Federal Home Loan Bank Membership for Non-Federally-Insured Credit Unions, 25716-25723 [2017-11207]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Rules and Regulations]
[Pages 25716-25723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11207]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1263

RIN 2590-AA85


Federal Home Loan Bank Membership for Non-Federally-Insured 
Credit Unions

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or Agency) is 
adopting a final rule revising its regulation governing Federal Home 
Loan Bank (Bank) membership to implement section 82001 of the Fixing 
America's Surface Transportation Act (FAST Act), which amended the 
Federal Home Loan Bank Act (Bank Act) to authorize certain credit 
unions without Federal share insurance to become Bank members.

[[Page 25717]]

The rule also makes appropriate conforming changes to FHFA's regulation 
on Bank membership. The final rule is substantially the same as the 
proposed rule, but includes one revision intended to streamline the 
application process for credit unions applying for Bank membership 
pursuant to the FAST Act provision.

DATES: Effective Date: July 5, 2017.

FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Associate General 
Counsel, Office of General Counsel, Eric.Raudenbush@fhfa.gov, (202) 
649-3084; or Julie A. Paller, Senior Financial Analyst, Division of 
Bank Regulation, Julie.Paller@fhfa.gov, (202) 649-3201 (not toll-free 
numbers), 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

    Under the Bank Act, federally insured depository institutions, 
including state- and federally chartered credit unions whose member 
accounts are insured by the National Credit Union Share Insurance Fund 
(NCUSIF), have been eligible for Bank membership since 1989. Until 
recently, however, state-chartered credit unions without Federal share 
insurance were ineligible for Bank membership, except to the limited 
extent that a credit union certified as a ``community development 
financial institution'' (CDFI) by the CDFI Fund of the United States 
Department of the Treasury could meet the eligibility requirements 
applicable to CDFIs.\1\
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    \1\ In 2008, Congress amended the Bank Act to authorize entities 
certified as CDFIs by the CFDI Fund of the United States Department 
of the Treasury to become Bank members, provided the CDFI meets the 
membership eligibility requirements established for such entities. 
See Housing and Economic Recovery Act of 2008, Public Law 110-289, 
section 1206, 122 Stat. 2787 (2008), codified at 12 U.S.C. 
1424(a)(1). By law, credit unions--including state-chartered credit 
unions without Federal share insurance--may be certified as CDFIs. 
See 12 U.S.C. 4701-4719; 12 CFR part 1805.
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    In December 2015, Congress amended the Bank Act to authorize the 
Banks to approve applications for membership from state-chartered 
credit unions without Federal share insurance (irrespective of their 
CDFI status) where specified requirements have been met.\2\ 
Specifically, new section 4(a)(5) of the Bank Act provides that a 
credit union lacking Federal share insurance that has applied to become 
a member of a Bank shall be treated as a federally insured depository 
institution for purposes of determining its eligibility for Bank 
membership, so long as the applicant's state credit union regulator has 
determined that it met all of the requirements for Federal share 
insurance as of the date of its application for membership.\3\ The new 
statutory provision also provides, however, that if the applicant's 
state regulator has not made a determination as to whether it met the 
requirements for Federal share insurance within six months of the date 
of its application for Bank membership, then the applicant shall be 
deemed to have met those requirements.\4\ Section 4(a)(5) also provides 
that, notwithstanding any State law to the contrary, the right of Banks 
to repayment of advances made to credit unions admitted to membership 
pursuant to that provision and Banks' interests in collateral securing 
such advances are to have protections and priorities similar to those 
that apply to advances made to, and collateral pledged by, members that 
are federally insured depository institutions.\5\
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    \2\ See Fixing America's Surface Transportation Act, Public Law 
114-94, section 82001(a), 129 Stat. 1795 (2015), codified at 12 
U.S.C. 1424(a)(5).
    \3\ See 12 U.S.C. 1424(a)(5)(A), (B)(i). Although the statutory 
text actually refers several times to ``Federal deposit insurance,'' 
FHFA construes those references to mean the Federal share insurance 
that is provided to credit unions by the NCUSIF, in light of the 
evident purpose for which Congress adopted the NFICU amendments.
    \4\ See 12 U.S.C. 1424(a)(5)(B)(ii).
    \5\ See 12 U.S.C. 1424(a)(5)(C), (D).
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B. The Proposed Rule

