii) Are acquired substantially by the
initiating Bank or Banks.
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§ 1268.4 Member or housing associate
nexus requirement.
(a) General provision. To qualify as
AMA, any assets described in § 1268.3
must be acquired in a purchase or
funding transaction only from:
(1) A participating financial
institution, provided that the asset was:
(i) Originated or issued by, through, or
on behalf of the participating financial
institution, or an affiliate thereof; or
(ii) Held for a valid business purpose
by the participating financial
institution, or an affiliate thereof, prior
to acquisition by the Bank; or
(2) Another Bank, provided that the
asset was originally acquired by the
selling Bank consistent with this
section.
(b) Special provision for housing
finance agency bonds. In the case of
housing finance agency bonds acquired
by a Bank from a housing associate
located in the district of another Bank
(local Bank), the arrangement required
by the definition of ‘‘participating
financial institution’’ in § 1268.1
between the acquiring Bank and the
local Bank may be reached in
accordance with the following process:
(1) The housing finance agency shall
first offer the local Bank right of first
refusal to purchase, or negotiate the
terms of, its proposed bond offering;
(2) If the local Bank indicates, within
three business days, it will negotiate in
good faith to purchase the bonds, the
housing finance agency may not offer to
sell or negotiate the terms of a purchase
with another Bank; and
(3) If the local Bank declines the offer,
or has failed to respond within three
business days, the acquiring Bank will
be considered to have an arrangement
with the local Bank for purposes of this
section and may offer to buy or
negotiate the terms of a bond sale with
the housing finance agency.
§ 1268.5
Credit risk-sharing requirement.
(a) General credit risk-sharing
requirement. For each AMA product,
the Bank shall implement and have in
place at all times, a credit risk-sharing
structure that:
(1) Requires a participating financial
institution to provide the credit
enhancement necessary to enhance an
eligible asset or pool to the credit
quality specified by the terms and
conditions of the AMA product,
provided, however, that such credit
enhancement results in the eligible asset
or pool being at least AMA investment
grade, as defined in § 1268.1; and
(2) Meets the requirements of this
section.
(b) Determination of necessary credit
enhancement. (1) No later than 30
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91689
calendar days after the purchase of the
asset or after a pool closes, the Bank
shall determine the total credit
enhancement necessary to enhance the
asset or pool to at least AMA investment
grade and to be consistent with the
terms and conditions of a specific AMA
product. The enhancement shall be for
the life of the asset or pool. The Bank
shall make this determination for each
AMA product using a model and
methodology that the Bank deems
appropriate, subject to paragraph (f) of
this section.
(2) A Bank shall document its basis
for concluding that the contractual
credit enhancement required from each
participating financial institution with
regard to a particular asset or pool will
equal or exceed the credit enhancement
level specified in the terms and
conditions of the AMA product and
determined in accordance with
paragraph (b)(1) of this section.
(c) Credit risk-sharing structure.
Under any credit risk-sharing structure,
the credit enhancement provided by the
participating financial institution shall
at all times meet the following
requirements:
(1) The participating financial
institution that is providing the credit
enhancement required under this
paragraph (c) shall in all cases:
(i) Bear the direct economic
consequences of actual credit losses on
the asset or pool:
(A) From the first dollar of loss up to
the amount of expected losses; or
(B) Immediately following expected
losses, but in an amount equal to or
exceeding the amount of expected
losses; and
(ii) Fully secure its direct credit
enhancement obligation in accordance
with § 1266.7; and
(2) The participating financial
institution also may provide all or a
portion of the credit enhancement, with
the approval of the Bank, by:
(i) Contracting with an insurance
affiliate of that participating financial
institution to provide an enhancement,
but only where such insurance is
positioned in the credit risk-sharing
structure so as to cover only losses
remaining after the participating
financial institution has borne losses as
required under paragraph (c)(1)(i) of this
section;
(ii) Purchasing loan-level insurance
only where:
(A) The participating financial
institution is legally obligated at all
times to maintain such insurance with
a qualified insurer; and
(B) Such insurance is positioned in
the credit enhancement structure so as
to cover only losses remaining after the
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participating financial institution has
borne losses as required under
paragraph (c)(1)(i) of this section;
(iii) Purchasing pool-level insurance
only where:
(A) The participating financial
institution is legally obligated at all
times to maintain such insurance with
a qualified insurer;
(B) Such insurance insures that
portion of the required credit
enhancement attributable to the
geographic concentration and size of the
pool; and
(C) Such insurance is positioned last
in the credit enhancement structure so
as to cover only those losses remaining
after all other elements of the credit
enhancement structure have been
exhausted;
(iv) Contracting with another
participating financial institution in the
Bank’s district to provide a credit
enhancement consistent with this
section, in return for compensation; or
(v) Contracting with a participating
financial institution in another Bank’s
district, pursuant to an arrangement
between the two Banks, to provide a
credit enhancement consistent with this
section, in return for compensation.
(d) Loans guaranteed or insured by a
department or agency of the U.S.
government. Instead of the structure set
forth in paragraph (c) of this section, a
participating financial institution also
may provide the required credit
enhancement through loan-level
insurance that is issued by an agency or
department of the U.S. government or is
a guarantee from an agency or
department of the U.S. government,
provided that the government insurance
or guarantee remains in place for as long
as the Bank owns the loan.
(e) Qualified insurers. (1) Within one
year of January 18, 2017, each Bank
must develop, and subsequently
maintain, written financial and
operational standards that an insurer
must meet for the Bank to approve it as
a qualified insurer. A Bank shall review
qualified insurers at least once every
two years to determine whether they
still meet the financial and operational
standards set by the Bank. A Bank may
delegate responsibility for development
of these standards and approval of
qualified insurers to another Bank or
group of Banks pursuant to § 1268.8.
(2) Only qualified insurers may
provide private loan insurance on AMA
eligible assets or the loan or pool
insurance allowed as part of the credit
enhancement structure for AMA
products under paragraphs (c)(2)(ii) or
(iii) of this section.
(f) Appropriate methodology for
calculating credit enhancement. A Bank
VerDate Sep<11>2014
20:05 Dec 16, 2016
Jkt 241001
shall use a model and methodology for
estimating the amount of credit
enhancement for an asset or pool. A
Bank shall provide to FHFA upon
request information about the model
and methodology, including and
without limitation results of any model
runs and the results of any tests of the
model performed by the Bank. FHFA
reserves the right to direct a Bank to
make changes to its model and
methodology, and a Bank promptly
shall institute any such FHFA-directed
changes.
§ 1268.6
Servicing of AMA loans.
(a) Servicing of AMA loans may be
performed by or transferred to any
institution, including an institution that
is not a member of the Bank System,
provided that the loans, after such
transfer, continue to meet all
requirements to qualify as AMA under
§§ 1268.3, 1268.4, and 1268.5.
(b) The transfer of mortgage servicing
rights and responsibilities must be
approved by the Bank or Banks that own
the loan or a participation interest in the
loan.
(c) A Bank shall have in place policies
and procedures to ensure that the
transfer of mortgage servicing rights
does not negatively affect the credit
enhancement on the loans in question
or substantially increase the Bank’s
exposure to the credit risk for the asset
or pool.
§ 1268.7 Reporting requirements for
acquired member assets.
Each Bank shall report information
related to AMA in accordance with the
instructions provided in the Data
Reporting Manual issued by FHFA, as
amended from time to time.
§ 1268.8 Administrative transactions and
agreements between Banks.
(a) Delegation of administrative
duties. A Bank may delegate the
administration of an AMA program to
another Bank whose administrative
office has been examined and approved
by FHFA, or previously examined and
approved by the Federal Housing
Finance Board, to process AMA
transactions. The existence of such a
delegation, or the possibility that such
a delegation may be made, must be
disclosed to any potential participating
financial institution as part of any
AMA-related agreements signed with
that participating financial institution.
A Bank may contract with one or more
parties, including without limitation
another Bank, to provide services
related to the administration of its own
AMA program or the AMA program of
another Bank for which it has been
PO 00000
Frm 00048
Fmt 4700
Sfmt 4700
delegated administrative responsibility,
without the necessity for further
disclosure to the participating financial
institutions.
(b) Termination of agreements. Any
agreement made between two or more
Banks in connection with the
administration of any AMA program
may be terminated by any party after a
reasonable notice period.
(c) Delegation of pricing authority. A
Bank that has delegated its AMA pricing
function to another Bank shall retain a
right to refuse to acquire AMA at prices
it does not consider appropriate,
pursuant to contractual provisions
among the parties.
Subchapter E—Housing Goals and Mission
PART 1281—FEDERAL HOME LOAN
BANK HOUSING GOALS
7. The authority citation for part 1281
continues to read as follows:
■
Authority: 12 U.S.C. 1430c.
8. Amend § 1281.1 by revising the
definitions of ‘‘Acquired Member Assets
(AMA) program’’ and ‘‘AMA-approved
mortgage’’ to read as follows:
■
§ 1281.1
Definitions.
*
*
*
*
*
Acquired Member Assets (AMA)
program means a program that
authorizes a Bank to hold assets
acquired from or through Bank members
or housing associates by means of either
a purchase or funding transaction,
subject to the requirements of parts 1268
and 1272 of this chapter.
AMA-approved mortgage means a
mortgage that meets the requirements of
an AMA program at part 1268 of this
chapter, which program has been
approved to be implemented under part
1272 of this chapter.
*
*
*
*
*
Dated: December 9, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016–30161 Filed 12–16–16; 8:45 am]
BILLING CODE 8070–01–P
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1272
RIN 2590–AA84
Federal Home Loan Bank New
Business Activities
Federal Housing Finance
Agency.
ACTION: Final rule.
AGENCY:
E:\FR\FM\19DER1.SGM
19DER1
Agencies
[Federal Register Volume 81, Number 243 (Monday, December 19, 2016)]
[Rules and Regulations]
[Pages 91674-91690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30161]
=======================================================================
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 955
FEDERAL HOUSING FINANCE AGENCY
12 CFR Parts 1201, 1267, 1268, and 1281
RIN 2590-AA69
Acquired Member Assets
AGENCY: Federal Housing Finance Board; Federal Housing Finance Agency.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing this
final rule to reorganize and relocate the current regulation governing
the Federal Home Loan Banks' (Banks) Acquired Member Asset (AMA)
programs. More significantly, as required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), it removes and
replaces references in the current regulation to, and requirements
based on, ratings issued by a Nationally Recognized Statistical Ratings
Organization (NRSRO). It also provides a Bank greater flexibility in
choosing the model it can use to estimate the credit enhancement
required for AMA loans. Additionally, the final rule adds a provision
allowing a Bank to authorize the transfer of mortgage servicing rights
on AMA loans to any institution, including a nonmember of the Federal
Home Loan Bank System (Bank System). The final rule allows the Banks to
acquire mortgage loans that exceed the conforming loan limits if they
are guaranteed or insured by a department or agency of the U.S.
government. The final rule excludes a proposed provision that would
have eliminated the use of private, loan-level, supplemental mortgage
insurance (SMI) in the member credit enhancement structure required by
the AMA regulation, but does require Banks to establish financial and
operational standards that insurers must meet to be qualified to
provide insurance on AMA loans. Finally, the final rule deletes some
obsolete provisions from the current regulation, and clarifies certain
other provisions.
DATES: The final rule is effective January 18, 2017.
FOR FURTHER INFORMATION CONTACT: Christina Muradian, Principal
Financial Analyst, Christina.Muradian@fhfa.gov, 202-649-3323, Division
of Bank Regulation; or Neil R. Crowley, Deputy General Counsel,
Neil.Crowley@FHFA.gov, 202-649-3055 (these are not toll-free numbers),
Office of General Counsel, Federal Housing Finance Agency, 400 Seventh
Street SW., Washington, DC 20219. The telephone number for the
Telecommunications Device for the Hearing Impaired is 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Bank System
The eleven Banks are wholesale financial institutions organized
under the Federal Home Loan Bank Act (Bank Act).\1\ The Banks are
cooperatives; only members of a Bank may purchase the capital stock of
a Bank, and only members or certain eligible housing associates (such
as state housing finance agencies) may obtain access to secured loans,
known as advances, or other products provided by a Bank.\2\ Each Bank
serves the public interest by enhancing the availability of residential
credit through its member institutions. Any eligible institution
(generally, a federally insured depository institution or state-
regulated insurance company) may become a member of a Bank if it
satisfies certain criteria and purchases a specified amount of the
Bank's capital stock.\3\ As government-sponsored enterprises (GSEs),
the Banks have certain privileges under federal law, which allow them
to borrow funds at spreads over the rates on U.S. Treasury securities
of comparable maturity that are narrower than those available to
corporate borrowers generally. The Banks pass along a portion of their
funding advantage to their members and housing associates--and
ultimately to consumers--by providing advances \4\ and other financial
services at rates that would not otherwise be available to their
members. Among those financial services are the Banks' AMA programs,
under which the Banks provide financing for members' housing finance
activities by purchasing mortgage loans that meet the requirements of
the AMA regulation.
---------------------------------------------------------------------------
\1\ See 12 U.S.C. 1423, 1432(a).
\2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
\3\ See 12 U.S.C. 1424; 12 CFR part 1263.
\4\ Members are required to pledge specific collateral, mainly
mortgages or other real estate related assets, to secure any advance
taken down from a Bank. See 12 CFR 1266.7.
---------------------------------------------------------------------------
B. Overview of the Existing AMA Regulation
The current AMA regulation has been in effect since July 2000. It
authorizes the Banks to acquire certain assets (principally, conforming
residential mortgage loans) from their members and housing associates
as a means of advancing their housing finance mission, and prescribes
the parameters within which the Banks may do so.
