Prudential Management and Operations Standards, 28433-28440 [2023-09320]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 88, Number 86 (Thursday, May 4, 2023)]
[Proposed Rules]
[Pages 28433-28440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09320]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 88 , No. 86 / Thursday, May 4, 2023 / 
Proposed Rules

[[Page 28433]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1236

RIN 2590-AB10


Prudential Management and Operations Standards

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to 
amend its prudential management and operations standards Rule (rule) to 
clarify that FHFA may establish prudential management and operations 
standards (Standards) as regulations as well as guidelines. The 
proposed amendments to the rule would also revise definitions and make 
other conforming changes. FHFA is not proposing to establish new 
Standards or to revise Standards already established. However, FHFA is 
proposing that the rule and some of the existing Standards in the 
appendix to the rule be made applicable to the Office of Finance of the 
Federal Home Loan Bank System (OF).

DATES: Comments must be received by July 3, 2023.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AB10, by any one 
of the following methods:
     Agency Website: www.fhfa.gov/open-for-comment-or-input.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at [email protected] to ensure timely receipt by FHFA. 
Include the following information in the subject line of your 
submission: Comments/RIN 2590-AB10.
     Hand Delivered/Courier: The hand delivery address is: 
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB10, 
Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW, 
Washington, DC 20219. Deliver the package at the Seventh Street 
entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 
p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Clinton Jones, 
General Counsel, Attention: Comments/RIN 2590-AB10, Federal Housing 
Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC 
20219. Please note that all mail sent to FHFA via U.S. Mail is routed 
through a national irradiation facility, a process that may delay 
delivery by approximately two weeks. For any time-sensitive 
correspondence, please plan accordingly.

FOR FURTHER INFORMATION CONTACT: Clinton Jones, General Counsel, (202) 
649-3006, [email protected]; or Francisco Medina, Assistant 
General Counsel, (202) 649-3076, [email protected]. These are 
not toll-free numbers. The mailing address is: Federal Housing Finance 
Agency, 400 Seventh Street SW, Washington, DC 20219. For TTY/TRS users 
with hearing and speech disabilities, dial 711 and ask to be connected 
to any of the contact numbers above.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comments on all aspects of the proposed rule and will 
consider all comments before issuing a final rule. Copies of all 
comments will be posted without change and will include any personal 
information provided, such as the commenter's name, address, email 
address, and telephone number, on the FHFA website at https://www.fhfa.gov. In addition, copies of all comments received will be 
available for examination by the public through the electronic 
rulemaking docket for this proposed rule, also located on the FHFA 
website.

II. Background

    The Federal Housing Enterprises Financial Safety and Soundness Act 
(the Safety and Soundness Act) requires the Director of FHFA to 
establish Standards that address ten subjects relating to the 
management and operation of the regulated entities, authorizes the 
Director to establish other Standards in addition to those on the ten 
listed subjects, and authorizes the Director to establish Standards by 
regulation or guideline.\1\ FHFA currently implements this statutory 
requirement, which is codified at 12 U.S.C. 4513b (section 4513b), 
through Standards that it has established as guidelines set forth in an 
appendix to FHFA's current rule, which is codified at 12 CFR part 1236.
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    \1\ 12 U.S.C. 4513b(a).
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    Section 4513b requires a regulated entity that fails to meet a 
Standard to submit a corrective plan if the Standard is established by 
regulation, and permits FHFA to require a corrective plan if a 
regulated entity fails to meet a Standard established by guideline.\2\ 
Section 4513b also establishes procedural requirements for corrective 
plans (including FHFA approval), and requires FHFA to establish other 
procedural requirements by regulation.\3\
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    \2\ Id. 4513b(b)(1)(A).
    \3\ Id. 4513b(b)(1)(C).
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    The proposed rule addresses FHFA's determination that a regulated 
entity has failed to meet a Standard and FHFA's direction to the 
regulated entity to submit a corrective plan; the contents of a 
corrective plan and filing deadlines; FHFA's review of a corrective 
plan and notification to the regulated entity of FHFA's decision on a 
plan; and the regulated entity's opportunity to request FHFA to amend 
an approved plan and FHFA's review of proposed amendments to the 
plan.\4\ The proposed rule also addresses procedural coordination of a 
corrective plan with a capital restoration plan submitted pursuant to 
12 U.S.C. 4622, a cease-and-desist order entered into pursuant to 12 
U.S.C. 4631 or 4632, a formal or informal agreement, or a response to a 
report of examination or report of inspection.\5\
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    \4\ 12 CFR 1236.4.
    \5\ Id. 1236.4(c)(2)(ii).
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    Section 4513b specifies the consequences if a regulated entity 
fails to submit an acceptable plan within the required time period or 
fails to implement a corrective plan that the Director has approved.\6\ 
In those cases, the Director must order the regulated entity to correct 
the deficiency.\7\ Section