    On September 28, 2016, FHFA published in the Federal Register a 
Notice of Proposed Rulemaking (proposed rule) to amend FHFA's 
regulation on Bank membership, located at 12 CFR part 1263, to 
implement section 4(a)(5) of the Bank Act.\6\ The proposed rule, which 
referred to state-chartered credit unions falling within the scope of 
the new statutory provision as ``non-federally-insured credit unions'' 
(NFICUs), proposed to add a new regulatory section governing the Banks' 
acceptance and processing of membership applications from NFICUs, as 
well as the treatment of existing credit union Bank members that choose 
to become NFICUs by canceling their federal share insurance. As 
proposed, the rule would have codified the core concepts of a set of 
April 2016 guidance letters in which FHFA advised each Bank on the 
handling of NFICU membership applications under section 4(a)(5). The 
proposed rule also would have provided additional clarification on 
certain points. The details of the proposed rule are discussed in the 
section-by-section analysis of the final rule below.
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    \6\ See 81 FR 66545 (Sept. 28, 2016).
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    The 60-day comment period for the proposed rule ended on November 
28, 2016. FHFA received eight comment letters from seven separate 
commenters, which included one Bank, one provider of private credit 
union share insurance, and five credit union trade associations.\7\ Six 
of the commenters expressed general support for the proposed rule and 
none of the commenters expressed general opposition to the rule. Each 
commenter, however, requested one or more specific revisions to the 
regulatory text. FHFA carefully considered all of the comments and 
ultimately decided to adopt one of the suggested revisions. The 
comments on specific aspects of the proposed rule, and FHFA's 
responses, are discussed in the section-by-section analysis below.
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    \7\ The comment letters may be viewed at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=566.
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    Three commenters raised an issue regarding the treatment of NFICU 
members by the Banks that was not addressed in the proposed rule, which 
focused exclusively on membership requirements for NFICUs. Those 
commenters expressed concerns that Banks currently may be imposing on 
NFICUs advances collateral requirements that are more stringent than 
those for federally insured depository institution members--for 
example, by requiring that NFICU members deliver collateral to the Bank 
or by imposing higher discounts on collateral after an existing member 
terminates its federal insurance--and asked that the final rule 
prohibit such practices.
    FHFA declines to amend its regulations to address those practices, 
in part because the request goes beyond the scope of the proposed rule 
and thus cannot be addressed in the final rule. Moreover, while FHFA's 
collateral regulations implement statutory requirements and establish 
minimum standards necessary to ensure the safety and soundness of the 
Banks, those regulations otherwise permit each Bank to make its own 
decisions regarding the terms on which it will lend to its members, 
including the amounts and types of collateral it will accept from 
particular members, the discounts on such collateral, and whether a 
member must deliver collateral to the Bank. This long-standing 
regulatory approach recognizes that the Banks are in the best position 
to assess the credit risks posed by particular members or by particular 
types of members within their

[[Page 25718]]

respective districts. In recent years, as more insurance companies have 
become members and CDFIs have become eligible for membership, FHFA has 
issued guidance recognizing that Banks may establish different 
collateral requirements for non-federally insured entities to address 
the risks posed by the lack of a federal receivership process for such 
institutions.\8\
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    \8\ See FHFA AB 2013-09 (Dec. 23, 2013) (providing guidance on 
credit risk management practices to ensure Bank advances remain 
fully secured when lending to insurance company members), available 
online at https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/AB-2013-09-COLLATERALIZATION-OF-ADVANCES-AND-OTHER-CREDIT-PRODUCTS-TO-INSURANCE-COMPANY-MEMBERS.aspx; FHFA AB 
2013-10 (Dec. 23, 2013) (outlining the criteria that FHFA examiners 
use in determining whether a Bank's advances are, as required by 
regulation, ``fully secured'' pursuant to a written security 
agreement that gives the Bank a ``perfectible'' security interest), 
available online at https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/AB-2013-10-COLLATERALIZATION-OF-ADVANCES-AND-OTHER-CREDIT-PRODUCTS;-PERFECTION-AND-CONTROL-OF-
COLLATERAL.aspx.
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    Notwithstanding that section 4(a)(5) of the Bank Act provides that 
the Banks' security interests in NFICU collateral are to have some of 
the same protections and priorities that apply to interests in 
collateral pledged by federally insured depository institutions, a Bank 
might reasonably conclude that there remain additional risks inherent 
in lending to NFICUs, arising principally from the fact that the Banks 
have had no experience with the liquidation of a non-federally insured 
credit union. While the laws governing liquidation of federally insured 
credit unions are well known to the Banks and are uniform across the 
country, the Banks are less familiar with the laws governing the 
insolvency and liquidation of NFICUs, which will vary from state to 
state. Although the Banks have significant numbers of state-chartered 
credit union members, any that have failed to date would have been 
federally insured and, therefore, would have been liquidated by the 
National Credit Union Association (NCUA). If a Bank concludes that the 
characteristics of NFICUs give rise to incrementally greater risk that 
it should address through more stringent collateral requirements, then 
FHFA would not prevent it from imposing those requirements.

II. The Final Rule

    An analysis of the primary revisions made by the final rule to 
FHFA's membership regulation appears below, followed by a discussion of 
the conforming revisions. Except as discussed below with respect to the 
timing of communications between an NFICU and its state credit union 
regulator during the membership application process, this final rule 
adopts without substantive change all of the regulatory additions and 
revisions set forth in the proposed rule. As described in more detail 
below, the final rule also makes a number of conforming revisions to 
other sections of the membership regulation, each of which appeared in 
identical form in the proposed rule.