The core of the current AMA regulation is a three-part test, which
establishes the requirements for a mortgage loan or other asset to
qualify as AMA. The three-part test embodies the underlying policy
regarding the acquisition of mortgages and other eligible AMA assets by
the Banks. First, the asset requirement establishes that assets must be
whole conforming mortgage loans, certain interests in such loans, whole
loans secured by
[[Page 91675]]
manufactured housing, certain state and local housing finance agency
(HFA) bonds, and certain other assets that qualify as eligible
collateral for a Bank advance. Second, assets must meet a member nexus
requirement, meaning that a Bank must acquire the AMA assets from a
member or housing associate that is a participating financial
institution \5\ in the Bank's AMA program or that of another Bank. In
either case, the assets acquired by a Bank must be originated or held
for a valid business purpose by a participating financial institution
(or an affiliate thereof). Finally, to meet the credit risk-sharing
requirement, a Bank must structure its AMA products such that a
substantial portion of the associated credit risk of the acquired asset
is borne by a participating financial institution.
---------------------------------------------------------------------------
\5\ A participating financial institution is a member or housing
associate approved by a Bank to sell mortgage loans to the Bank or
otherwise participate in its AMA program.
---------------------------------------------------------------------------
C. The Proposed Rule
The Federal Housing Finance Board (Finance Board) \6\ adopted the
current AMA regulation in July 2000, and neither the Finance Board nor
FHFA subsequently has amended the regulation. FHFA issued the proposed
rule in part to incorporate the AMA provisions into its own regulations
and in part to give effect to section 939A of the Dodd-Frank Act, which
requires federal agencies to remove from their regulations all
references to, or requirements based on, ratings issued by NRSROs.\7\
To comply with the Dodd-Frank Act requirements, the proposed rule would
have eliminated the existing requirement for the Banks' members to
credit enhance the AMA assets to specific NRSRO rating levels. Instead,
the proposal would have required the Banks to establish a level of
credit enhancement for each AMA product, using models and methodologies
of their own choosing.
---------------------------------------------------------------------------
\6\ The Finance Board was regulator for the Bank System prior to
the creation of FHFA in 2008, at which time supervisory and
oversight responsibilities for the Bank System were transferred to
FHFA. By statute, the Finance Board regulations, including the
existing AMA regulations, remain in effect until such time as FHFA
acts to modify or supersede them. See 12 U.S.C. 4511 note.
\7\ See 15 U.S.C. 78o-7. Although FHFA cannot include within its
regulations requirements based on NRSRO ratings, the Dodd-Frank Act
does not prohibit the Banks from using such ratings in conducting
their business.
---------------------------------------------------------------------------
The proposed rule also contemplated making a number of other
substantive changes, which would have: (1) Added several credit
enhancement model-related provisions; (2) allowed for the transfer of
servicing on AMA loans to nonmembers, so long as the transfer did not
cause the associated mortgage loan to cease to comply with the
requirements of the AMA rule; (3) allowed for federal insurance or
guarantees to provide the required credit enhancement, and eliminated
the requirement for a member to bear the risk of loss from unreimbursed
servicing expenses; (4) removed the provisions that allow for the use
of SMI or pool insurance as part of the credit enhancement structure;
(5) generally prohibited Banks from acquiring loans made to any
insiders of the Bank or of the selling institution; and (6) added a new
``grandfather'' provision to allow a Bank to continue to hold AMA loans
acquired as AMA products that the Finance Board or FHFA previously
authorized.
Additionally, FHFA asked for comments relating to three specific
issues. First, FHFA asked whether the regulation should continue to
limit the size of AMA loans to those that meet the conforming loan
limits and, more broadly, on any issues related to a Bank's purchase of
AMA loans on properties located in designated high-cost areas. Second,
FHFA asked whether FHFA should continue to authorize the purchase of
AMA loans on manufactured housing that were deemed to be chattel loans
under state law. Third, FHFA asked for comments related to the use and
importance of SMI and pool insurance in credit enhancement structures
that were acceptable under the regulation. FHFA specifically asked what
type of standards should replace those in the current AMA regulation,
which are based on an insurer's NRSRO rating, and how a Bank might
evaluate the claims-paying ability of an insurer in the absence of a
specific NRSRO credit rating requirement. FHFA also requested comments
on whether, if it were to adopt specific requirements in the rule for
SMI providers, such requirements also should apply to private mortgage
insurance (PMI) providers.
In developing the proposed rule, FHFA retained the key policies
underlying the original AMA regulation, which the Finance Board adopted
in 2000, after the courts had upheld the authority of the Finance Board
to permit the Banks to engage in this activity.\8\ More specifically,
the proposed rule retained the Finance Board's determination that the
acquisition of AMA loans is the functional equivalent of making
advances such that it: (1) Allows the member or housing associate to
use its eligible assets to access liquidity for further mission-related
lending; and (2) requires all, or a material portion of, the credit
risk attached to the mortgage assets to be borne by the member or
housing associate.
---------------------------------------------------------------------------
\8\ See Texas Savings and Community Bankers Association v.
Federal Housing Finance Board, 201 F.3d 551 (5th Cir. 2000)
(hereinafter Texas Savings).
---------------------------------------------------------------------------
FHFA also carried forward in the proposed rule the basic tenet of
the current AMA regulation, which is that the Banks and their members
each take advantage of their respective core competencies. As such,
current AMA requirements allow members to do what they do best (manage
their customer relationship) and for the Banks to do what they do best
(manage the interest rate risk associated with those loans).\9\ The
proposed rule also maintained the basic AMA credit risk-sharing
structure of the current regulation, which the Finance Board
purposefully designed to mirror the risk allocation of advances.
Specifically, when a Bank extends an advance to a member, the member is
exposed to the credit risk (on the housing assets that the advances
ultimately support), and the Bank is exposed to the interest rate risk
associated with funding the advance. Under the current AMA regulation,
the Bank and its member similarly allocate the interest rate risk and
credit risk associated with funding and holding mortgage loans whenever
a member sells the Bank an AMA loan.\10\
---------------------------------------------------------------------------
\9\ Although the AMA regulation requires the member to bear a
significant amount of the credit risk (which may be accomplished
through a variety of ways), the Bank remains exposed to some credit
risk from those loans.
\10\ The advance and AMA risk-allocation structures are
different from the risk-allocation structure used by Fannie Mae and
Freddie Mac, whereby they are exposed to the credit risk and sell
the interest rate risk.
---------------------------------------------------------------------------
The current AMA rule's ``three-part test'' also embodies additional
underlying policy determinations related to the acquisition of mortgage
assets by Banks. The asset requirement, i.e., limiting AMA to loans
that do not exceed the conforming loan limit, addresses mission issues
and establishes a level playing field among the Banks, Federal National
Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage
Corporation (Freddie Mac) with respect to the types of residential
mortgages loans eligible for purchase. The member or housing associate
nexus requirement, i.e., limiting the potential sellers of AMA to a
Bank member or housing associate, ensures that the Banks do not extend
the benefits of their GSE status to institutions that are not part of
the Bank System, thus aligning
[[Page 91676]]
the program with the cooperative structure of the System. The credit
risk-sharing requirement encourages members or housing associates to
use sound underwriting practices by requiring them to retain a material
exposure to the credit risk associated with the mortgage assets sold to
the Bank.
The underlying policy considerations embodied in the current and
proposed AMA rule are also closely aligned with the legal reasoning
that supported the Finance Board's initial authorization of the
mortgage loan purchase pilot program, an approval that predated
adoption of the AMA regulation. Although the Federal Home Loan Bank Act
(Bank Act) does not specifically authorize a Bank to purchase mortgage
loans, the Finance Board determined that the authority conferred by
section 11(e) of the Bank Act, which authorizes a Bank to carry out
activities that are incidental to those specifically authorized by the
Bank Act, provided authority for the Banks to purchase mortgage loans
from their members.\11\ Certain parties challenged the Finance Board's
approval of the pilot program, but the Fifth Circuit Court of Appeals
agreed with the Finance Board that the incidental powers provision of
the Bank Act provided authority for the mortgage purchase program and
upheld the Finance Board approval of the program.\12\
---------------------------------------------------------------------------
\11\ See 12 U.S.C. 1431(e).
\12\ See, Texas Savings, 201 F.3d at 551.
---------------------------------------------------------------------------
In reaching its conclusion, the court considered the Finance
Board's determination that a Bank's purchase of mortgages from its
members involved an activity that was incidental to the Banks' housing
finance mission and represented another method by which the Banks could
act as a reservoir of liquidity for members' housing finance lending,
albeit in a manner that was ``technically more sophisticated than, yet
functionally similar to, that which occur[red] when a [Bank] makes an
advance.'' \13\ The court also determined that the Finance Board had
authority to define the scope of the incidental powers provision, given
its ambiguity, and that the Finance Board's construction of that power
with regard to the mortgage purchase pilot program was permissible
because it was consistent with the structure and purpose of the Bank
Act. In particular, the court noted that under the pilot program, the
Banks used their access to low-cost funds in capital markets in an
effort to improve the level of housing finance. The basic structure and
requirements for the mortgage purchase pilot program reviewed by the
court later formed the basis for the specific provisions of the current
AMA regulation, including the core three-part test.
---------------------------------------------------------------------------
\13\ Id. at 554-555.
---------------------------------------------------------------------------
D. Overview of Comments on the Proposed Regulation
The proposed rule provided a comment period of 120 days, which
closed on April 15, 2016. FHFA received 65 comment letters on the
proposed rule, two of which were not responsive to issues raised by the
proposed rule. FHFA reviewed every comment letter and considered all of
the comments in developing the final rule.
Approximately three-quarters of the commenter letters came from
Bank System members, most of whom filed a substantively similar letter.
The eleven Banks filed a joint letter. Eight of the nine Banks that
offer the Mortgage Partnership Finance (MPF) program to their members
also filed a separate joint letter, which addressed issues beyond those
addressed by the joint letter from the eleven Banks. FHFA also received
letters from trade associations, including the American Bankers
Association, five state banking associations, an association of
mortgage insurers, and one mortgage insurance company.
Taken as a whole, the comments requested changes to the proposed
rule that would be at odds with the existing policy and legal
principles underlying the three-part test. Some commenters suggested
that Banks be permitted to purchase loans from institutions that are
not Bank System members, which would effectively extend the benefits of
membership to institutions that cannot become members and thus cannot
receive advances from the Banks. Further, some commenters suggested
Banks be permitted to create their own risk-sharing structures under
which members would not necessarily be required to retain a meaningful
exposure to the credit risk associated with the mortgage loans they
sold to the Banks under AMA programs. None of these comments provided a
reasoned analysis addressing how their proposed revisions to the
proposed rule would be consistent with the legal and policy
determinations on which the current regulation is predicated. After
considering these comments, FHFA has determined not to alter the basic
three-part test for AMA, as set forth in the proposed rule, which
remains the most appropriate means of ensuring that the AMA programs
operate consistently with the Banks' legal authority and with the
policy and safety and soundness goals established by the Finance Board.
These goals include limiting the benefits of GSE funding to those
institutions that Congress has authorized for membership or for housing
associate status, which is consistent with the cooperative nature of
the Bank System, and that members maintain a degree of financial
``skin-in-the game'' with regard to AMA assets, which helps to ensure
that loans are well underwritten, protects the Banks against the
expected credit risk associated with the purchased assets, and is
consistent with the sharing of financial risks that are present when
Banks make advances to their members.
The comments also generally opposed FHFA's proposal to remove the
option of allowing SMI or pool insurance as part of the credit
enhancement structure, even though no AMA products currently use that
option. They further opposed the imposition of any requirements on a
Bank's ability to buy loans on which any director, officer, employee,
attorney, or agent of a Bank, or of the selling member institution, was
the borrower. Several commenters advocated allowing the Banks to buy
AMA loans with principal balances that exceed the conforming loan
limits applicable to Fannie Mae and Freddie Mac, while others made a
number of specific technical suggestions for changes to language of
proposed rule provisions.
The primary comments regarding each of the substantive aspects of
the proposed rule, as well as FHFA's responses to some of those
comments, are discussed below. Comments addressing specific rule
provisions are discussed in part II of SUPPLEMENTARY INFORMATION, which
describes the final rule in detail and the ways in which it differs
from the proposed rule.
1. Comments on the Definitions
Commenters recommended that FHFA make a number of technical
suggestions to several of the definitions in the proposed rule. Some
commenters suggested that FHFA revise the proposed definition of ``AMA
product'' to exclude loans that the Banks acquire and hold temporarily
until they aggregate a sufficient number of loans to transfer the loans
to another entity, such as is done under certain off-balance sheet
programs.
Other comments suggested that FHFA revise the proposed definition
of ``investment quality'' to capture the unique characteristics of the
mortgage loans acquired for the AMA program. These Banks pointed out
that they acquire AMA loans over time with the expectation that a
certain number of
[[Page 91677]]
such loans will become delinquent or go into default. Thus, even if
credit enhancements were to allow a Bank to recoup full repayment of
principal for a particular loan, the payments received on such a loan
may not be ``timely'' as required by the proposed definition. Moreover,
the commenters noted that the models used by the Banks to calculate the
credit enhancement and pricing for a particular AMA loan already take
into account the expected delinquencies and defaults for the loan pool
as a whole.
Commenters also suggested that FHFA revise the proposed definition
of ``participating financial institution'' to reflect that an
institution may participate in an AMA program in more than one way,
i.e., as a seller, servicer, or credit enhancer of the AMA assets, but
not necessarily all of these activities. The proposed definition would
have included only those members that the Bank had approved to sell
loans into an AMA program and, therefore, would not have captured the
full set of potential participating financial institutions.
Commenters further suggested that FHFA change the proposed
definition of ``pool'' to reflect that FHFA has allowed Banks to offer
AMA products for which they aggregate loans that have been purchased
from different sellers into a single pool. The proposed definition had
implied that a pool would include only those loans sold by a single
seller under a single master commitment.