[[Page 28434]]

4513b also provides the Director with additional discretionary 
authority to take other actions (including imposing limits on asset 
growth or requiring increases in capital, as well as taking any other 
action the Director believes will better carry out the purposes of 
section 4513b) until the regulated entity meets the standard.\8\ The 
Director must take at least one of those additional actions for a 
regulated entity that has failed to submit or implement a corrective 
plan and has experienced ``extraordinary growth'' within the 18 months 
before it failed to meet the standard.\9\
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    \6\ 12 U.S.C. 4513b(b)(2).
    \7\ Id. 4513b(b)(2)(A).
    \8\ Id. 4513b(b)(2)(B).
    \9\ Id. 4513b(b)(3).
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    The proposed rule implements these statutory provisions by setting 
forth a process for FHFA to notify the regulated entity of its intent 
to issue an order requiring the regulated entity to correct its failure 
to submit or implement a corrective plan, which must include FHFA's 
proposed action and, if applicable, FHFA's determination of 
``extraordinary growth.'' \10\ The proposed rule defines 
``extraordinary growth,'' and does so separately for the FHLBanks and 
the Enterprises.\11\ The proposed rule provides an opportunity for the 
regulated entity to respond to an FHFA notice of intent to issue an 
order and sets forth the actions FHFA may take on review of a response 
or if no response is received.\12\ The proposed rule also addresses 
FHFA's issuance of an order that is immediately final and establishes a 
process for a regulated entity to appeal such an order.\13\ Finally, 
the proposed rule addresses a request by a regulated entity for 
modification or rescission of an order.\14\
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    \10\ 12 CFR 1236.5(b); 12 CFR 1236.5(c)(1).
    \11\ Id. 1236.2.
    \12\ Id. 1236.5(c)(2) and 1236.5(c)(3).
    \13\ Id. 1236.5(c)(4).
    \14\ Id. 1236.5(d).
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    The proposed rule provides that failure to meet a Standard may 
constitute an unsafe or unsound practice for purposes of FHFA's 
enforcement authority.\15\ Section 4513b provides that its remedial 
powers are in addition to any other authority of the Director and thus 
expressly preserves FHFA's right to exercise any other supervisory or 
enforcement authority available under the Safety and Soundness Act.\16\ 
The PMOS framework does not limit FHFA's authorities and FHFA will 
determine the appropriate supervisory response (including the 
appropriate timing or sequence of supervisory action) based on the 
facts and circumstances of any failure or violation.
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    \15\ 12 CFR 1236.3(d).
    \16\ 12 U.S.C. 4513b(c).
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    When FHFA proposed the rule and initial Standards in 2011, FHFA did 
not propose to apply the rule or the Standards to OF on the grounds 
that several of the statutorily required standards (such as the 
standards on relating to interest rate, market and credits risks and 
investment portfolio growth) would not be relevant to OF and statutory 
examples of corrective actions for noncompliance also would not be 
applicable.\17\ FHFA nonetheless noted that the Safety and Soundness 
Act, which grants FHFA general supervisory and regulatory authority 
over OF, would permit FHFA to extend the rule or Standards to OF, or to 
establish new Standards specifically applicable to OF.\18\ Likewise, 
section 4513b permits FHFA to establish other prudential management and 
operational standards as the Director deems appropriate, and permits 
FHFA to require a regulated entity to take any other action that the 
Director determines will better carry out the purposes of section 4513b 
than the statutorily listed actions.\19\ Consequently, it is feasible 
to establish appropriate Standards and corrective actions for OF.
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    \17\ 76 FR 35791, 35792 (June 20, 2011).
    \18\ Id.; see also 12 U.S.C. 4511(b)(2).
    \19\ 12 U.S.C. 4513b(a)(11) and (b)(2)(B)(iii).
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III. Overview of Proposed Amendments; Section-by-Section Analysis