A. Primary Revisions

    The principal regulatory provisions regarding NFICUs include a new 
Sec.  1263.19, setting forth the prerequisites that must be met in 
order for an NFICU to be treated as an insured depository institution 
for Bank membership purposes, as well as two substantive definitions 
located in Sec.  1263.1.
1. Definitions of NFICU and Insured Depository Institution--Sec.  
1263.1
    The final rule adds to Sec.  1263.1 a definition of ``non-
federally-insured credit union,'' defining the term to mean a ``State-
chartered credit union that does not have Federal share insurance and 
that has not been certified as a CDFI by the CDFI Fund.'' In 
conjunction with this, the rule also revises the definition of 
``insured depository institution'' to include, in addition to federally 
insured depository institutions, NFICUs meeting the prerequisites of 
Sec.  1263.19. As an ``insured depository institution'' under the 
revised regulation, a qualifying NFICU applying for Bank membership is 
subject to all of the eligibility requirements and other provisions of 
the membership regulation that apply to insured depository institutions 
generally, except where otherwise provided. Thus, a qualifying NFICU 
applicant is eligible for membership only if: It is duly organized 
under Federal or state law; it is subject to inspection and regulation 
under Federal or state banking laws, or similar laws; it makes long-
term home mortgage loans; its financial condition is such that advances 
may be safely made to it (hereinafter the ``financial condition'' 
requirement); its management and its home financing policy are both 
consistent with sound and economical home financing; and it has at 
least 10 percent of its assets in ``residential mortgage loans.'' \9\ 
With the exception of the financial condition requirement, an NFICU 
applicant must demonstrate compliance with each of those membership 
eligibility requirements in the same manner that is required of insured 
depository institutions generally. As discussed below, the final rule 
requires an NFICU applicant to demonstrate compliance with the 
financial condition requirement in the same manner as a CDFI credit 
union.
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    \9\ See 12 CFR 1263.6(a), (b). The Bank Act exempts certain 
smaller depository institutions--``community financial 
institutions'' (CFIs)--from the ``10 percent'' requirement, but 
defines CFI to include only institutions the deposits of which are 
insured under the Federal Deposit Insurance Act (FDIA) that have 
total assets below a certain threshold amount. See 12 U.S.C. 
1422(10)(A)(i), 1424(a)(4). Because a credit union cannot obtain 
deposit insurance under the FDIA, it cannot qualify as a CFI 
regardless of its level of total assets.
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2. Prerequisites for an NFICU to be Treated as an Insured Depository 
Institution--Sec.  1263.19
    As proposed, the final rule adds to the membership regulation a new 
Sec.  1263.19 (a reserved section under the existing regulation), which 
sets forth the prerequisites that an NFICU must meet in order to be 
treated as an insured depository institution for purposes of 
determining its eligibility for Bank membership. Paragraph (a) of new 
Sec.  1263.19 addresses the treatment of NFICUs that apply for Bank 
membership, while paragraph (b) addresses the status of any credit 
union that is already a Bank member at the time it opts to become an 
NFICU by canceling its Federal share insurance.
a. Treatment of an NFICU Applying for Bank Membership--Sec.  1263.19(a)
    In parallel with the inclusion of qualifying NFICUs within the 
regulatory definition of ``insured depository institution,'' new Sec.  
1263.19(a) provides that an NFICU applicant shall be treated as an 
insured depository institution for purposes of determining its 
eligibility for membership, provided that it complies with all of the 
requirements of Sec.  1263.19(a)(1) through (3).
    As proposed, these provisions would have required that a Bank first 
obtain from an NFICU applicant all of the information that the Bank 
generally requires to process membership applications from federally 
insured depository institutions, including all of the information 
needed to demonstrate compliance with the general eligibility 
requirements for Bank membership. Once in receipt of all of those 
materials, the Bank would have been required to notify the NFICU that 
its application is ``provisionally complete'' and that, before the Bank 
may act on the application, the NFICU must: (1) Request from its state 
regulator a determination that the institution met all eligibility 
requirements for Federal share insurance, as of the date of the 
request; and (2) subsequently, provide

[[Page 25719]]