2. Comments on the Authorization of AMA
Section 1268.2 of the proposed rule would have authorized the Banks
to invest in assets that qualify as AMA under the terms of the proposed
rule, but also would have added a provision regarding ``grandfathered
transactions,'' meaning those authorized under the current AMA
regulation.
Commenters suggested that FHFA expand the proposed grandfather
provision to include any purchase of mortgage loans pursuant to any AMA
purchase commitment agreements that remained open as of the effective
date of any final rule. They suggested that FHFA make this change to
address the possibility that any of the previously approved AMA
products might not comply with the requirements of the final rule. The
commenters, however, did not identify any specific category of current
AMA loans or products to which these requested changes could apply, and
did not identify which of FHFA's proposed changes to the rule might
conceivably cause any active AMA products or structures to fail to
comply with the final rule.
A number of commenters urged FHFA to include within the final rule
a provision allowing the Banks to sell AMA loans, or participation
interests therein, to other Banks and to Bank members, including
members of other Bank districts. They also asked FHFA to allow the sale
of AMA loans and pools or interests in such loans or pools to any
party--not just members. The commenters noted that any such sales would
reduce a Bank's exposure to market risk and free up resources for
additional purchases. Commenters also asked that FHFA allow the Banks
the flexibility to design other means to transfer risk associated with
AMA purchase to third parties, apart from sales of the loans or
interests in the loans. None of these comments provided specific
requirements or suggestions for structuring such sales or any analyses
of compliance issues that may arise under other regulatory requirements
that could apply to such sales, including issues that could arise under
federal securities laws or the risk retention rule for asset
securitizations.\14\ Given the lack of specifics provided, FHFA has not
altered the proposed rule in response to any of these comments, but
notes that nothing in the current or proposed rule would prevent a Bank
from selling AMA loans or developing a program to transfer risk on
those loans to third parties. Any such transactions, however, would
likely require that the Banks obtain FHFA approval under the new
business activity regulation, which would also require that the Banks
demonstrate that they have the legal authority under the Bank Act to
undertake the proposed activity. Given that an assessment of the legal
authority and risks associated with any such proposed transactions is
apt to depend significantly on the particular facts of each proposal,
FHFA does not believe that it would be appropriate to provide a general
authorization for such as part of this rulemaking. Instead, FHFA
expects that it would be more appropriate to identify and assess any
legal, regulatory, or policy issues associated with such proposals
after a Bank has devoted the time and resources to develop a specific
structure and identify the market for such transactions.
---------------------------------------------------------------------------
\14\ See 12 CFR part 1234.
---------------------------------------------------------------------------
3. Comments on the Asset Requirement
The proposed rule at Sec. 1268.3(a)(1) retained the current
prohibition on the Banks acquiring AMA loans that exceed the conforming
loan limits. In proposing the rule, FHFA expressly asked for comments
regarding loan size, including any issues related to a Bank's purchase
of loans in designated high-cost areas, as well as whether FHFA should
continue to limit the size of AMA loans to those that meet the
conforming loan limits.\15\ A few commenters supported allowing the
Banks to acquire loans that exceed the conforming loan limits, while
one commenter opposed that change, and others supported the change,
provided that the nonconforming loans were limited to those that are
guaranteed or insured by a department or agency of the U.S. government.
---------------------------------------------------------------------------
\15\ See Proposed Rule, 80 FR at 78691.
---------------------------------------------------------------------------
The proposed rule would have added new provisions at Sec. Sec.
1268.3(a)(3) and (b) to restrict the Banks from acquiring as AMA any
mortgage loans that had been made to a director, officer, employee,
attorney, or agent of the Bank or of the selling institution unless the
Bank's board of directors specifically approved such a purchase and
FHFA endorsed the Bank's resolution. The Bank Act generally prohibits
the Banks from accepting such mortgage loans as collateral for
advances.\16\ FHFA had proposed extending the substance of that
provision to the AMA programs, reasoning that a statutory prohibition
on taking a security interest in such loans logically should apply as
well to the purchase of those same loans because ownership of the loan
confers on the Bank a greater interest in the loan, along with the
attendant risks, than does the acquisition of a security interest in
the same loan. Nearly every comment letter FHFA received requested that
FHFA remove the proposed provision from the final rule. Generally,
commenters noted that participating financial institutions underwrite
loans to such persons to the same standards as all other AMA loans,
and, therefore, there is little likelihood that persons employed by the
Bank or its members will obtain mortgage loans on favorable terms that
might expose the Bank to increased credit risk. Accordingly, those
commenters urged FHFA to permit the Banks to purchase the loans without
restriction.
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 1430(b); 12 CFR 1266.7(f).
---------------------------------------------------------------------------
The proposed rule at Sec. 1268.3(b) would have continued to
authorize the Banks to purchase as AMA manufactured housing loans
regardless of whether such housing qualifies as real property under
state law, which would include as AMA chattel loans on manufactured
housing. FHFA requested specific comments on this provision.\17\ A
couple of commenters urged FHFA to retain this provision in the final
rule, contending that manufactured housing fulfills a need for
affordable housing
[[Page 91678]]
and that Banks should be able to continue to support their members'
determinations about how to meet those needs in their market areas. No
commenters opposed the provision.
---------------------------------------------------------------------------
\17\ See Proposed Rule, 80 FR at 78692.
---------------------------------------------------------------------------
The proposed rule at Sec. 1268.3(a), which is substantively
unchanged from the existing regulation, would have allowed the Banks to
acquire as AMA any whole mortgage loans that are eligible to secure
advances under FHFA's advances collateral regulation.\18\ One commenter
contended that the Banks should be able to buy as AMA mortgage loans on
multifamily properties, as well as residential land acquisition,
development and construction loans, given that these loans also qualify
as collateral for advances. FHFA notes that the existing AMA regulation
already allows the Banks to buy those types of loans as AMA, given that
they may qualify as other real estate-related collateral under the
advance collateral regulation. The proposed amendments would not change
that authority. Before commencing a program to buy such loans as AMA,
however, a Bank likely would have to obtain FHFA approval under the new
business activity regulation, and would have to demonstrate that the
new AMA product otherwise satisfied all of the requirements of the AMA
rule.
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\18\ See 12 CFR 1266.7.
---------------------------------------------------------------------------
4. Comments on the Member or Housing Associate Nexus Requirement
Section 1268.4 of the proposed rule would have retained the member
nexus requirement, which requires that AMA assets must have been
originated or held for a valid business purpose by a member or housing
associate, and must be acquired from a member or housing associate of
the acquiring Bank, or from another Bank. As previously discussed, the
Finance Board originally adopted this requirement to ensure that the
benefits of Bank System membership are not extended to nonmembers.
Commenters suggested that FHFA amend the AMA regulation to authorize
the Banks to acquire mortgage loans directly from affiliates of their
members, which would include nonmember institutions.
5. Comments on the Credit Risk-Sharing Requirement
The Finance Board originally established the credit risk-sharing
requirement to ensure that members have a material exposure to the
credit risk associated with the AMA assets that they sell to their
Banks, which was consistent with the risks undertaken by members when
funding loans for their own portfolios with Bank advances. FHFA
received many comments on different aspects of the credit risk-sharing
requirement, nearly all of which generally supported loosening the
requirement in some fashion. The comments on the individual credit
risk-sharing sections, taken together, would have the effect of
permitting the Banks to create what they characterized as their own
risk-sharing structures, but would not necessarily have required that
the Banks structure their AMA products such that the participating
financial institution actually continued to have a material exposure to
the credit risk associated with the mortgages they sell to the Banks.
For example, some commenters asked that the Banks be allowed to
transfer the credit enhancement obligation to nonmember institutions,
which would have the effect of eliminating the current structure under
which members bear the expected losses on the AMA products. Other
commenters requested that FHFA permit arrangements under which an
affiliate of a member, rather than a member itself, could satisfy any
portion of the credit enhancement obligation or that FHFA allow a
member to transfer its credit enhancement obligation to any other
institution that is willing to assume that obligation.
Some commenters requested that FHFA allow Banks to create an AMA
structure that would permit participating financial institutions to
accept a price adjustment for the mortgage loans, in lieu of providing
a credit enhancement for those loans. Under such an arrangement, the
participating financial institution would receive a lesser price from
the Bank in return for the Bank agreeing to bear the credit risk, and
the price adjustment would vary in proportion to the amount of credit
risk the Bank would bear. Other commenters requested that a
participating financial institution meet part, or all, of its credit
enhancement obligation simply by pledging collateral. Those commenters,
however, did not explain how such an arrangement would work or how it
would differ from the current enhancement approach used under the
Mortgage Partnership Finance (MPF) program, in which a participating
financial institution pledges collateral to secure its obligation to
absorb a specified amount of the credit losses on mortgage loans sold
to the Bank.
The proposed rule also would have carried over the timing
requirements of the current regulation regarding the date by which a
Bank must calculate a member's total credit enhancement obligation.
Thus, the proposal would have required that a Bank make that
determination at the earlier of 270 days from the time a Bank acquires
a loan from the member for a particular pool or when the pool reaches
$100 million. Commenters asked that the final rule allow the timing of
determining the final credit enhancement vary based on the structure of
the particular product. For example, commenters noted that under
products where the member pre-funds the credit obligation the Banks
should be able to calculate the required credit enhancement at the time
the pool closes.
The proposed rule would have added several model-related
requirements at Sec. 1268.5(e). Specifically, the proposed rule would
have required a Bank to: (1) Validate its model and methodology at
least annually and make the results available to FHFA upon request; (2)
institute and maintain a process for monitoring model performance that
would include tracking, back-testing, benchmarking, and stress testing
the model and methodology; (3) inform FHFA prior to making any material
changes to the model and methodology, and (4) promptly change its model
and methodology as directed by FHFA. Commenters generally requested
that the final rule provide general guidance regarding models and
methodologies, rather than the specific provisions proposed in the
rule, described above.
The proposed rule would have eliminated the option of allowing
members to use SMI and/or pool insurance to meet a part of their credit
enhancement for AMA assets. The current AMA regulation allows the use
of SMI as part of the credit enhancement if the insurance provider has
obtained a rating from an NRSRO of no lower than the second highest
investment grade. The regulation also allowed pool insurance if the
insurance were used to enhance against geographic concentration or pool
size risk.
FHFA proposed to remove the option of using SMI and pool insurance
in the credit enhancement structure in part based on the experience
during the financial crisis, when no private mortgage insurance company
was able to maintain an NRSRO credit rating at the minimum level
required by the current AMA regulation, and on concerns that other
private mono-line insurers could face similar problems in the future.
Further, FHFA considered that the Banks have in place alternate AMA
structures and products that do not rely on SMI and that eliminating
the use of SMI from authorized credit enhancement structures would
remain consistent with the intent of the AMA regulation to require
participating
[[Page 91679]]
financial institutions to bear the direct economic consequences of the
credit risk associated with AMA assets and not transfer such risk to
third parties.\19\ Finally, because the current AMA regulation relies
on an NRSRO rating to define eligible insurers, FHFA must change or
delete that provision in order to comply with section 939A of the Dodd-
Frank Act, which bars federal regulatory agencies from incorporating
NRSRO ratings requirements into their regulations.
---------------------------------------------------------------------------
\19\ See Proposed Rule, 80 FR at 78694-95.
---------------------------------------------------------------------------
In the preamble to the proposed rule, FHFA specifically requested
comments regarding the use and importance of SMI or pool insurance as
part of an allowable credit enhancement structure.\20\ In particular,
FHFA solicited comments on what type of requirements could replace the
specific credit rating requirement for insurance providers if it were
to retain these insurance options as part of the credit enhancement
structure. Further, FHFA requested comments on how a Bank might
evaluate the claims-paying ability of an insurer in the absence of a
specific credit rating requirement. Finally, FHFA requested comments on
whether, if it were to adopt in the AMA regulation specific minimum
requirements of SMI and pool insurance, such requirements also should
apply to PMI providers.
---------------------------------------------------------------------------
\20\ See id.
---------------------------------------------------------------------------
No commenters responded to the specific questions FHFA posed in the
proposed rule regarding these topics, but many comments opposed the
elimination of a provision that would authorize the use of SMI and pool
insurance as part of the credit enhancement structure, and no
commenters supported the removal of this option. Commenters generally
argued that FHFA did not articulate a sound reason for removing the
insurance option from the rule and that FHFA's focus on credit ratings
for mortgage insurers ignored the actual claims paying abilities of
these firms. They also pointed out that mortgage insurance providers,
including those in run-off, have paid all ``valid'' claims, with 96
percent of claims paid in cash and the remainder due over time.\21\
Commenters also noted that mortgage insurers and their regulators have
taken steps to enhance the financial strength of the insurers, improve
regulatory oversight, and increase clarity and reduce ambiguity in
master insurance policies. At least one commenter noted that using
insurance in the credit enhancement structure did not undermine the
incentive to sell quality loans under the AMA regulation because lower
insurance premiums would be associated with lower-risk mortgages.
---------------------------------------------------------------------------
\21\ Payments ``due over time'' represent obligations of
indefinite duration issued by insurers that they will pay the
remainder of any amounts owed under a claim at some point in the
future. In many cases, troubled insurers paid only part of what was
owed under a claim (e.g., 50 cents on the dollar) with the remaining
amount due over time.
---------------------------------------------------------------------------
Commenters also noted that use of SMI and pool insurance provided
important economic benefits to members that sell AMA loans to the
Banks, by reducing capital charges on the retained credit enhancement
and transferring risk associated with the enhancement to third parties.
A number of commenters stated that the Banks could develop internal
ratings for SMI and pool insurance providers and pointed to the
Enterprises' Private Mortgage Insurer Eligibility Requirements (PMIERS)
recently adopted by Fannie Mae and Freddie Mac as an example of
acceptable standards, although some commenters said that PMIERS should
not be the only standard used for qualifying insurance providers. These
commenters suggested that FHFA could condition use of such internal
standards on a Bank demonstrating the effectiveness of its approach
prior to introducing products that use SMI or pool insurance. Some
comments also suggested that the rule not restrict insurance providers
to mono-line mortgage insurers, although the current AMA regulation
only requires that insurance be provided by an insurer. Thus, the AMA
regulation already allows multiline insurers to provide SMI or pool
insurance if they meet the other requirements in the regulation.