A. Overview

    FHFA is proposing to amend part 1236 to reflect the scope of FHFA's 
statutory authority to establish Standards as regulations as well as 
guidelines and to apply the rule and some Standards to OF.
    Currently, the rule addresses ``prudential standards as 
guidelines,'' \20\ provides that the Standards ``have been adopted as 
guidelines,'' \21\ and states that these Standards ``constitute the 
prudential and operations standards'' required by section 4513b.\22\ In 
turn, the appendix to part 1236 further provides that guidelines set 
forth in the appendix ``constitute the prudential and operations 
standards established pursuant'' to section 4513b.\23\
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    \20\ 12 CFR 1236.3.
    \21\ Id. 1236.3(b).
    \22\ Id. 1236.3(a).
    \23\ 12 CFR part 1236, appendix.
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    Taken together, the rule and its appendix imply that the guidelines 
in the appendix constitute the entirety of the Standards that FHFA has 
established and that any further Standards adopted by FHFA will 
similarly be established as guidelines and located in the appendix. 
That implication is inconsistent with FHFA's statutory authority and 
recent actions. Specifically, FHFA established Standards by regulation 
in December 2020 and May 2021.\24\
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    \24\ See 12 CFR 1240.1(e)(3) (Enterprise Regulatory Capital 
Framework) and 12 CFR 1242.1(b) (Enterprise Resolution Planning).
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    As amended, the rule would expressly reflect FHFA's statutory 
authority to establish Standards as either regulations or guidelines 
and to locate Standards established as regulations outside of the 
appendix to the rule. If amended as proposed, the rule would make clear 
that guidelines or regulations adopted by FHFA that FHFA identifies as 
Standards are to be considered Standards for purposes of section 4513b 
and part 1236.
    As an administrative matter, for convenience and clarity, FHFA 
plans to continue establishing Standards that are guidelines through a 
Federal Register notice and comment process, and will continue locating 
all Standards established as guidelines in the appendix to part 1236.
    FHFA is also proposing to amend the rule and the appendix to part 
1236 so that the OF would be subject to the rule and identified 
Standards. The Standards FHFA proposes to apply to OF are the General 
Responsibilities of the Board of Directors and Senior Management, and 
Standards 1, 2, 8, and 10. Standard 1 addresses ``Internal Controls and 
Information Systems.'' Standard 2 addresses ``Independence and Adequacy 
of Internal Audit Systems.'' Standard 8 addresses ``Overall Risk 
Management Processes.'' Standard 10 addresses ``Maintenance of Adequate 
Records.'' Since adopting the rule in 2012, FHFA has revisited its 
decision to exclude OF from the rule and has determined that making OF 
subject to the rule and the identified Standards would further the 
purposes of section 4513b. Moreover, FHFA could in the future establish 
Standards by regulation or guideline that would apply only to OF. FHFA 
welcomes any comments on subjecting OF to the rule and the identified 
Standards.
    Consistent with the foregoing changes, FHFA also proposes to revise 
and clarify definitions and make conforming changes to part 1236 and 
its appendix. Proposed changes to the rule are discussed by section and 
proposed changes to the appendix are discussed by Standard, below.