to the Bank acceptable documentation of the regulator's response or 
lack of response to its request. The proposed rule would also have 
expressly required the NFICU applicant to submit such a request, in 
writing, to its state regulator and simultaneously provide a copy of 
the request to the Bank. The rule would have permitted a Bank to deem 
an NFICU's application fully complete, and to act on the application as 
provided in Sec.  1263.3(c),\10\ after having received from the 
applicant any one of the following items: (1) A written statement from 
the state regulator confirming that the NFICU satisfied all of the 
eligibility requirements for Federal share insurance as of the date of 
the request; (2) a written statement from the state regulator that it 
is unable or unwilling to make a determination as to the NFICU's 
eligibility for Federal share insurance; or (3) a written statement 
from the NFICU certifying that it did not receive a response from its 
state regulator within the six-month waiting period provided for in the 
statute.
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    \10\ Existing Sec.  1263.3(c) requires that a Bank notify an 
applicant when it deems the application to be complete and (with 
certain exceptions) either approve or deny the application within 60 
calendar days of the date it made that determination. See 12 CFR 
1263.3(c).
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    FHFA received comments on both the required timing of an NFICU's 
request for a determination from its state regulator and the type of 
documentation of that determination a Bank must receive to deem an 
NFICU's application complete under proposed Sec.  1263.19(a). On the 
timing issue, several commenters requested that the final rule permit 
an NFICU applicant to request the determination from its state 
regulator at any time after initiating the membership application 
process, instead of waiting until the Bank has deemed the application 
provisionally complete, as would have been required under the proposed 
rule. Those commenters expressed a belief that most NFICUs would be 
inclined to request the determination early in the application process 
to enable the Bank to make a decision on the membership application at 
the earliest possible time.
    With regard to timing requirements for the NFICU application 
process, the Bank Act uses the undefined term ``date of the 
application'' in establishing both the point in time as of which the 
state regulator must determine the NFICU's eligibility for Federal 
share insurance and the starting point of the six-month period during 
which the Bank and NFICU must await action by the state regulator. 
Specifically, section 4(a)(5) requires a Bank to treat an NFICU 
applicant as a federally insured depository institution if the NFICU's 
state credit union regulator either: (1) Has determined that the NFICU 
met all the eligibility requirements for Federal share insurance ``as 
of the date of the application for membership''; or (2) has failed to 
make a determination ``by the end of the 6-month period beginning on 
the date of the application.'' In its April 2016 guidance letters to 
the Banks, FHFA construed the statutory term ``date of the 
application'' to be the date as of which the NFICU had submitted a 
``provisionally complete'' application--that is, an application 
including all information and supporting materials required for the 
Bank to act on it, except for the documentation regarding the state 
regulator's determination. Although the proposed rule did not use the 
term ``date of the application,'' the proposed requirement that an 
NFICU wait until after the Bank has deemed its application 
provisionally complete to submit the request to its state regulator is 
based on the construction of that term adopted in the guidance letters.
    The proposed rule would have required the state regulator's 
eligibility determination to have been made as of the date of the 
NFICU's request and would have measured the six-month waiting period 
from the date of the request. Section 4(a)(5) of the Bank Act does not 
expressly require that either a Bank or an NFICU applicant request a 
determination from the NFICU's state regulator. But, in that the 
statute allows a state regulator six months within which to make a 
determination if it wishes to do so, it is most reasonably read as 
presuming that the regulator has in the first instance been asked to 
make a determination. The proposed rule's use of the date of the 
NFICU's request for a determination, instead of the date the Bank 
notified the NFICU that its application is provisionally complete, to 
set both the date as of which the regulator's determination should be 
made and the starting date of the six-month waiting period reflected 
this reading of the statute.
    Given the ambiguity of the statute on the issue, FHFA may 
reasonably construe the ``date of the application'' to be a point in 
the application process that is earlier than the date on which the Bank 
deems an NFICU's application to be provisionally complete, as requested 
by some commenters. FHFA had two principal reasons for proposing to 
require that an NFICU submit a provisionally complete application prior 
to officially requesting a determination from its state regulator. The 
first was to provide some reasonable assurance that an NFICU applicant 
actually was committed to completing the application process prior to 
requiring it to submit a request to its state regulator. The second was 
that the concept of a ``complete'' membership application and the 
requirement that a Bank notify an applicant after deeming its 
application complete are already well established under the existing 
membership regulation.\11\
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    \11\ See 12 CFR 1263.3(c).
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    FHFA is persuaded, however, that allowing an NFICU to request a 
determination at an earlier stage in the membership application process 
would result in a more efficient process than would the approach of the 
proposed rule. Accordingly, FHFA has revised the final rule to permit 
an NFICU applicant to submit its official request for a determination 
to its state regulator at any time after it has submitted its 
application to the Bank to initiate the membership application process. 
As under the proposed rule, the six-month waiting period will start on, 
and the state regulator must make the Federal share insurance 
eligibility determination as of, the date that the applicant submits 
the request to its state regulator. Specifically, Sec.  1263.19(a)(1) 
of the final rule requires that, after an NFICU initiates the 
membership application process, the Bank promptly notify the applicant 
in writing that its application will not be deemed complete or be acted 
upon by the Bank until the applicant has, in addition to satisfying all 
other application requirements, requested a determination from its 
state regulator as required under paragraph (a)(2) and subsequently 
provided one of the types of acceptable documentation listed in 
paragraph (a)(3). Section 1263.19(a)(2) and (3) of the final rule are 
substantively unchanged from the proposed provisions.
    As does the final provision, proposed Sec.  1263.19(a)(3) would 
have required a Bank to deem an NFICU's application complete after 
having received any one of three types of documentation regarding the 
response or lack of response of the applicant's state regulator to its 
request for a Federal share insurance eligibility determination. As 
noted above, one of those types of documentation is a written statement 
from the regulator to the NFICU applicant that the regulator is unable 
or unwilling to make such a determination. One commenter requested that 
the final rule also include a fourth option under which a Bank could 
deem an application fully complete if the applicant's state regulator 
had previously provided direct written notification to the Bank that it

[[Page 25720]]