A number of commenters stated that FHFA should not impose specific
requirements in the regulation on providers of borrower-financed PMI
and instead should continue current practice of letting the Banks
identify acceptable providers. Other commenters said that if FHFA
wished to add such a requirement, it should require the PMI provider to
meet PMIERS. Still other commenters urged FHFA to consider a broader
range of insurance products as part of the credit enhancement structure
and allow a member to rely on insurance to cover the entire credit
enhancement obligation rather than just the amount in excess of the
member required direct enhancement, as under the current regulation.
6. Comments on Mortgage Servicing Rights
No commenter objected to FHFA's proposal to allow a participating
financial institution to transfer servicing rights on AMA loans to any
institution approved by the Bank, regardless of whether it was a
member. Some commenters objected to a related change that would have
relieved a participating financial institution of the responsibility
for paying the unreimbursed servicing expenses on loans guaranteed or
insured by a federal department or agency as a means of meeting its
credit enhancement obligation for such loans. FHFA had proposed that
change in order to facilitate the transfer of mortgage servicing rights
on federally insured or guaranteed AMA loans to a nonmember
institution, because for such loans the responsibility for unreimbursed
servicing expenses transfers with servicing rights. The commenters
disagreed with FHFA's statement that requiring a member to retain
exposure to unreimbursed servicing expenses on loans guaranteed or
insured by a department or agency of the U.S. government was unlikely
to substantially affect the underwriting for such loans, given the
requirements and standards already imposed by the provider of the
federal guarantee or insurance. They believed that the proposed change
would alter the underlying premise for AMA in the case of such
federally guaranteed or insured loans--namely that members needed to
have ``skin in the game'' for loans sold to the Banks. The commenters
did not address why continuing to allow SMI or pool insurance would not
similarly be contrary to this aspect of the AMA program.
7. Comments on Administrative Transactions and Agreements Between Banks
Section 1268.8 of the proposed rule addressed the delegation of
administrative AMA program duties (i.e., back-office operations) and
the ability to terminate AMA agreements between Banks. FHFA made no
substantive changes to this section of the rule when it proposed the
amendment. Commenters asked FHFA to make two changes to this section.
First, commenters asked to add regulatory language to the delegation of
administrative duties provisions to allow a Bank to contract with other
parties (including other Banks) to provide services related to
administration of its own or its delegated AMA program without having
to disclose such delegation to participating financial institutions.
Second, commenters asked to add regulatory language to the delegation
of pricing provision to allow Banks to specify that a Bank that has
delegated its AMA pricing function to another Bank
[[Page 91680]]
may retain its right to refuse to acquire AMA at certain prices
pursuant to contractual provisions among the parties.
8. Comments on Other FHFA Regulations
FHFA received comments requesting that it consider two other
regulations--those pertaining to Bank housing goals and new business
activities--as part of its review of the AMA rule, even though FHFA had
not proposed to address either of those matters as part of this
rulemaking. FHFA believes that the issues raised by commenters pertain
to matters that are beyond the scope of this rulemaking and are best
considered as part of FHFA rulemakings related to the other
regulations.
As to the matter of Bank housing goals, these commenters called on
FHFA to align the AMA regulation and the new housing goals regulation.
Without providing specific examples, the commenters suggested that the
AMA regulation should provide flexibility for the Banks to offer AMA
products and purchase AMA loans as one means to satisfy the housing
goals regulation requirements. FHFA also received many comments asking
it to address FHFA's current new business activity regulation, as it
may be applied to the Banks' AMA programs. The majority of commenters
believed that the new business activity filings were burdensome and
resulted in significant delays to the Banks' ability to improve their
programs. More specifically, they sought to exclude from the new
business activity review process certain types of modifications or
expansions to existing AMA programs and products. These suggestions are
much the same as those received in response to a separate rulemaking in
which FHFA had proposed certain amendments to the existing new business
activity regulation, and which FHFA will consider as part of that
rulemaking.
II. Section-by-Section Analysis of the Final Rule
A. Definitions--Sec. 1268.1
The proposed rule included definitions for four new terms to be
used in the AMA regulation, which are: ``AMA product,'' ``AMA
program,'' ``participating financial institution,'' and ``pool.'' FHFA
intended for these terms to help simplify and clarify other provisions
in the regulation and, with the exception of revisions made in response
to certain comments, as discussed below, is adopting those definitions
as proposed. FHFA has expanded the proposed definition of
``participating financial institution'' to reflect the fact that a
participating financial institution may be approved to sell AMA loans
to a Bank, but also could be approved (either in conjunction with or
apart from its role as a seller of loans) to service those loans, or
provide a credit enhancement for them. FHFA has also clarified the
wording for the definition of ``pool'' to reflect the fact that FHFA
has authorized some Banks to aggregate AMA pools, which requires that
the definition make clear that a pool may contain loans sold by more
than one member or other source.
FHFA has also modified somewhat the proposed definition of ``AMA
product'' to make clear that while each Bank may develop and establish
different AMA products and structures, all such products and structures
must comply with the provisions of the AMA regulation. This change was
based on language suggested by the comments. FHFA did not, however,
alter the definition to specifically exclude loans held by a Bank on
its balance sheet for a short time prior to transferring them to
another entity, as some commenters requested. Generally speaking,
mortgage loans purchased under the Banks' off-balance sheet programs
are not intended to qualify as AMA, and thus do not have all of the
features that are necessary for a mortgage loan to qualify as AMA.
Therefore, such loans would not come within the new definition of ``AMA
product'', which specifically includes only those loans that comply
with all of the requirements of the AMA regulation.\22\ In light of
that fact, there is no need to specifically exclude these loans from
the definition.
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\22\ In approving most of these off-balance sheet products, FHFA
specifically recognized that the loans did not qualify as AMA loans.
The one exception was the MPF Government MBS product. However, in
that case, part of FHFA's reasoning for approving the product was
that the Bank would purchase loans that qualified as AMA and would
treat the loans as AMA loans while it accumulated them on its
balance sheet.
---------------------------------------------------------------------------
In response to issues raised by the commenters, FHFA is also adding
new definitions in the final rule for the terms ``AMA investment
grade'' and ``qualified insurer.'' The term ``AMA investment grade''
modifies and replaces the proposed definition of ``investment
quality.'' FHFA developed the definition of ``AMA investment grade''
based on comments received on the proposed definition of ``investment
quality.'' The term ``qualified insurer'' is used in provisions that
FHFA is adding back to Sec. 1268.5, which will allow Banks to use pool
and loan-level insurance as part of an eligible credit enhancement
structure for AMA products. FHFA addresses these new definitions in
more detail below, in its discussion of Sec. 1268.5 of the final rule.
FHFA is also adopting, without further change, its proposed amendments
to the definitions of ``expected losses'' and ``acquired member
assets'' in 12 CFR part 1201.\23\
---------------------------------------------------------------------------
\23\ See Proposed Rule, 80 FR at 78690-91. FHFA also made non-
substantive changes to the wording of the definition of ``expected
losses'' to clarify the meaning of the term, but these changes were
not intended to alter the scope of the proposed definition.
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B. Authorization for Acquired Member Assets--Sec. 1268.2
FHFA is adopting Sec. 1268.2 as proposed.\24\ This section
generally authorizes the Banks to invest in AMA, subject to the
requirements of FHFA's AMA and new business activity regulations. This
section also includes a ``grandfather'' provision that authorizes a
Bank to continue to hold as AMA any loans that FHFA or the Finance
Board previously authorized for purchase, even if the loan would not
meet one or more of the requirements of the final rule. The grandfather
provision covers all loans that were previously authorized for purchase
by any regulation, order, or other agency action, such as waiver of
particular requirements that allowed a Bank to purchase the loan.\25\
The grandfather provision at Sec. 1268.2(b), however, does not allow a
Bank to continue to purchase new loans that do not meet the
requirements of the final rule after the rule becomes effective.
---------------------------------------------------------------------------
\24\ Section 1268.2 carries over the substance of the general
Bank authority to purchase and hold AMA now found at 12 CFR 955.2.
As part of the final rule, however, FHFA is moving the loan type,
member nexus, and credit-enhancement requirements also now found in
current 12 CFR 955.2 to Sec. Sec. 1268.3, 1268.4, and 1268.5. FHFA
is also making other changes to these provisions.
\25\ For example, on August 5, 2011, FHFA waived the ratings
requirement for SMI providers in the current regulation to allow
Banks to continue to buy loans that used SMI as part of the credit
enhancement structure, even though no SMI provider met the ratings
requirement. This grandfather provision would allow the Banks that
bought loans pursuant to that waiver to continue to hold those
loans.
---------------------------------------------------------------------------
One commenter requested that FHFA expand the grandfather provision
to include any purchase of mortgage loans pursuant to any open
commitment as of the effective date of the final rule. The commenter
stated that this would assure the Banks could fulfill any existing
commitments to purchase loans if any of the existing Bank AMA products
did not meet the requirements of the final rule. FHFA noted in
proposing the rule, however, that it believed that all currently active
AMA products would
[[Page 91681]]
meet the requirements of the proposed rule.\26\ The commenter did not
provide an example of an active AMA product that would not meet the
requirements of the proposed rule. As a consequence, FHFA has not
revised the proposed grandfather provision in response to the comment.
In the unlikely event that a Bank determines that an existing AMA
product would not meet all of the requirements under this final rule,
FHFA would allow the Bank to continue to honor any contractual
obligations it had entered into under a commitment that had been
entered into prior to the effective date of this rule and that complied
in all respects with the requirements of the existing AMA regulation.
---------------------------------------------------------------------------
\26\ See Proposed Rule, 80 FR at 78691.
---------------------------------------------------------------------------
C. Asset Requirement--Sec. 1268.3
1. Asset Types
Section 1268.3 of the final rule sets forth the four categories of
asset types that are eligible for purchase as AMA. As adopted, it
closely follows current 12 CFR 955.2(a), although the final rule also
incorporates specific authority for Banks to acquire as AMA certain
certificates representing interests in AMA-qualified whole loans, which
is based on a Finance Board approval of a similar transaction in 2002.
The first of these categories allows a Bank to acquire as AMA any whole
loans that are eligible to secure advances to members under FHFA's
advances regulation, at 12 CFR 1266.7. These assets include: (1) Fully
disbursed, whole first mortgage loans on improved residential real
property not more than 90 days delinquent; (2) mortgages or other
loans, regardless of delinquency status, to the extent that they are
insured or guaranteed by the United States or any agency thereof, and
such insurance or guarantee is for the direct benefit of the holder of
the mortgage or loan; (3) loans that qualify as ``other real estate-
related collateral,'' which requires that such loans also have a
readily ascertainable value, can be reliably discounted to account for
liquidation and other risks, can be liquidated in due course, and in
which the Bank can perfect a security interest; and (4) loans acquired
from community financial institution (CFI) members or their affiliates,
for small business, small farm, small agri-business, or community
development purposes, and which are fully secured by collateral other
than real estate, or securities representing a whole interest in such
secured loans. Such CFI collateral also must have a readily
ascertainable value, be able to be reliably discounted to account for
liquidation and other risks, and be able to be liquidated in due
course.
As under current 12 CFR 955.2(a), Sec. 1268.3 of the final rule
authorizes a Bank to purchase as AMA manufactured housing loans
regardless of whether such housing constitutes real property under
state law. FHFA specifically requested comment on whether it should
continue to authorize the purchase of manufactured housing loans as AMA
if relevant state law considers the loans to be chattel loans. FHFA
received only a few comments in response to this request, which
supported retaining the current regulatory text, citing, among other
things, the importance of manufactured housing in meeting affordable
housing needs in certain markets. As a result, FHFA has determined not
to change the scope of existing authority and the final rule will
continue to allow Banks to purchase as AMA manufactured housing loans
regardless of whether state law considers them to be real property or
chattel loans. The third category of asset types is state and local
housing finance agency bonds, which is unchanged from the corresponding
provision of the current regulation. FHFA received no comments
advocating for changes to this provision.
The fourth category of asset types pertains to certain certificates
that represent interests in loans that qualify as AMA. This category of
assets is not addressed by the current regulation, but the Finance
Board had previously approved a Bank's request to acquire such assets
as AMA. The effect of including this provision in the final rule is to
codify the previous Finance Board determination that such assets may
qualify as AMA. When the Finance Board adopted the current AMA
regulation, it noted, in response to comments, that the rule would
allow the Banks to buy structured products as AMA, provided the
products met certain identified conditions.\27\ Section 1268.3(d)
incorporates these conditions, which require that any such certificate
must: (i) Be backed by loans that themselves qualify as AMA and that
meet the member nexus requirement; (ii) Meet the requirement that the
certificate is enhanced to AMA investment grade; (iii) Be issued
pursuant to an agreement between the Bank and the participating
financial institution under which the participating financial
institution shares credit risk as required by the regulation; and (iv)
Are acquired substantially by the initiating Bank or Banks.
---------------------------------------------------------------------------
\27\ Currently, this authority is set forth in a discussion in
the Supplementary Information of the Federal Register release
originally adopting the AMA regulation. See Final Rule: Federal Home
Loan Bank Acquired Member Assets, Core Mission Activities,
Investments and Advances, 65 FR at 43974, 43977 (July 17, 2000)
(hereinafter 2000 Final AMA Rule). The Finance Board approved one
AMA product under this authority (in December 2002), which is now
inactive.
---------------------------------------------------------------------------
By incorporating the substance of the Finance Board's earlier
approval into the regulatory text, FHFA would clarify that such
programs are possible under the amended regulation and would bring all
relevant authority into a single provision within the regulatory text.