[[Page 28435]]

B. Section 1236.1--Purpose

    This section currently states that part 1236 establishes ``the'' 
prudential management and operations standards that are required by 
section 4513b. That construction was appropriate when part 1236 
addressed only the 10 Standards specifically required by statute, and 
when all Standards established by FHFA were located within the appendix 
to part 1236. FHFA is proposing to remove ``the'' and to revise 
``establishes'' to ``addresses'' to reflect the full scope of part 
1236, and to add ``and authorized'' following ``required'' to reflect 
the discretion expressly conferred on FHFA to establish other 
operational and management Standards as the Director determines to be 
appropriate. These changes also acknowledge that Standards may be 
located either in the appendix (if they are established as guidelines) 
or elsewhere in chapter XII of title 12 of the Code of Federal 
Regulations (if they are established as regulations).
    As appropriate throughout the rule, FHFA is also proposing to 
revise the terms ``a regulated entity,'' ``any regulated entity,'' and 
``entity'' to ``a regulated entity or the Office of Finance'' to bring 
the OF within the scope of the rule.

C. Section 1236.2--Definitions

    This section defines terms used in this part. After the rule was 
adopted by FHFA in 2012, FHFA adopted part 1201 of the FHFA regulations 
(12 CFR part 1201), one section of which sets forth definitions that 
apply to all FHFA regulations. FHFA is now proposing to amend Sec.  
1236.2 to include a reference to 12 CFR part 1201 as an aid to users of 
this part. This amendment is not a substantive change, as definitions 
in 12 CFR part 1201 already apply to terms used in this part.
    In addition, FHFA is proposing one change to the definition of 
``standard'' (which is defined within this part) to remove language 
that referred to Sec.  1236.3(b), on FHFA's authority to revise 
Standards established as guidelines. Other changes that FHFA is 
proposing would cause that reference to become incomplete, as a 
different section of the rule would now address revisions to Standards 
established as regulations. On review, FHFA has determined that the 
reference to Sec.  1236.3(b) is unnecessary; for that reason, instead 
of expanding on it, FHFA proposes to delete the reference.

D. Section 1236.3--Prudential Standards as Guidelines or Regulations

    FHFA is proposing to revise Sec.  1236.3(a) to remove language that 
effectively repeated the definition of ``Standard'' set forth at Sec.  
1236.2 and thus is unnecessary, and in its place add a sentence 
acknowledging that, as expressly authorized by statute, FHFA may 
establish Standards as guidelines or regulations.
    Section 1236.3(b) would be amended to clarify that it applies only 
to Standards established as guidelines (instead of stating that it 
covers all Standards, which would include those established as 
regulations). In keeping with FHFA's prior practice, proposed revisions 
to Sec.  1236.3(b) would set forth FHFA's commitment to provide public 
notice of and seek public comment on Standards that it proposes to 
establish as guidelines, or on any material modification to a Standard 
established as a guideline. For efficiency, however, FHFA could revoke 
a Standard adopted as a guideline at any time by order or notice. FHFA 
requests comment on these proposed processes for establishing, 
modifying, and revoking Standards established as guidelines.
    FHFA proposes to revise Sec.  1236.3(c) to address Standards 
established as regulations. Although section 4513b expressly authorizes 
FHFA to establish Standards as regulations, FHFA had not done so when 
part 1236 was promulgated in 2012. As a result, part 1236 does not 
currently address Standards that have been established as regulations 
after part 1236 was promulgated.
    As proposed to be amended, Sec.  1236.3(c) acknowledges that the 
Administrative Procedure Act sets forth the process for establishing 
Standards as regulations and amending such Standards. FHFA also 
proposes to clarify that Standards established as regulations may be 
located in part 1236, may amend existing regulations, or may be 
undertaken as entirely new rulemakings that would be located outside of 
part 1236. For example, FHFA may decide to locate a Standard 
established as a regulation that applies to all of its regulated 
entities within part 1236, but may locate a Standard established as a 
regulation that applies only to the Enterprises (including any 
affiliate of an Enterprise), or only to the Federal Home Loan Banks 
(including OF), outside of part 1236. Any Standard established as a 
regulation would be identified as a Standard in that regulation.\25\ 
Proposed Sec.  1236.3(c) would also make clear that Standards 
established as regulations are subject to the remedial and enforcement 
provisions of part 1236 (because they are Standards) as well as 
statutory enforcement provisions (because they are regulations).
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    \25\ See, e.g., 12 CFR 1240.1(e)(3).
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    FHFA proposes to re-number current Sec.  1236.3(c) as Sec.  
1236.3(d), and to amend it to clarify that if there is a direct 
conflict between a Standard adopted as a guideline and an FHFA 
regulation, the regulation will control. This clarification retains the 
sense of current Sec.  1236.3(c) (which recognizes the primacy of an 
FHFA regulation over other agency guidance), but it was not necessary 
when, for purposes of part 1236, all Standards were guidelines. FHFA's 
authority to determine that failure to meet a Standard is an unsafe or 
unsound practice, currently addressed in Sec.  1236.3(d), would be 
relocated to Sec.  1236.4(a) (addressed below).