would not make federal share insurance eligibility determinations for 
any of its NFICU regulatees. In advocating the suggested revision, the 
commenter reasoned that permitting a Bank to accept such a statement of 
general policy from a state regulator would relieve the regulator of 
``unnecessary administrative burdens'' because the regulator then would 
not be required to address each individual NFICU request with the same 
response. The commenter also asserted that including such an option 
would streamline the application process for both the Bank and the 
NFICU in that, once the applicant had made the required request to its 
state regulator, the Bank could rely on the prior direct communication 
from the regulator to conclude that no individual response would be 
forthcoming and could act upon the application immediately.
    For three principal reasons, FHFA has decided not to provide for 
the recommended option in the final rule. First, doing so would further 
complicate what is already somewhat complicated regulatory text.\12\ 
Second, reliance on statements of general policy received directly from 
a state regulator leaves open the possibility that the regulator's 
policy regarding these Federal share insurance eligibility 
determinations may change over time (such as when a successor regulator 
assumes office) without the knowledge of the Bank. Third, reliance on 
such general statements would foreclose the possibility that a state 
regulator, despite having a general policy against making such 
determinations, could in appropriate circumstances choose to convey to 
a Bank information about a particular institution that is relevant to 
its eligibility for Federal share insurance or its eligibility for Bank 
membership. While FHFA could include caveats in the final rule to 
address each of those drawbacks, any benefits to doing so are apt to be 
modest and would result in further complicating the regulatory text. 
Retaining the language of the proposed rule will also ensure that, in 
each case, the state regulator is aware that its regulatee is applying 
for Bank membership and that it has an opportunity to make a 
determination if it wishes to do so.
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    \12\ Because FHFA received no information from any state 
regulators on this issue, it is possible, and perhaps likely, that 
some regulators will decline to provide such blanket statements to 
the Banks, rather than responding to the requests of their own 
regulated institutions. For that reason, the final rule would still 
have to include the proposed provisions requiring each NFICU to 
request such a determination and further requiring each Bank to 
await receipt of one of the three acceptable types of documentation 
before proceeding.
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    In addition, FHFA does not believe that adopting this 
recommendation would reduce the burden on the state regulators to any 
meaningful degree. The only burden that the proposed rule would have 
imposed on the state regulator in this respect is to provide individual 
responses to requests received from its credit unions, which could be 
easily accomplished by means of a form letter.
b. Treatment of a Credit Union That Becomes an NFICU When Already a 
Member--Sec.  1263.19(b)
    Mirroring the proposed rule, final Sec.  1263.19(b) makes clear 
that an existing credit union Bank member that cancels its Federal 
share insurance may remain a member of its Bank as an NFICU without 
requesting a Federal share insurance eligibility determination from its 
state regulator, provided the Bank determines that the member has 
canceled its Federal share insurance voluntarily. A Bank could make 
this determination by obtaining a copy of the NCUA's approval of the 
credit union's request to terminate its Federal insurance.\13\ After 
becoming an NFICU, the credit union would remain subject to all 
regulatory provisions that apply to Bank members that are insured 
depository institutions.
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    \13\ A state-chartered credit union may terminate its Federal 
share insurance or convert to a non-federal form of insurance only 
with the prior written approval of the NCUA. See 12 CFR 708b.201(d), 
(e), 708b.203(d).
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    Two commenters took issue with the use of the word ``cancel'' in 
proposed Sec.  1263.19(b), as well as with the use of the word 
``terminate'' in the proposed rule preamble, in describing the process 
a federally insured credit union would undertake in becoming an NFICU. 
Those commenters requested that the final rule instead describe the 
process as ``converting'' from Federal share insurance to private share 
insurance.
    As the commenters noted, under the regulations of the NCUA, the 
word ``convert'' refers to ``the act of canceling federal insurance and 
simultaneously obtaining insurance from another insurance carrier,'' 
while the word ``terminate'' refers to ``the act of canceling federal 
insurance and mean[s] that the credit union will become uninsured.'' 
\14\ In advocating for the use of the word ``convert'' in referring to 
existing Bank members that become NFICUs, the commenters asserted that 
any existing member that cancels its Federal share insurance will 
simultaneously obtain private share insurance, rather than simply 
becoming uninsured. As a practical matter, that is likely to be true 
given that there appears to be no state that allows its credit unions 
to operate without either federal or private share insurance.\15\
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    \14\ See 12 CFR 708b.2.
    \15\ The laws of some states allow for use of a state insurance 
fund by their state-chartered credit unions, but there are no longer 
any such state funds that provide primary share insurance.
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    As a legal matter, however, section 4(a)(5) of the Bank Act does 
not require a credit union to have private share insurance to become a 
Bank member through the NFICU process. The statutory provision refers 
to ``credit union[s] which lack[ ] Federal deposit insurance'' and does 
not require coverage by private, or other non-federal, share insurance 
as a prerequisite to qualifying for treatment as a federally insured 
depository institution for Bank membership purposes.\16\ In recognition 
of this fact, the final rule defines ``non-federally-insured credit 
union'' in terms of ``a State-chartered credit union that does not have 
Federal share insurance'' and does not otherwise require an NFICU to be 
covered by any type of non-federal share insurance in order to be 
treated as a federally insured depository institution.\17\
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    \16\ Although the provision is entitled ``Certain Privately 
Insured Credit Unions,'' the statutory text contains no reference to 
privately insured credit unions and does not include coverage by 
private, or other non-federal, share insurance among the 
prerequisites that must be met.
    \17\ The use of the term ``non-federally-insured credit union'' 
in FHFA's rule differs from its use in the NCUA's regulations. 
FHFA's rule defines the term to mean a credit union without Federal 
share insurance, while NCUA regulations define the term to mean a 
credit union covered by a non-federal form of share insurance. See 
12 CFR 708b.2.
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    If FHFA were to accept the commenters' suggestion and revise the 
rule to refer to members that have ``converted,'' the rule would then 
appear to impose upon existing members a private share insurance 
requirement that is not imposed by the statute. As indicated in the 
definitions quoted above, the NCUA's regulations use the undefined word 
``cancel'' to refer generically to the relinquishing of federal share 
insurance coverage without connoting either the existence or lack of an 
alternative form of share insurance. Accordingly, the final rule 
continues to describe members that become NFICUs as those that 
voluntarily ``cancel'' their federal share insurance.