FHFA would interpret the provisions of Sec. 1268.3(d) of the final
rule to permit the use of a third party to securitize the whole loans,
as that arrangement would merely represent the use of a vehicle to
invest in certain types of AMA under more favorable terms. However, if
any such certificates were to have been created as a security that
initially was available to investors generally, they would not qualify
as AMA under this provision.\28\
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\28\ Id.
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2. Restrictions on Certain Loans
Although, as discussed above, whole loans eligible to secure
advances may qualify as AMA, both the current regulation and the
proposed rule explicitly excluded from AMA any single-family home
mortgage loans that exceed the conforming loan limits and any loans
made to an entity, or secured by property, that is not located in a
state. The final rule carries over without change the existing
exclusion for loans not located in a state, and modifies the conforming
loan provision, as described below. In proposing the rule, FHFA
specifically requested comments on whether the final rule should
continue to limit AMA loans to those that meet the conforming loan
limits more generally.\29\ Some commenters suggested that FHFA remove
the limits for all loans, while other commenters suggested loans that
are guaranteed or insured by a department or agency of the U.S.
government be allowed to exceed the conforming loan limits.
---------------------------------------------------------------------------
\29\ See Proposed Rule, 80 FR at 78691.
---------------------------------------------------------------------------
After considering the comments, FHFA has decided that it would be
appropriate to allow the Banks to acquire as AMA loans guaranteed or
insured by a department or agency of the U.S. government without regard
to the conforming loan limit, while continuing to apply the limit to
other types of loans. FHFA considers the conforming loan limit, which
is a statutory requirement, to be an appropriate public policy guide in
determining how the GSE subsidy that
[[Page 91682]]
accrues to the Banks should be used to support the housing finance
efforts of their members when making loans without any federal
guarantee or insurance. Because other federal statutes separately
authorize certain agencies or departments of the U.S. government to
insure or guarantee mortgage loans that exceed the conforming loan
limit, FHFA views those provisions as evidence that public policy would
favor allowing the Banks to also support those market segments, and to
do so in a manner that is consistent with the limits of those programs.
Accordingly, Sec. 1268.3(a)(1) of the final rule will carry forward
the existing AMA rule provision that excludes from AMA those single-
family mortgages where the loan amount exceeds the conforming loan
limits established pursuant to 12 U.S.C. 1717(b)(2), but will also
exempt from that prohibition loans that are insured or guaranteed by a
department or agency of the U.S. government.\30\
---------------------------------------------------------------------------
\30\ For loans not guaranteed or insured by a department or
agency of the U.S. government, the rule allows loans on properties
located in designated ``high-cost areas,'' where the conforming loan
limit is adjusted in accordance with the criteria established in 12
U.S.C. 1717(b)(2), to remain eligible for purchase as AMA as long as
the loan value is within the adjusted conforming loan limit.
---------------------------------------------------------------------------
As discussed earlier, the proposed rule would have barred a Bank
from purchasing as AMA any home mortgage loans on which a director,
officer, employee, attorney, or agent of a Bank or of the selling
member institution was the borrower, unless the board of directors of
the Bank specifically approved such purchase.\31\ As commenters point
out, in the current mortgage market any loans made to such ``insiders''
should meet the same AMA underwriting standards that the member or
other originator would apply to all of AMA-eligible loans and thus
would not have a different risk profile from those other loans.
Commenters also contended that such a requirement would present
significant operational difficulties. For example, because of the
breadth of the proposal, it would effectively require the Banks to
screen out of their AMA pools not only those loans that had been made
to a member's executives, but also to any of its rank and file
employees. FHFA is persuaded that the costs to the Banks of
implementing this provision would likely outweigh whatever benefits
might accrue from it. FHFA also recognizes that the statutory language
to which FHFA looked in proposing this provision was likely intended to
address the risks associated with particular practices that are less of
a concern in today's mortgage marketplace. The original statutory
provision, which pertains only to the acceptance of such loans as
collateral and dates to the original Bank Act, likely was intended to
prevent the Banks from accepting as collateral mortgage loans that
savings and loan association members had made to their ``insiders'' and
which may not have been underwritten as rigorously as their other
loans. Given that today's mortgage markets are much more uniform, in
terms of underwriting practices, than was the case in the 1930s, it is
unlikely that removing the prohibition would create any significant
risks for the Banks.
---------------------------------------------------------------------------
\31\ See Proposed Rule, 80 FR at 78691-92.
---------------------------------------------------------------------------
While the final rule adopts or retains specific restrictions on
certain loans, it does not limit the total amount of AMA assets a Bank
may acquire. Nevertheless, FHFA expects each Bank's board of directors
to establish a prudential limit on its maximum holdings of AMA, which
should be governed by the Bank's ability to manage the risks inherent
in funding and holding such mortgage loans.
D. Member or Housing Associate Nexus Requirement--Sec. 1268.4
Section 1268.4 of the proposed rule would have carried forward
without substantive change the member nexus requirement of the current
AMA regulation, found at 12 CFR 955.2(b). After considering the issues
raised by the commenters, described below, FHFA has decided to adopt
this provision of the final rule without any substantive differences
from the proposed rule. Under this ``member nexus'' provision, an asset
may be eligible for purchase as AMA only if the participating financial
institution has originated or issued the assets or has held it for a
valid business purpose. The ``valid business purpose'' provision was
intended to recognize the fact that some members may conduct their
mortgage lending operations through both the origination and purchase
of mortgage loans, which may include the acquisition of loans from
nonmember institutions as part of the normal course of business, and
may then wish to sell both categories of loans to their Bank. The
Finance Board and FHFA have interpreted this provision as excluding any
loans that merely pass from a nonmember through a member to a Bank,
because such arrangements would have the effect of extending the
benefits of membership to the nonmember.\32\
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\32\ See Proposed Rule: Federal Home Loan Bank Acquired Member
Assets, Core Mission Activities, Investments and Advances, 65 FR
25676, 25681 (May 3, 2000) (hereinafter 2000 Proposed AMA Rule).
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Commenters suggested that FHFA amend the AMA rule to allow Banks to
acquire loans directly from the affiliates of a Bank member, which they
contend would streamline the process of acquiring loans. The Banks
believe that the current requirement is inefficient because it requires
the use of a two-step process whereby a nonmember affiliate that
originates a mortgage loan must first assign the loan to its affiliated
member prior to the member is able to sell the loan to the Bank. FHFA
acknowledges that the current process may be inefficient for such
members, but believes that the Finance Board struck an appropriate
balance when it first adopted the AMA rule between the need for
operational efficiency and the need to ensure that the benefits of Bank
membership are made available only to institutions that are eligible
for membership. Accordingly, FHFA decided to adopt the provision
generally as proposed.
The reference in Sec. 1268.4(a) of the final rule to assets issued
``through, or on behalf of the participating financial institution''
carries over from the current regulation, and is intended to address
the terms under which HFA bonds may qualify as AMA. As under the
current regulation, this provision allows HFA bonds issued by an
underwriter for the participating financial institution, i.e., a
housing finance agency that has become a housing associate of the Bank,
to qualify as AMA.\33\ In Sec. 1268.4(b), FHFA is also carrying over
without substantive change the provisions of the current regulations
that address the process through which a Bank may purchase HFA bonds as
AMA from a housing associate of another Bank. Under this provision, a
Bank may acquire initial-offering taxable HFA bonds from out-of-
district associates, provided the Bank in whose district the HFA is
located (local Bank) has a right of first refusal to purchase, or
negotiate the terms of, a particular bond issue. If the local Bank
refuses, or does not respond within three business days, the HFA may
then offer the bonds to an out-of-district Bank.
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\33\ Id. at 25681.
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E. Credit Risk-Sharing Requirement--Sec. 1268.5
1. Overview
FHFA proposed to reorganize the current credit risk-sharing
requirements from two provisions of the Finance Board regulations, 12
CFR 955.2(c) and 955.3, into a single provision of the final rule,
Sec. 1268.5. The proposed rule would
[[Page 91683]]
have carried over several of the credit risk-sharing provisions without
substantive changes, including the requirement that all AMA loans carry
a credit enhancement and the design requirement for the credit
enhancement structure to ensure that the participating financial
institution retained a material economic incentive to reduce actual
losses on any AMA loans.\34\ To comply with Dodd-Frank Act mandates
that generally bar regulatory agencies from incorporating NRSRO credit
rating requirements into their regulations, FHFA also proposed to amend
those provisions of the current AMA regulation that were based on or
referenced NRSRO ratings, including allowing the Banks flexibility to
use a non-NRSRO methodology and model for calculating the credit
enhancement obligation. Finally, FHFA had proposed to delete existing
provisions that authorize the use of private SMI or pool insurance as
part of the credit enhancement structure and, as a consequence, also
remove provisions from the current regulation requiring eligible SMI
providers to maintain specific NRSRO ratings.
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\34\ See 2000 Final AMA Rule, 65 FR at 43976-77.
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FHFA has made several changes to the credit enhancement provisions
of the proposed rule in response to comments, including restoring to
the rule provisions allowing the use of SMI or pool insurance as part
of the credit enhancement structure. Related to that provision, and as
addressed in more detail below, FHFA is also adding to the final rule a
requirement that a Bank must develop and maintain written financial and
operational standards under which it will review and approve insurers
as eligible to provide mortgage insurance on AMA loans. This
requirement replaces the provisions of the current regulation, which
had required the Banks to use NRSRO ratings for evaluating mortgage
insurers. The final rule will carry over from the current rule the
requirements that all AMA loans be covered by a member-provided credit
enhancement, and that such credit enhancement on loans other than those
loans covered by a federal guarantee or insurance bear the direct
economic consequences of losses from the first dollar up to expected
losses, or immediately following expected losses but in an amount that
is equal to or exceeding the expected losses.\35\
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\35\ As FHFA noted in proposing the new AMA rule, the credit
risk-sharing requirements provide that participating financial
institutions selling mortgages must retain a substantial portion of
the credit risk, given their expertise in underwriting mortgages. In
requiring the participating financial institution to have such
financial ``skin in the game,'' the rule provides them an incentive
to sell high-quality loans to the Banks and the opportunity to
benefit financially from good underwriting practices. See Proposed
Rule, 80 FR at 78693.
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2. Determining Credit Enhancements on AMA pools
Section 1268.5(b)(1) of the final rule sets forth the general
requirements for how a Bank is to determine the total credit
enhancement that a participating financial institution must provide for
an asset or pool to qualify as AMA. Unlike under the current rule, the
final rule does not require that Banks calculate the credit enhancement
for AMA using NRSRO models and methodologies, or that the credit
enhancement raises the credit quality of an asset or pool to a level
that is equivalent to a specific NRSRO-determined rating. Instead, the
final rule requires the Banks to determine and document that AMA assets
are enhanced at least to ``AMA investment grade.'' The rule defines
``AMA investment grade'' as:
. . . a determination made by the Bank with respect to an asset or
pool, based on documented analysis, including consideration of
applicable insurance, credit enhancements, and other sources for
repayment on the asset or pool, that the Bank has a high degree of
confidence that it will be paid principal and interest in all
material respects, even under reasonably likely adverse changes to
expected economic conditions.
The term ``AMA investment grade,'' as well as its definition,
represents a change from the proposed rule that FHFA made in response
to comments received on the proposal. The proposed rule would have
required that the enhancement on AMA assets raise them to at least
``investment quality,'' which would have been defined by reference to
the definition of that term that is used in the Bank investment
regulation, at 12 CFR 1267.1. Commenters pointed out, however, that the
term ``investment quality'' as used in the investment regulation
generally applies to debt securities and that, unlike when Banks
purchase debt securities, Banks buy AMA assets with the knowledge and
expectation that some of those assets will default, and become
delinquent.\36\ Thus, as commenters further noted, the fact that the
definition of ``investment quality'' in the Bank investment rule
references expectations of ``full and timely payment of principal and
interest'' means the definition cannot be readily applied to individual
mortgages or mortgage pools purchased as AMA.
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\36\ The Banks take account of these expected defaults and
delinquencies and related losses when determining pricing for their
purchases of AMA loans and in structuring the AMA products.
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FHFA agrees with the comments and has revised the proposed
definition to address those commenters' concerns. In particular, the
definition of ``AMA investment grade'' that is adopted in the final
rule replaces the references to expectations that a Bank will receive
``full and timely payment of principal and interest'' with language
suggested by commenters, i.e., that a Bank has a high degree of
confidence that ``it will be paid principal and interest in all
material respects.'' The change recognizes that Banks will, upon
purchase of the AMA asset, expect certain levels of payment defaults
and delinquencies. The final definition continues to require that the
Bank's analysis of the possibility for repayment take account of
adverse stress to future expected economic conditions and that the Bank
should consider such adverse stresses in their analysis, to the extent
that such adverse changes could reasonably occur given current economic
conditions and outlooks.
While the proposed rule would not have changed the existing
requirement that a Bank determine the necessary credit enhancement on a
pool at the earlier of 270 days from the date of the Bank's acquisition
of the first loan in a pool or the date at which the pool reaches $100
million in assets, Sec. 1268.5(b)(1) of the final rule has revised
those provisions such that a Bank now must determine the total credit
enhancement obligation no later than 30 calendar days after a pool
closes or the Bank completes the purchase of an AMA asset.\37\ FHFA
made this change based on comments that the rule should allow a Bank to
calculate the credit enhancement in a manner that is consistent with
the terms of specific loan funding commitments. Commenters provided as
an example the Mortgage Partnership Program (MPP) for which calculating
the credit enhancement at the time the pool closes would bring more
certainty to participating financial institutions as to their ongoing
financial obligations. FHFA believes that the change in the final rule
will provide Banks sufficient flexibility to meet the concerns raised
by commenters while still ensuring that all AMA pools are enhanced to
levels
[[Page 91684]]
consistent with the terms and conditions of the specific AMA product.