E. Section 1236.4--Failure To Meet a Standard; Corrective Plans

    Consistent with other proposed changes to part 1236, FHFA is 
proposing to expand the scope of Sec.  1236.4, which addresses the 
failure to meet a Standard and submission of corrective plans, to cover 
Standards established as regulations. Other changes are proposed to 
clarify the application of Sec.  1236.4.
    As already noted, FHFA proposes to relocate its authority to 
determine that failure to meet a Standard is an unsafe or unsound 
practice, currently addressed in Sec.  1236.3(d), to Sec.  1236.4(a). 
FHFA believes this authority is more appropriately located in Sec.  
1236.4, with other regulatory provisions addressing failure to meet a 
Standard.
    Section 1236.4(b), which addresses the submission of corrective 
plans, currently implies that FHFA has discretion in all cases to 
decide whether to require a corrective plan from a regulated entity 
that fails to meet a Standard. That implication was correct when part 
1236 was originally adopted because part 1236 established Standards as 
guidelines only, and section 4513b provides that FHFA may require a 
corrective plan if a regulated entity fails to meet a Standard 
established as a guideline.\26\ However, section 4513b provides that 
FHFA must require a corrective plan if a regulated entity fails to meet 
a Standard established as a regulation.\27\ Consistent with those 
statutory provisions, and reflecting extension of the rule to OF, FHFA 
is now proposing to clarify in Sec.  1236.4(b) that FHFA may require a 
corrective plan if a regulated entity or OF fails to meet a Standard 
established as a guideline, but must require a corrective plan if a

[[Page 28436]]

regulated entity or OF fails to meet a Standard established as a 
regulation.
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    \26\ 12 U.S.C. 4513b(b)(1)(A)(ii).
    \27\ Id. 4513b(b)(1)(A)(i).
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    As a procedural matter, Sec.  1236.4(b) provides that FHFA will 
inform a regulated entity or the OF that it is required to submit a 
corrective plan by written notice, which will also set forth FHFA's 
determination that the regulated entity or OF has failed a particular 
Standard or Standards. FHFA may otherwise inform a regulated entity or 
the OF that it has failed to meet a Standard, but Sec.  1236.4(b) and 
(c) establish procedural requirements that govern corrective plans. For 
example, FHFA may provide a regulated entity a report of examination 
that includes a determination that the regulated entity failed to meet 
a particular Standard. That determination, without more, is not 
``written notice'' for purposes of Sec.  1236.4(b) and (c), because it 
does not include the statement that FHFA is requiring the regulated 
entity to submit a corrective plan. FHFA intends it to be explicitly 
clear when ``written notice'' for purposes of Sec.  1236.4(b) has been 
provided (e.g., it is likely such a notice will cite to Sec.  
1236.4(b)), to avoid confusion about the applicability of regulatory 
deadlines in Sec.  1236.4(c) while permitting fulsome dialogue and 
communication between FHFA examiners and management of a regulated 
entity or OF.
    Within Sec.  1236.4(c), FHFA is proposing to relocate the 
requirement that plans be in writing from Sec.  1236.4(c)(2)(i) to 
Sec.  1236.4(c)(1). FHFA is also proposing to amend Sec.  
1236.4(c)(2)(ii), on submitting a corrective plan with another 
submission such as a capital restoration plan, to clarify that the 
relevant deadline may be one established by FHFA in accordance with 
Sec.  1236.4(c)(2) and to expand the sorts of required plans or 
submissions of which a corrective plan may be a part, as deemed 
appropriate by FHFA. This last change is intended to reduce burden on a 
regulated entity or OF, if it is feasible and appropriate to combine a 
corrective plan under this proposed rule with another type of required 
plan or submission.
    Finally, FHFA is also proposing conforming amendments to Sec.  
1236.4(d) and (e) to bring OF within the scope of those provisions.