B. Conforming Amendments

    In addition to the primary revisions, the final rule makes a number 
of conforming revisions to part 1263.

[[Page 25721]]

1. Definitions--Sec.  1263.1
    In addition to the substantive amendments to Sec.  1263.1 that are 
discussed above, the final rule makes several amendments to that 
section that are intended merely to provide greater clarity, without 
effecting any substantive change. The final rule adds a definition for 
the term ``Federal share insurance'' that is identical to the 
definition appearing in the proposed rule and adopts verbatim the 
proposed revisions to the definitions of ``CDFI credit union,'' 
``community development financial institution or CDFI,'' and 
``regulatory financial report.''
2. Membership Application Requirements--Sec.  1263.2
    The final rule adopts without change the two revisions to Sec.  
1263.2 of the existing regulation that appeared in the proposed rule. 
The final rule revises Sec.  1263.2(b), which requires a Bank to 
prepare a written membership application digest for each applicant, to 
expressly require a Bank to include in the application digest for each 
NFICU applicant a summary of the manner in which the applicant has 
complied with the requirements of Sec.  1263.19(a). The final rule also 
revises Sec.  1263.2(c), which requires a Bank to maintain a membership 
file for each applicant, to make clear that a Bank should include in 
the file for an NFICU applicant any documents required under Sec.  
1263.19.
3. Compliance With the Financial Condition Requirement--Sec.  1263.11
    Existing Sec.  1263.11 governs the manner in which Banks are to 
determine whether depository institution applicants, including insured 
depository institutions and CDFI credit unions, are in compliance with 
the statutory ``financial condition'' eligibility requirement. As 
proposed, the final rule revises Sec.  1263.11 to require a Bank to 
assess an NFICU applicant's compliance with the ``financial condition'' 
membership eligibility requirement in the same manner as is required 
for CDFI credit unions.
    The existing provision allows a Bank to deem a depository 
institution applicant in compliance with the financial condition 
requirement if: (1) The applicant has received a composite examination 
rating within the past two years; (2) it meets its regulatory capital 
requirements; and (3) its most recent composite examination rating was 
``1,'' or the most recent rating was ``2'' or ``3'' and the applicant 
satisfies certain ``performance trend criteria'' pertaining to its 
earnings, nonperforming assets, and allowance for loan and lease 
losses.\18\ Although the regulation generally exempts federally insured 
depository institutions with a ``1'' exam rating from compliance with 
the performance trend criteria, FHFA did not extend that exemption to 
``1'' rated CDFI credit unions (which, like NFICUs, are state-chartered 
credit unions without federal share insurance) in 2010, when it amended 
the regulation to accommodate CDFIs as members.
---------------------------------------------------------------------------

    \18\ 12 CFR 1261.11(b)(3).
---------------------------------------------------------------------------

    As the final rule does, the proposed rule would have revised Sec.  
1263.11 to treat NFICUs in the same way as CDFI credit unions by 
requiring all NFICU applicants, including those that had received a 
composite examination rating of ``1'' from their state regulators, also 
to satisfy the performance trend criteria. The rationale behind this 
approach is that both CDFI credit unions and NFICUs are state-chartered 
credit unions without federal share insurance, which warrants treating 
them in the same way for purposes of assessing their financial 
condition. Six commenters requested that the final rule treat NFICU 
applicants in the same manner as federally insured credit unions by 
exempting NFICUs with an examination rating of ``1'' from complying 
with the performance trend criteria. FHFA has declined to make that 
change.
    When FHFA amended the membership regulation to accommodate CDFIs as 
members, it described its decision to require even ``1'' rated CDFI 
credit unions to satisfy the performance trend criteria as a prudential 
measure.\19\ The Agency noted that, because such institutions are not 
subject to oversight by the NCUA and because they had not previously 
been eligible for membership, the Banks were likely to be less familiar 
with the state examination processes and ratings systems to which they 
are subject than with those that apply to federally insured depository 
institutions. To the best of the Agency's knowledge, no CDFI credit 
union has been admitted to Bank membership to date.\20\ Accordingly, 
the prudential concerns arising from the Banks' relative lack of 
familiarity with the regulatory regimes that apply to credit unions 
that are supervised only at the state level and that would be 
liquidated by a private insurance company continue to exist and 
logically should apply with equal validity to both CDFI credit unions 
and NFICUs.
---------------------------------------------------------------------------

    \19\ See 75 FR 678, 684-85 (Jan. 5, 2010)
    \20\ The Bank membership regulation effectively treats federally 
insured credit unions certified as CDFIs as insured depository 
institutions for Bank membership purposes, while subjecting a ``CDFI 
credit union'' (defined to refer only to a CDFI that is a state-
chartered credit union without Federal share insurance) to the same 
standards that apply to non-depository CDFIs, with the exception of 
those that must be met in order for an applicant to be deemed in 
compliance with the financial condition eligibility requirement.
---------------------------------------------------------------------------