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\37\ As FHFA previously noted, some AMA eligible assets would be
in the form of a security or certificate, such as an HFA bond or a
certificate of security representing interest in a pool of whole
loans. For those AMA products that involve a Bank's purchase of a
single security or instrument, and not the purchase of a pool of
individual loans, the relevant date for applying this provision
would be the date the purchase of the instrument is completed.
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Under Sec. 1268.5(b)(1), the Bank could continue to specify, as
part of the terms and conditions for a particular AMA product, that a
participating financial institution must provide a credit enhancement
greater than that needed to enhance the asset or pool to AMA investment
grade. The final rule further provides that a Bank must make its credit
enhancement determinations using a model and methodology of the Bank's
choosing, subject to the requirements of Sec. 1268.5(f), which
requires the Banks to provide information about their model and
methodology to FHFA upon request, and which reserves FHFA's right to
require changes to a Bank's model or methodology. As FHFA noted in the
proposed rule, a Bank may continue to use the same NRSRO model it
currently uses for making credit enhancement determinations under the
final rule, and in such a case, would not need to alter the credit
enhancement levels it currently requires, unless FHFA directs it to do
so or its estimated enhancement levels otherwise do not comply with the
rule.\38\ For example, a Bank would need to increase credit enhancement
levels if it determined that the credit enhancement currently estimated
by its NRSRO model was not sufficient for an asset or pool to be AMA
investment grade under the definition of that term.
---------------------------------------------------------------------------
\38\ See Proposed Rule, 80 FR at 78693.
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FHFA is adopting as proposed the requirement that a Bank document
the basis for its conclusion that the contractual credit enhancement
required for a particular pool is sufficient to meet the required
credit enhancement obligation for a particular AMA product, given the
Bank's chosen model's relevant stress scenarios.\39\ This provision is
located at Sec. 1268.5(b)(2) of the final rule, and that information
will help FHFA monitor the Banks' use of their models and the adequacy
of the specific credit enhancement structures used in each AMA product.
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\39\ This requirement replaces 12 CFR 955.3(b) and (c) which
state that a Bank had to obtain the NRSRO verifications with regard
to the adequacy of the credit enhancement structure and Bank's use
of the NRSRO model for estimating the required enhancement in each
AMA product. Given that under the amendments made by this final
rule, FHFA no longer requires a Bank to use NRSRO models, the NRSRO
verification requirements are obsolete, and FHFA has removed them.
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Section 1268.5(c) of the final rule addresses the credit risk-
sharing structure for AMA products. As is the case under existing
regulations, this provision generally requires that the participating
financial institution providing the credit enhancement bear the direct
economic consequences of actual credit losses on the assets from the
first dollar of loss up to expected losses, or immediately following
expected losses in an amount equal to or exceeding expected losses.\40\
This requirement would not apply to federally insured or guaranteed
mortgage loans.\41\
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\40\ The economic responsibility of the expected credit losses
may be borne by the member or housing associate in a variety of
ways. For instance, under the product developed by the Chicago Bank
known as MPF 100, a Bank establishes an account to absorb credit
losses. As the Bank incurs losses, the member reimburses the Bank
through the reduction of credit enhancement fees paid to the member
by the Bank and, therefore, is exposed to the credit risk of the
loans starting with the first dollar of loss. Essentially, the fees
paid to the member are contingent upon the performance of the asset.
Also, the rule allows for a member-provided credit enhancement to be
positioned after expected losses. Authorizing this structure in the
rule allows for the existing MPF Original product.
\41\ As is discussed below, FHFA is amending the requirement
that for government insured or guaranteed loans the members or
housing associates must bear responsibility for unreimbursed
servicing expenses up to the amount of expected losses for the loan
to qualify as AMA.
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As noted previously by the Finance Board, this requirement helps
ensure that a participating financial institution bears the direct
consequences of the credit quality of the asset or pool, and thereby
has the incentive to maintain high underwriting standards for any AMA
loans sold to a Bank.\42\ The participating financial institution
cannot transfer this responsibility to an affiliate or nonmember
entity.
---------------------------------------------------------------------------
\42\ See 2000 Proposed AMA Rule, 65 FR at 25683; see also, 2000
Final AMA Rule, 65 FR at 43976.
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While the current regulation defines ``expected losses'' as the
base loss scenario in the methodology of an NRSRO applicable to a
particular AMA asset, the final rule amends this definition to refer to
the loss on the particular AMA asset or pool given the expected future
economic and market conditions in the model or methodology used by the
Bank to calculate the credit enhancement for an AMA product. This
change results from the fact that the final rule no longer requires a
Bank to use an NRSRO model, and also accommodates the potential for a
Bank to adopt a model that applies a methodology that differs from that
used in the Banks' current models. Otherwise, FHFA believes that this
change does not alter the substance of what is currently required by
the AMA rule; nor is it intended to alter how a Bank would calculate
``expected losses'' if the Bank continues to use its current model.
Section 1268.5(c) also continues to require that the credit
enhancement remain in place at all times, i.e., for the life of the
asset or pool.\43\ This requirement effectively prohibits the Banks
from using structures, for example, that comply with the credit rating
requirement during in the first year, but that then scale back the
amount of the member's credit enhancement in subsequent years so that
the pool would no longer be credit enhanced to a level that is
consistent with the terms and conditions of the AMA product.\44\
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\43\ Where the Bank returns the credit enhancement to a
participating financial institution, it would only do so if the
credit quality of the asset or pool continues to meet the terms and
conditions of the AMA product.
\44\ See 2000 Final Rule, 65 FR at 43976.
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Section 1268.5(c)(1)(ii) of the final rule also will retain the
existing requirement that a participating financial institution must
secure fully its credit enhancement obligation, and that it do so in
the same manner that a member must secure its obligation to repay an
advance under part 1266 of the FHFA advances regulations. This
provision is intended to prevent a Bank from being exposed to any
additional credit risk as a result of a member's failure to comply with
its contractual obligation to absorb a specified portion of the credit
losses on its AMA loans. While some commenters asked FHFA to delete
this requirement so that the Banks could have added flexibility in
designing different types of credit enhancement structures, FHFA
believes that the collateral requirement provides a necessary level of
protection for the Banks should a participating financial institution
be unable to fulfill its credit enhancement obligation, and also is
consistent with the legal rationale for the AMA programs, which views
the acquisition of AMA loans as being functionally equivalent to the
extension of credit via an advance, which members must fully secure
with eligible collateral.
3. Transfer of Credit Enhancement Obligation
The final rule will carry over, with some modifications, the
provisions of the existing regulations that establish alternative means
by which a member may provide the credit enhancement for its AMA loans,
including a transfer of the enhancement obligation to certain parties,
subject to certain limitations. The revised provision would be located
at Sec. 1268.5(c)(2) of the final rule. The use of these structures
requires the approval of the Bank, which could do so either by
establishing the required form of credit enhancement in the terms of a
particular AMA product, or by
[[Page 91685]]
providing specific approval for the transfer.
Specifically, Sec. 1268.5(c)(2)(i) authorizes a participating
financial institution to transfer its credit enhancement obligation to
its insurance affiliate, but only where the insurance provided by the
affiliate is positioned after the participating financial institution
bears the financial losses on the AMA loan in an amount at least equal
to the expected losses. Similarly, the final rule carries over the
substance of two provisions of the current regulations, which allow a
participating financial institution to transfer its credit enhancement
obligation to another participating financial institution, which may be
either a member of the same Bank or, subject to certain conditions, a
member of another Bank. Those provisions are located at Sec.
1268.5(c)(2)(iv) and (v) of the final rule. These provisions remain
consistent with the existing regulations, as well as with current Bank
practice with regard to AMA product structures and permissible
transfers of the credit enhancement obligations.
As already discussed, FHFA had proposed eliminating provisions of
the existing regulation that allow a participating financial
institution to meet part of its credit enhancement obligation through
the purchase of loan-level SMI or pool insurance. After considering the
comments on this issue, however, FHFA has determined to retain those
provisions, which are located at Sec. 1268.5(c)(2)(ii) and (iii) of
the final rule. Thus, a participating financial institution can
continue to provide part of its credit enhancement obligation by
purchasing loan-level SMI, but only if the SMI is positioned in the
credit enhancement structure to cover losses remaining after the
participating financial institution has borne the direct economic
consequences of the actual credit losses, as required by Sec.
1268.5(c)(1)(i). Similarly, the participating financial institution can
continue to purchase pool insurance, but only where such insurance
covers that portion of the credit enhancement obligation attributable
to the geographic concentration or size of the pool and is positioned
last in the credit enhancement structure.
The provisions pertaining to the use of SMI or pool insurance
generally carry over the substance of the existing regulations, with
one significant exception related to the rating requirement for
insurance providers. The existing AMA regulations require that
insurance be maintained at all times with an insurer that has been
assigned a rating from an NRSRO that is at least equal to the second
highest investment grade NRSRO rating. Because the Dodd-Frank Act
requires that FHFA remove such ratings-based provisions from its
regulations, FHFA is replacing this requirement with a requirement that
the participating financial institution may obtain its SMI or pool
insurance only from an institution that at all times is a ``qualified
insurer,'' as defined by the final rule.\45\ To implement this
``qualified insurer'' requirement, FHFA is adopting as part of the
final rule a new provision, to be located at Sec. 1268.5(e)(1), which
directs a Bank to develop and maintain a written financial and
operational standards that it will apply in approving an entity as a
``qualified insurer.'' That provision also makes clear that a Bank can
rely on another provision of the final rule, Sec. 1268.8, to delegate
to another Bank or group of Banks the responsibility for developing and
applying these standards. The provision will allow a group of Banks to
develop a common policy and common list of qualified insurers for AMA
programs if they choose.
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\45\ FHFA also has adopted in Sec. 1268.1 a definition for
``qualified insurer,'' which includes any insurance company that a
Bank approves in accordance with Sec. 1268.5(e) to provide any form
of mortgage insurance on assets and pools purchased under an AMA
program. Consistent with suggestions by commenters, this definition
does not restrict potential qualified insurers just to mono-line
mortgage insurance providers, but could include any insurance
company.
---------------------------------------------------------------------------
The rule allows a Bank one year to develop these new insurance
provider standards. The FHFA expects that Banks will develop the new
standards and qualify under these standards any mortgage insurers with
which the Banks intend to do business under their AMA programs within
this one-year timeframe. Until the end of this one-year grace period,
Banks can continue to do business with the insurance counterparties
that it currently allows to provide insurance on AMA assets or can add
new insurance counterparties based on existing standards that the Banks
may have in place.\46\ Once the new standards are in place, Sec.
1268.5(e)(1) also requires that a Bank review qualified insurers at
least once every two years and verify that they continue to meet the
Bank's standards.\47\
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\46\ The grandfather provision in Sec. 1268.2(b) allows a Bank
to continue to hold loans purchased prior to the end of the phase-in
period for adopting the qualified insurer standards even if the PMI
or other insurance on those loans is provided by an entity that does
not meet the Bank's new standards.
\47\ Section 1268.8 of the final rule allows a Bank to delegate
the administration of its AMA program to another Bank, which would
allow a Bank to delegate the responsibility for conducting this
required periodic review to another Bank or Banks should it so wish.
---------------------------------------------------------------------------
FHFA expects that any standards a Bank adopts under Sec.
1268.5(e)(1) will be rigorous and will set minimum financial and
operating standards that an insurer must meet to help ensure that the
insurer will have the financial resources to fulfill its obligations
under insurance policies on AMA assets. While the rule does not provide
specific requirements that the Banks must meet in developing these
standards, FHFA notes that the PMIERS recently implemented by the
Enterprises represent a good model of the type of analytical approach
that FHFA would expect of the Banks' standards under this provision.
FHFA expects to review a Bank's qualified insurer standards as part of
its regular supervisory examination and off-site monitoring of Bank
activities. FHFA also expects Banks periodically to review their
qualified insurer standards, and to revise them as appropriate.
In order to ensure a degree of uniformity with respect to the
financial condition of entities that may provide insurance in
connection with the AMA programs, FHFA is also adopting new Sec.
1268.5(e)(2), which will allow only those entities that are ``qualified
insurers'' to provide either the loan-level or pool insurance policies
allowed as part of the credit enhancement structure under Sec.
1268.5(c)(2)(ii) and (iii) or the private mortgage insurance on loans
purchased as AMA. In proposing this rule, FHFA specifically requested
comments on whether any eligibility requirements for providers of SMI
or pool insurance should also apply to PMI providers.\48\ Few
commenters responded to this request, but the commenters generally
expressed the view that FHFA should not impose specific requirements on
PMI providers and, instead, should continue to allow Banks to adopt
their own standards for those providers. One of the commenters noted,
however, that if the FHFA did impose requirements, PMI providers should
be required to meet PMIERS. After consideration of these comments, FHFA
has determined to apply the ``qualified insurer'' requirements of Sec.
1268.5(e)(1) to providers of PMI, SMI and pool insurance. By requiring
that providers of all types of mortgage insurance used in AMA products
meet rigorous financial and operational standards, this provision helps
assure that Banks engage in sound counterparty risk management and
maintain strong safety and soundness measures for their AMA programs.
Moreover, given that Sec. 1268.5(e)
[[Page 91686]]
provides the Banks with latitude to develop their own standards for
what constitutes a ``qualified insurer,'' the application of this
provision to PMI providers should not represent a significant change
from the existing approach.
---------------------------------------------------------------------------
\48\ See Proposed Rule, 80 FR at 78695.
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4. Loans Guaranteed or Insured by a Department or Agency of the U.S.