    Given the Banks' scant experience with state-chartered credit 
unions that do not have federal share insurance, it remains prudent to 
require all such applicants--that is, both CDFI credit unions and 
NFICUs--to meet the performance trend criteria as part of satisfying 
the ``financial condition'' eligibility requirement. Moreover, 
assessing compliance with the performance trend criteria is a 
relatively straightforward exercise, requiring only that a Bank confirm 
that an applicant has positive net income and that its nonperforming 
assets and its allowance for loan and lease losses meet certain 
specified ratios. As the Banks gain more experience with admitting 
these types of members, FHFA could reconsider this requirement.
4. Reports and Examinations--Sec.  1263.31
    Existing Sec.  1263.31 sets forth a number of stipulations to which 
each Bank member is deemed to have agreed as a condition precedent to 
becoming a Bank member. The final rule adopts without change the 
revisions to paragraphs (b) and (e) of that section that appeared in 
the proposed rule. Existing Sec.  1263.31(b) deems each Bank member to 
have agreed that the appropriate local, state, or Federal agencies or 
institutions may furnish the member's reports of examination to the 
Bank or to FHFA upon request. The final rule revises that provision to 
stipulate that each member that is an NFICU or a CDFI credit union is 
also deemed to have agreed that a private entity providing the member 
with share insurance may furnish such reports. Existing Sec.  
1263.31(e) deems each Bank member to have agreed to provide the Bank, 
within 20 days of filing, with copies of reports of condition and 
operations filed with its appropriate Federal banking agency. The final 
rule revises that provision to stipulate that each member is also 
deemed to have agreed to furnish copies of any reports of condition and 
operations it may be required to file with its appropriate state 
regulator and that each NFICU or CDFI credit union member is deemed to 
have agreed to provide copies of any such reports required to be filed 
with a private entity providing it with share insurance.

III. Consideration of Differences Between the Banks and the Enterprises

    Section 1313(f) of the Safety and Soundness Act requires the 
Director of FHFA, when promulgating regulations

[[Page 25722]]

relating to the Banks, to consider the differences between the Banks 
and the Enterprises (Fannie Mae and Freddie Mac) as they relate to: The 
Banks' cooperative ownership structure; the mission of providing 
liquidity to members; the affordable housing and community development 
mission; their capital structure; and their joint and several liability 
on consolidated obligations.\21\ The Director also may consider any 
other differences that are deemed appropriate. In preparing this final 
rule, the Director considered the differences between the Banks and the 
Enterprises as they relate to the above factors, and determined that 
the rule is appropriate.
---------------------------------------------------------------------------

    \21\ 12 U.S.C. 4513(f).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) requires that FHFA 
consider the impact of paperwork and other information collection 
burdens imposed on the public.\22\ Under the PRA and the implementing 
regulations of the Office of Management and Budget (OMB), an agency may 
not collect or sponsor the collection of information, nor may it impose 
an information collection requirement unless it displays a currently 
valid control number assigned by OMB.\23\ FHFA's regulation ``Members 
of the Federal Home Loan Banks,'' located at 12 CFR part 1263, contains 
several collections of information that OMB has approved under control 
number 2590-0003, which expires on March 31, 2020. The final rule does 
not make any revisions that affect the burden estimates for those 
collections of information. Therefore, FHFA has not submitted any 
materials to OMB for review.
---------------------------------------------------------------------------

    \22\ See 44 U.S.C. 3507(a) and (d).
    \23\ See 44 U.S.C. 3512(a); 5 CFR 1320.8(b)(3)(vi).
---------------------------------------------------------------------------

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act \24\ (RFA) 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. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities.\25\ FHFA has considered the impact of the final rule under 
the RFA. The General Counsel of FHFA certifies that the final rule is 
not likely to have a significant economic impact on a substantial 
number of small entities because the regulation applies only to the 
Banks, which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \24\ 5 U.S.C. 601, et seq.
    \25\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 1263

    Federal home loan banks, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, and under 
the authority of 12 U.S.C. 4511, 4513, and 4526, FHFA amends part 1263 
of subchapter D of chapter XII of title 12 of the Code of Federal 
Regulations as follows:

PART 1263--MEMBERS OF THE BANKS

0
1. The authority citation for part 1263 continues to read as follows:

    Authority: 12 U.S.C. 1422, 1423, 1424, 1426, 1430, 1442, 4511, 
4513.


0
2. Amend Sec.  1263.1 as follows:
0
a. Revise the definitions of ``CDFI credit union'' and ``Community 
development financial institution or CDFI'';
0
b. Add, in alphabetical order, a definition for ``Federal share 
insurance'';
0
c. Revise the definition of ``Insured depository institution'';
0
d. Add, in alphabetical order, a definition for ``Non-federally-insured 
credit union''; and
0
e. Revise the definition of ``Regulatory financial report''.
    The revisions and additions read as follows:


Sec.  1263.1  Definitions.

* * * * *
    CDFI credit union means a State-chartered credit union that does 
not have Federal share insurance and that has been certified as a CDFI 
by the CDFI Fund.
* * * * *
    Community development financial institution or CDFI means an 
institution that is certified as a community development financial 
institution by the CDFI Fund under the Community Development Banking 
and Financial Institutions Act of 1994 (12 U.S.C. 4701 et seq.), other 
than a bank or savings association insured under the Federal Deposit 
Insurance Act (12 U.S.C. 1811 et seq.), a holding company for such a 
bank or savings association, or a credit union that has Federal share 
insurance.
* * * * *
    Federal share insurance means insurance coverage of credit union 
member accounts provided by the National Credit Union Share Insurance 
Fund under subchapter II of the Federal Credit Union Act (12 U.S.C. 
1781 et seq.).
* * * * *
    Insured depository institution means:
    (1) An insured depository institution as defined in section 2(9) of 
the Bank Act, as amended (12 U.S.C. 1422(9)); and
    (2) To the extent provided under Sec.  1263.19, a non-federally-
insured credit union.
* * * * *
    Non-federally-insured credit union means a State-chartered credit 
union that does not have Federal share insurance and that has not been 
certified as a CDFI by the CDFI Fund.
* * * * *
    Regulatory financial report means a financial report that an 
institution is required to file with its appropriate regulator on a 
specific periodic basis, including the quarterly call report for 
commercial banks and savings associations, quarterly or semi-annual 
call report for credit unions, NAIC's annual or quarterly statement for 
insurance companies, or other similar report, including such report 
maintained by the appropriate regulator in an electronic database.
* * * * *


Sec.  1263.2  [Amended]

0
3. Amend Sec.  1263.2:
0
a. By removing ``to 1263.18'' wherever it appears and, in its place, 
adding ``through 1263.19''; and
0
b. In paragraph (b), by adding at the end of the paragraph the sentence 
``In preparing a digest for a non-federally-insured credit union 
applicant, the Bank shall summarize the manner in which the applicant 
has complied with the requirements of Sec.  1263.19(a).''


Sec.  1263.3  [Amended]

0
4. Amend Sec.  1263.3, in paragraph (c), by removing from the second 
sentence the words ``a Bank'' and adding in their place the words ``the 
Bank''.


Sec.  1263.11  [Amended]

0
5. Amend Sec.  1263.11, in paragraph (b)(3)(iii), by removing the words 
``A CDFI credit union applicant'' and adding in their place the words 
``An applicant that is a CDFI credit union or a non-federally-insured 
credit union''.


Sec.  1263.19  [Transferred to Subpart C]

0
6. Transfer reserved Sec.  1263.19 to subpart C.

[[Page 25723]]

Subpart C--Eligibility Requirements

0
7. Add Sec.  1263.19 to read as follows:


Sec.  1263.19  Non-federally-insured credit unions.

    (a) Applicants. Except where otherwise provided, a non-federally-
insured credit union applying to become a member of a Bank shall be 
treated as an insured depository institution for purposes of 
determining its eligibility for membership under this part, provided 
that all of the following requirements have been met:
    (1) Notice. Upon receiving from a non-federally-insured credit 
union an application for membership, a Bank shall promptly notify the 
applicant in writing that its application will not be deemed complete 
or be acted upon by the Bank until the applicant has, in addition to 
satisfying all other generally applicable requirements, complied with 
paragraph (a)(2) of this section and subsequently provided one of the 
items listed in paragraph (a)(3) of this section.
    (2) Request to regulator. After receiving the notice required under 
paragraph (a)(1) of this section, a non-federally-insured credit union 
applicant shall send to its appropriate State regulator a written 
request for a determination that the applicant met all of the 
eligibility requirements for Federal share insurance as of the date of 
the request. The applicant shall provide to the Bank a copy of that 
request simultaneously with its transmittal to the regulator.
    (3) Completion of application. A Bank may deem the application of a 
non-federally-insured credit union to be complete and may act upon the 
application, as provided under Sec.  1263.3(c), only if it has received 
from the applicant one of the following items:
    (i) A written statement from the applicant's appropriate State 
regulator that the applicant met all of the eligibility requirements 
for Federal share insurance as of the date of the request sent pursuant 
to paragraph (a)(2) of this section;
    (ii) A written statement from the applicant's appropriate State 
regulator that it cannot or will not make a determination regarding the 
applicant's eligibility for Federal share insurance; or
    (iii) A written statement from the applicant, prepared no earlier 
than the end of the six-month period beginning on the date of the 
request sent pursuant to paragraph (a)(2) of this section, certifying 
that the applicant did not receive from its appropriate State regulator 
within that six-month period either a response as described in 
paragraph (a)(3)(i) or (ii) of this section or a response stating that 
the applicant did not meet all of the eligibility requirements for 
Federal share insurance as of the date of the request sent pursuant to 
paragraph (a)(2) of this section.
    (b) Members canceling Federal share insurance. A Bank member that 
is a federally insured credit union and that subsequently cancels its 
Federal share insurance may remain a member of the Bank, subject to all 
regulatory provisions applicable to insured depository institution 
members, provided that the Bank has determined that the institution has 
canceled its Federal share insurance voluntarily.

0
8. Amend Sec.  1263.31 by revising paragraphs (b) and (e) to read as 
follows:


Sec.  1263.31  Reports and examinations.

* * * * *
    (b) Agrees that reports of examination by local, State, or Federal 
agencies or institutions, or by any private entity providing share 
insurance to a member that is a non-federally-insured credit union or a 
CDFI credit union, may be furnished by such authorities or entities to 
the Bank or FHFA upon request;
* * * * *
    (e) To the extent applicable, agrees to provide to the Bank, within 
20 days of filing, copies of reports of condition and operations 
required to be filed with:
    (1) The member's appropriate Federal banking agency;
    (2) The member's appropriate State regulator; or
    (3) Any private entity providing share insurance to a member that 
is a non-federally-insured credit union or a CDFI credit union.

    Dated: May 24, 2017.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2017-11207 Filed 6-2-17; 8:45 am]
 BILLING CODE 8070-01-P