Government
Section 1268.5(d) of the final rule addresses the purchase of
federally insured or guaranteed mortgage loans as AMA. The existing
regulatory text allows a portion of the credit enhancement to be
provided through the purchase of loan-level insurance, including
insurance provided by a federal mortgage insurance or guarantee
program. Although the federal insurance or guarantee generally
eliminates the credit risk to the member selling mortgage loans to its
Bank, the Finance Board had determined that the member's potential
liability to bear the unreimbursed servicing expenses on such loans
served the same purpose of providing an economic incentive for the
member to sell only well-underwritten loans to the Bank. The final rule
carries over much of the substance of current agency policy, and simply
states that a participating financial institution may provide the
required credit enhancement by purchasing loan-level guarantees or
insurance from departments or agencies of the U.S. government, provided
that the guarantee or insurance remains in effect for however long the
Bank owns the loan. The requirement that the guarantee or insurance
remain in effect does not require that the Bank member be the party
that maintains the guarantee or insurance for that period, which would
allow any other entity servicing the loan to maintain the guarantee or
insurance. The final rule differs from the existing regulations,
however, in that it does not require loans guaranteed or insured by a
department or agency of the U.S. government to meet the specific credit
enhancement structure requirements, i.e., wherein the member must bear
the first dollar of losses for a loan or pool up to the amount of
expected losses or must bear losses immediately following the expected
losses in an amount that equals or exceeds expected losses.\49\ Even
under this new provision, however, the federal guarantee or insurance
must be sufficient so that the underlying asset or pool meets the
required credit enhancement specified as part of the terms and
conditions that the Bank has established for the relevant AMA product.
---------------------------------------------------------------------------
\49\ FHFA is readopting these requirements as Sec. 1268.5(c)(1)
of this final rule.
---------------------------------------------------------------------------
As already noted, the Finance Board has described the purpose of
the AMA credit enhancement structure requirement as being to ensure
that participating financial institutions, ``when responsible for such
losses, [had] incentive to seek ways to achieve better than expected
performance [for the loans sold as AMA].'' \50\ As the Finance Board
explained, for a participating financial institution to meet this
structure requirement with respect to federally guaranteed or insured
loans, given that losses eventually would be covered by the guarantee
or insurance, the participating financial institution would have to
bear the economic responsibility of all unreimbursed servicing expenses
associated with those loans, up to the amount of the expected
losses.\51\ As a result, under the current regulation the member's
credit enhancement obligation for AMA government loans is tied closely
to its servicing obligations. An unintended consequence of tying the
credit enhancement obligation to the servicing obligation is that such
a requirement effectively limits a participating financial
institution's ability to transfer the mortgage-servicing rights for any
AMA government loans to non-participating financial institutions. In
addition, as FHFA noted in proposing the rule, after having had the
opportunity to review the Banks' AMA programs since 2000, FHFA has come
to the conclusion that requiring a member to retain an obligation to
cover unreimbursed servicing expenses for AMA government loans provides
no meaningful additional incentive to improve underwriting to achieve
better than expected loan performance.\52\
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\50\ 2000 Final AMA Rule, 65 FR at 43977.
\51\ Id. In the supplementary information section of the
original rule, the Finance Board explained how loans guaranteed or
insured by a department or agency of the U.S. government would meet
the credit enhancement requirements of the original AMA rule.
\52\ Proposed Rule, 80 FR at 78695.
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A small number of commenters objected to this proposed revision.
These comments noted that the proposed change would have altered one of
the key underlying premises for AMA with regard to government loans,
namely that the members need to have ``skin in the game'' to assure
high quality underwriting. After considering these comments in light of
its own experience in monitoring the Banks' AMA programs, FHFA has
concluded that, with regard to federally guaranteed or insured loans,
the underwriting standards imposed by the relevant government
department or agency address the same policy objective of the credit
enhancement requirements, which is to encourage the members to
underwrite the loans to a high level. Therefore, FHFA finds that
requiring the participating financial institution to also remain
responsible for unreimbursed servicing expenses would add little, if
any, incentive to underwrite its mortgage loans to a materially
different level above the already high level required by the federal
guarantor or insurer. At the same time, FHFA believes that the ability
to transfer the servicing rights on federally insured or guaranteed
loans is important in the current marketplace. Thus by carrying over to
the final rule a provision that would prevent participating financial
institutions from transferring servicing rights on such loans FHFA
could negatively affect members' ability to use the AMA program to
obtain liquidity to support this segment of the mortgage market.\53\
FHFA, therefore, is adopting Sec. 1268.5(d), as proposed.
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\53\ As FHFA noted when it proposed this rule, the flexibility
allowed in transferring mortgage-servicing rights under the amended
provision would prove beneficial for many smaller or medium sized
members. These members, in particular, might wish to sell their AMA
government loans into AMA government products but may lack the
ability to perform the servicing obligations, as now required by the
AMA regulation. In addition, given changes in the mortgage industry,
Banks may find it increasingly difficult to find member institutions
willing to take on the servicing obligations for AMA government
loans. Id.
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5. Model and Methodology
Section 1268.5(f) of the final rule addresses the model and
methodology that a Bank uses to estimate the required credit
enhancement, and has been simplified in response to certain
recommendations from the commenters. The final rule requires a Bank to
establish a model and methodology for estimating the required member
credit enhancements for AMA loans that a participating financial
institution sells to a Bank.\54\ The new provision, consistent with the
Dodd-Frank Act requirements, no longer requires a Bank to use an NRSRO
model.\55\ The final rule does require a Bank to provide to FHFA upon
request any information about the Bank's model and methodology
including results of any model runs and testing performed by the Bank.
While the final rule does not require that FHFA approve the model
[[Page 91687]]
and methodology that a Bank uses to estimate the required credit
enhancement, it specifically reserves to FHFA the right to direct a
Bank to make changes to its model and methodology and further requires
that a Bank promptly implement any such changes once FHFA directs it to
do so.
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\54\ The provision was proposed as Sec. 1268.5(e). See Proposed
Rule, 80 FR at 78698.
\55\ Nothing in the final rule, however, prohibits a Bank from
continuing to use an NRSRO model to estimate the credit enhancement
requirement, provided that the Bank otherwise complies with Sec.
1268.5(f).
---------------------------------------------------------------------------
As noted above, FHFA has altered the final version of Sec.
1268.5(f) from what it proposed based on the comments received, a
number of which thought that the proposed provision was too
prescriptive and would hinder the Banks' ability to adjust their models
and methodologies in response to advances in technologies and methods.
These commenters believed that it would be more appropriate for the
final rule to provide only general guidance relating to the models and
methodologies, and rely on advisory bulletins and other forms of
supervisory guidance with regard to specific practices on evaluating
and monitoring performance. The commenters also noted that FHFA
generally follows their suggested approach with regard to Banks' use of
models in other areas.
FHFA agrees with the comments, and has note included as part of the
final rule the proposed requirements related to a Bank's validation and
monitoring of its model, or that requiring a Bank to inform FHFA prior
to making any material changes to its model and methodology. Instead,
FHFA will address these items through its supervisory process, and will
issue guidance to the Banks on these topics as the need arises. FHFA,
however, continues to expect a Bank to have risk management policies
and procedures commensurate with the complexity of the model and
methodology. Effective model risk management should entail a
comprehensive approach in identifying risk throughout the model
lifecycle and should be consistent with any applicable FHFA guidance.
F. Servicing of AMA Loans--Sec. 1268.6
Section 1268.6 of the final rule addresses the servicing of AMA
loans, which FHFA is adopting as proposed. This provision incorporates
current FHFA positions, as set forth in a recent regulatory
interpretation, on the rights of the Banks to allow for the transfer of
mortgage servicing rights from the participating financial institution
that originally sold the AMA loans to the Bank.\56\ FHFA received no
comments on this provision.\57\
---------------------------------------------------------------------------
\56\ See Regulatory Interpretation, 2015-RI-01 (June 23, 2015).
\57\ As discussed previously, FHFA received comments objecting
to amendments that would eliminate the requirement that members bear
the unreimbursed servicing expenses for U.S. government insured
loans as part of their AMA credit enhancement obligation. These
comments were addressed in the section above addressing credit
enhancement requirements.
---------------------------------------------------------------------------
Thus, Sec. 1268.6 allows for the transfer of servicing rights on
AMA loans, including federally guaranteed or insured loans, to any
institution, including a non-Bank System member. The provision
specifically provides that any such transfer cannot result in the AMA
loan failing to meet any other AMA requirement, including the credit
enhancement requirement.\58\ Section 1268.6 also requires the approval
of each Bank that has any ownership interest in the underlying loans,
no matter how small that interest may be, prior to the transfer of the
servicing obligation. Finally, Sec. 1268.6 states that the Banks must
have policies and procedures that ensure the transfer of servicing
would not negatively affect the credit enhancement on the underlying
loans or substantially increase the Bank's exposure to risk. As it
noted when proposing the rule, FHFA expects such policies and
procedures specifically to address transfers to non-Bank System member
servicers and provide contingency plans to address a case in which a
large servicer fails or is otherwise unable to continue to service a
Bank's AMA portfolio.\59\
---------------------------------------------------------------------------
\58\ As FHFA noted in proposing the rule, this means that a
member cannot transfer any part of the credit enhancement obligation
on a non-U.S. government insured loan to a non-member institution as
part of the transfer of servicing rights. See Proposed Rule, 80 FR
at 78696.
\59\ Id.
---------------------------------------------------------------------------
G. Administrative Arrangements Between Banks--Sec. 1268.8
Proposed Sec. 1268.8 would have carried over without substantive
change the provisions of Sec. 955.5 of the current regulation, which
addresses administrative transactions and agreements between Banks
involving AMA. This provision allows Banks to delegate to another Bank
the administration of its AMA program, but requires the delegating Bank
to disclose to a participating financial institution the existence of
the delegation or the possibility of such delegation, in its AMA-
related agreements with the participating financial institution.
Commenters requested technical changes to the proposed rule to
clarify that Banks can contract with third parties, including another
Bank, to provide services for their AMA programs separate and apart
from the administrative delegation contemplated in this provision
without triggering additional disclosure obligations. They also
suggested a change in wording to make clear that a Bank may, by
contract, define specific parameters on its delegation of pricing
authority for its AMA program to another Bank. FHFA agrees that the
suggested changes appropriately clarify the scope of the requirements
in Sec. 1268.8 and raise no safety and soundness or other concerns.
Therefore, FHFA has incorporated the Banks' suggested language into the
final rule. Otherwise, proposed Sec. 1268.8 is adopted as final
without further changes.
H. Other Provisions--Sec. 1268.7
As proposed, FHFA is carrying over without change the current
rule's data reporting requirements for AMA, which would be located at
Sec. 1268.7. FHFA received no comments on that provision. Also as
proposed, FHFA is deleting from the AMA rule the provision that had
established risk-based capital requirements for AMA, which has been
superseded by the statutory risk-based capital requirement and thus has
no continuing applicability.\60\ FHFA received no comments on its
proposal to delete this provision.
---------------------------------------------------------------------------
\60\ Id.
---------------------------------------------------------------------------
III. Consideration of Differences Between the Banks and the Enterprises
When promulgating regulations relating to the Banks, section
1313(f) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 requires the Director to consider the differences
among the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation (together, 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.\61\ The amendments made by this rulemaking apply exclusively
to the Banks. In preparing the proposed and final rules the Director
considered the differences between the Banks and the Enterprises as
they relate to the above factors, and the proposed rule requested
public comments on the extent to which the rule might implicate any of
the statutory factors. FHFA received a comment suggesting that the
continued use of the conforming loan limit for Bank AMA purchases would
not appropriately take into account the differences between the Banks
and the Enterprises. As already discussed above, in connection with the
section of the
[[Page 91688]]
final rule relating to the conforming loan limits, the Director has
considered this comment and has determined that it is appropriate to
continue to refer to the conforming loan limit as a policy guide for
establishing reasonable limits on the use of the Banks' GSE subsidy in
connection with their purchase of non-federally insured or guaranteed
mortgage loans.
---------------------------------------------------------------------------
\61\ See 12 U.S.C. 4513(f).
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
The information collection, entitled ``Federal Home Loan Bank
Acquired Member Assets, Core Mission Activities, Investments and
Advances'' contained in current 12 CFR part 955 of the regulations that
is transferred to 12 CFR part 1268 by this final rule has been assigned
control number 2590-0008 by the Office of Management and Budget (OMB).
The final rule does not substantively or materially modify the current,
approved information collection.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified the regulation will not have a
significant economic impact on a substantial number of small entities.
5 U.S.C. 605(b). FHFA has considered the impact of the final rule under
the Regulatory Flexibility Act.
FHFA certifies that the final rule will not have a significant
economic impact on a substantial number of small entities because the
regulation is applicable only to the Banks, which are not small
entities for purposes of the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 955
Community development, Credit, Federal home loan banks, Housing,
Reporting and recordkeeping requirements.
12 CFR Part 1201
Administrative practice and procedure, Federal home loan banks,
Government-sponsored enterprises, Office of Finance, Regulated
entities.
12 CFR Part 1267
Community development, Credit, Federal home loan bank, Housing,
Reporting and recordkeeping requirements.
12 CFR Part 1268
Acquired member assets, Credit, Federal home loan bank, Housing,
Nationally recognized statistical rating agency.
12 CFR Part 1281
Credit, Federal home loan banks, Housing, Mortgages, Reporting and
recordkeeping requirements.
Authority and Issuance
For reasons stated in the SUPPLEMENTARY INFORMATION, and under the
authority of 12 U.S.C. 1430, 1430b, 1431, 4511, 4513, 4526, FHFA is
amending subchapter G of chapter IX and subchapters A, D, and E of
chapter XII of title 12 of the Code of Federal Regulations as follows:
CHAPTER IX--FEDERAL HOUSING FINANCE BOARD
Subchapter G--[Removed and Reserved]
0
1. Subchapter G, consisting of part 955, is removed and reserved.
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
Subchapter A--Organization and Operations
PART 1201--GENERAL DEFINITIONS APPYING TO ALL FEDERAL HOUSING
FINANCE AGENCY REGULATIONS
0
2. The authority citation for part 1201 continues to read as follows:
Authority: 12 U.S.C. 4511(b), 4513(a), 4513(b).
0
3. Amend Sec. 1201.1 by revising the definition of ``Acquired member
assets'' to read as follows:
Sec. 1201.1 Definitions.
* * * * *
Acquired member assets or AMA means assets acquired in accordance
with, and satisfying the applicable requirements of, part 1268 of this
chapter.
* * * * *
Subchapter D--Federal Home Loan Banks
PART 1267--FEDERAL HOME LOAN BANK INVESTMENTS
0
4. The authority citation for part 1267 continues to read as follows:
Authority: 12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513,
4526.
Sec. 1267.2 [Amended]
0
5. Amend Sec. 1267.2 in paragraph (a) by removing ``955 of this
title'' and adding in its place ``1268 of this chapter''.
0
6. Part 1268 is added to subchapter D to read as follows:
PART 1268--ACQUIRED MEMBER ASSETS
Sec.
1268.1 Definitions.
1268.2 Authorization for acquired member assets.
1268.3 Asset requirement.
1268.4 Member or housing associate nexus requirement.
1268.5 Credit risk-sharing requirement.
1268.6 Servicing of AMA loans.
1268.7 Reporting requirements for acquired member assets.
1268.8 Administrative transactions and agreements between Banks.
Authority: 12 U.S.C. 1430, 1430b, 1431, 4511, 4513, 4526.
Sec. 1268.1 Definitions.
As used in this part:
Affiliate means any business entity that controls, is controlled
by, or is under common control with, a member.
AMA investment grade means a determination made by the Bank with
respect to an asset or pool, based on documented analysis, including
consideration of applicable insurance, credit enhancements, and other
sources for repayment on the asset or pool, that the Bank has a high
degree of confidence that it will be paid principal and interest in all
material respects, even under reasonably likely adverse changes to
expected economic conditions.
AMA product means a structure that is defined by a specific set of
terms and conditions that comply with this part 1268 and that is
established by a Bank for purposes of governing the Bank's purchase of
AMA-eligible loans.
AMA program means a Bank-established program to buy mortgage loans
that meet the requirements of this part, which may comprise multiple
AMA products.
Expected losses means the loss on the asset or pool given the
expected future economic and market conditions in the model or
methodology used by the Bank under Sec. 1268.5 and applicable to an
AMA product.
Participating financial institution means a member or housing
associate of a Bank that is authorized to sell, credit enhance, or
service mortgage loans to or for its own Bank through an AMA program,
or a member or housing associate of another Bank that has been
authorized to sell, credit enhance, or service mortgage loans to or for
the other Bank pursuant to an agreement between the Bank acquiring the
AMA product and the Bank of which the selling institution is a member
or housing associate.
Pool means a group of loans acquired under one or more loan funding
[[Page 91689]]
commitments, contractual agreements, or similar arrangements.
Qualified insurer means an insurer that a Bank approves in
accordance with Sec. 1268.5(e)(1) to provide any form of mortgage
insurance coverage on assets and pools purchased under an AMA program.
Residential real property has the meaning set forth in Sec. 1266.1
of this chapter.
Sec. 1268.2 Authorization for acquired member assets.
(a) General. Each Bank is authorized to invest in assets that
qualify as AMA, subject to the requirements of this part and part 1272
of this chapter.
(b) Grandfathered transactions. Notwithstanding paragraph (a), a
Bank may continue to hold as AMA assets that were previously authorized
by the Federal Housing Finance Board or FHFA for purchase as AMA,
provided that the assets were purchased, and continue to be held, in
compliance with that authorization.
Sec. 1268.3 Asset requirement.
Assets that qualify as AMA shall be limited to the following:
(a) Whole loans that are eligible to secure advances under Sec.
1266.7(a)(1)(i),
(a)(2)(ii), (a)(4), or (b)(1) of this chapter, excluding:
(1) Single-family mortgage loans where the loan amount exceeds the
limits established pursuant to 12 U.S.C. 1717(b)(2), unless the loan is
guaranteed or insured by an agency or department of the U.S.
government, in which case the limits in 12 U.S.C. 1717(b)(2) do not
apply; and
(2) Loans made to an entity, or secured by property, not located in
a state;
(b) Whole loans secured by manufactured housing, regardless of
whether such housing qualifies as residential real property under
applicable state law;
(c) State and local housing finance agency bonds; or
(d) Certificates representing interests in whole loans if:
(1) The loans qualify as AMA under paragraphs (a) or (b) of this
section and meet the nexus requirement of Sec. 1268.4; and
(2) The certificates:
(i) Meet the credit enhancement requirements of Sec. 1268.5;
(ii) Are issued pursuant to an agreement between the Bank and a
participating financial institution to share risks consistent with the
requirements of this part; and
(iii) Are acquired substantially by the initiating Bank or Banks.
Sec. 1268.4 Member or housing associate nexus requirement.
(a) General provision. To qualify as AMA, any assets described in
Sec. 1268.3 must be acquired in a purchase or funding transaction only
from:
(1) A participating financial institution, provided that the asset
was:
(i) Originated or issued by, through, or on behalf of the
participating financial institution, or an affiliate thereof; or
(ii) Held for a valid business purpose by the participating
financial institution, or an affiliate thereof, prior to acquisition by
the Bank; or
(2) Another Bank, provided that the asset was originally acquired
by the selling Bank consistent with this section.
(b) Special provision for housing finance agency bonds. In the case
of housing finance agency bonds acquired by a Bank from a housing
associate located in the district of another Bank (local Bank), the
arrangement required by the definition of ``participating financial
institution'' in Sec. 1268.1 between the acquiring Bank and the local
Bank may be reached in accordance with the following process:
(1) The housing finance agency shall first offer the local Bank
right of first refusal to purchase, or negotiate the terms of, its
proposed bond offering;
(2) If the local Bank indicates, within three business days, it
will negotiate in good faith to purchase the bonds, the housing finance
agency may not offer to sell or negotiate the terms of a purchase with
another Bank; and
(3) If the local Bank declines the offer, or has failed to respond
within three business days, the acquiring Bank will be considered to
have an arrangement with the local Bank for purposes of this section
and may offer to buy or negotiate the terms of a bond sale with the
housing finance agency.
Sec. 1268.5 Credit risk-sharing requirement.
(a) General credit risk-sharing requirement. For each AMA product,
the Bank shall implement and have in place at all times, a credit risk-
sharing structure that:
(1) Requires a participating financial institution to provide the
credit enhancement necessary to enhance an eligible asset or pool to
the credit quality specified by the terms and conditions of the AMA
product, provided, however, that such credit enhancement results in the
eligible asset or pool being at least AMA investment grade, as defined
in Sec. 1268.1; and
(2) Meets the requirements of this section.
(b) Determination of necessary credit enhancement. (1) No later
than 30 calendar days after the purchase of the asset or after a pool
closes, the Bank shall determine the total credit enhancement necessary
to enhance the asset or pool to at least AMA investment grade and to be
consistent with the terms and conditions of a specific AMA product. The
enhancement shall be for the life of the asset or pool. The Bank shall
make this determination for each AMA product using a model and
methodology that the Bank deems appropriate, subject to paragraph (f)
of this section.
(2) A Bank shall document its basis for concluding that the
contractual credit enhancement required from each participating
financial institution with regard to a particular asset or pool will
equal or exceed the credit enhancement level specified in the terms and
conditions of the AMA product and determined in accordance with
paragraph (b)(1) of this section.
(c) Credit risk-sharing structure. Under any credit risk-sharing
structure, the credit enhancement provided by the participating
financial institution shall at all times meet the following
requirements:
(1) The participating financial institution that is providing the
credit enhancement required under this paragraph (c) shall in all
cases:
(i) Bear the direct economic consequences of actual credit losses
on the asset or pool:
(A) From the first dollar of loss up to the amount of expected
losses; or
(B) Immediately following expected losses, but in an amount equal
to or exceeding the amount of expected losses; and
(ii) Fully secure its direct credit enhancement obligation in
accordance with Sec. 1266.7; and
(2) The participating financial institution also may provide all or
a portion of the credit enhancement, with the approval of the Bank, by:
(i) Contracting with an insurance affiliate of that participating
financial institution to provide an enhancement, but only where such
insurance is positioned in the credit risk-sharing structure so as to
cover only losses remaining after the participating financial
institution has borne losses as required under paragraph (c)(1)(i) of
this section;
(ii) Purchasing loan-level insurance only where:
(A) The participating financial institution is legally obligated at
all times to maintain such insurance with a qualified insurer; and
(B) Such insurance is positioned in the credit enhancement
structure so as to cover only losses remaining after the
[[Page 91690]]
participating financial institution has borne losses as required under
paragraph (c)(1)(i) of this section;
(iii) Purchasing pool-level insurance only where:
(A) The participating financial institution is legally obligated at
all times to maintain such insurance with a qualified insurer;
(B) Such insurance insures that portion of the required credit
enhancement attributable to the geographic concentration and size of
the pool; and
(C) Such insurance is positioned last in the credit enhancement
structure so as to cover only those losses remaining after all other
elements of the credit enhancement structure have been exhausted;
(iv) Contracting with another participating financial institution
in the Bank's district to provide a credit enhancement consistent with
this section, in return for compensation; or
(v) Contracting with a participating financial institution in
another Bank's district, pursuant to an arrangement between the two
Banks, to provide a credit enhancement consistent with this section, in
return for compensation.
(d) Loans guaranteed or insured by a department or agency of the
U.S. government. Instead of the structure set forth in paragraph (c) of
this section, a participating financial institution also may provide
the required credit enhancement through loan-level insurance that is
issued by an agency or department of the U.S. government or is a
guarantee from an agency or department of the U.S. government, provided
that the government insurance or guarantee remains in place for as long
as the Bank owns the loan.
(e) Qualified insurers. (1) Within one year of January 18, 2017,
each Bank must develop, and subsequently maintain, written financial
and operational standards that an insurer must meet for the Bank to
approve it as a qualified insurer. A Bank shall review qualified
insurers at least once every two years to determine whether they still
meet the financial and operational standards set by the Bank. A Bank
may delegate responsibility for development of these standards and
approval of qualified insurers to another Bank or group of Banks
pursuant to Sec. 1268.8.
(2) Only qualified insurers may provide private loan insurance on
AMA eligible assets or the loan or pool insurance allowed as part of
the credit enhancement structure for AMA products under paragraphs
(c)(2)(ii) or (iii) of this section.
(f) Appropriate methodology for calculating credit enhancement. A
Bank shall use a model and methodology for estimating the amount of
credit enhancement for an asset or pool. A Bank shall provide to FHFA
upon request information about the model and methodology, including and
without limitation results of any model runs and the results of any
tests of the model performed by the Bank. FHFA reserves the right to
direct a Bank to make changes to its model and methodology, and a Bank
promptly shall institute any such FHFA-directed changes.
Sec. 1268.6 Servicing of AMA loans.
(a) Servicing of AMA loans may be performed by or transferred to
any institution, including an institution that is not a member of the
Bank System, provided that the loans, after such transfer, continue to
meet all requirements to qualify as AMA under Sec. Sec. 1268.3,
1268.4, and 1268.5.
(b) The transfer of mortgage servicing rights and responsibilities
must be approved by the Bank or Banks that own the loan or a
participation interest in the loan.
(c) A Bank shall have in place policies and procedures to ensure
that the transfer of mortgage servicing rights does not negatively
affect the credit enhancement on the loans in question or substantially
increase the Bank's exposure to the credit risk for the asset or pool.
Sec. 1268.7 Reporting requirements for acquired member assets.
Each Bank shall report information related to AMA in accordance
with the instructions provided in the Data Reporting Manual issued by
FHFA, as amended from time to time.
Sec. 1268.8 Administrative transactions and agreements between
Banks.
(a) Delegation of administrative duties. A Bank may delegate the
administration of an AMA program to another Bank whose administrative
office has been examined and approved by FHFA, or previously examined
and approved by the Federal Housing Finance Board, to process AMA
transactions. The existence of such a delegation, or the possibility
that such a delegation may be made, must be disclosed to any potential
participating financial institution as part of any AMA-related
agreements signed with that participating financial institution. A Bank
may contract with one or more parties, including without limitation
another Bank, to provide services related to the administration of its
own AMA program or the AMA program of another Bank for which it has
been delegated administrative responsibility, without the necessity for
further disclosure to the participating financial institutions.
(b) Termination of agreements. Any agreement made between two or
more Banks in connection with the administration of any AMA program may
be terminated by any party after a reasonable notice period.
(c) Delegation of pricing authority. A Bank that has delegated its
AMA pricing function to another Bank shall retain a right to refuse to
acquire AMA at prices it does not consider appropriate, pursuant to
contractual provisions among the parties.
Subchapter E--Housing Goals and Mission
PART 1281--FEDERAL HOME LOAN BANK HOUSING GOALS
0
7. The authority citation for part 1281 continues to read as follows:
Authority: 12 U.S.C. 1430c.
0
8. Amend Sec. 1281.1 by revising the definitions of ``Acquired Member
Assets (AMA) program'' and ``AMA-approved mortgage'' to read as
follows:
Sec. 1281.1 Definitions.
* * * * *
Acquired Member Assets (AMA) program means a program that
authorizes a Bank to hold assets acquired from or through Bank members
or housing associates by means of either a purchase or funding
transaction, subject to the requirements of parts 1268 and 1272 of this
chapter.
AMA-approved mortgage means a mortgage that meets the requirements
of an AMA program at part 1268 of this chapter, which program has been
approved to be implemented under part 1272 of this chapter.
* * * * *
Dated: December 9, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-30161 Filed 12-16-16; 8:45 am]
BILLING CODE 8070-01-P