F. Section 1236.5--Failure To Submit a Corrective Plan; Noncompliance

    Section 1236.5 addresses FHFA authority to require a corrective 
order if a regulated entity fails to submit an acceptable corrective 
plan or fails in any material respect to implement an approved 
corrective plan and processes related to such an order. FHFA is 
proposing to revise the term ``regulated entity'' in the first clause 
of Sec.  1236.5(a) to ``regulated entity or Office of Finance''. 
Similarly, FHFA is proposing to revise the term ``regulated entity'' to 
``regulated entity or Office of Finance'' in Sec.  1236.5(a)(6). 
However, given that the corrective measures set out in Sec.  
1236.5(a)(1) through (5) and Sec.  1236.5(b) are not applicable to the 
OF, FHFA is not proposing to revise the term ``regulated entity'' in 
those provisions. FHFA is also proposing conforming amendments to Sec.  
1236.5(c), (d), and (e) to extend the application of those paragraphs 
to OF.

G. Appendix to Part 1236

    FHFA is proposing to revise the introductory text of the appendix 
to be consistent with proposed amendments to the rule. Currently that 
introductory text states the provisions in the appendix ``constitute 
the prudential management and operations standards established pursuant 
to 12 U.S.C. 4513b'' and thus implies that FHFA has established all 
Standards as guidelines located in the appendix, even though FHFA has 
also established Standards as regulations located in different parts of 
title 12, chapter XII, of the Code of Federal Regulations. Although 
FHFA intends to continue locating Standards established as guidelines 
in the appendix, FHFA may locate any additional Standards established 
as regulations outside of part 1236.
    FHFA is also proposing to add a sentence after the introductory 
text of the appendix stating that the General Responsibilities of the 
Board of Directors and Standards 1, 2, 8, and 10 in the appendix apply 
to OF as appropriate. In addition, FHFA is proposing to revise the 
General Responsibilities of the Board of Directors and Standards 1, 2, 
8, and 10 in the appendix so that these Standards would apply to OF as 
appropriate. In particular, FHFA is proposing to revise the term 
``regulated entity'' in those Standards to ``regulated entity and 
Office of Finance'' or some variation thereof.

V. Differences Between Banks and Enterprises

    Section 1313(f) of the Safety and Soundness Act (12 U.S.C. 
4513(f)), as amended by section 1201 of the Housing and Economic 
Recovery Act of 2008, requires the Director, when promulgating 
regulations relating to the Banks, to consider the differences between 
the Banks and the Enterprises 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. The Director may also 
consider any other differences that are deemed appropriate. In 
preparing this proposed rule, the Director considered the differences 
between the Banks (including OF) and the Enterprises as they relate to 
the above factors, and determined that the rule is appropriate.

VI. Paperwork Reduction Act

    The proposed rule would not contain any information collection 
requirement that would require the approval of the Office of Management 
and Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to OMB for 
review.

VII. 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. 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. 5 U.S.C. 605(b). FHFA has considered the impact of this 
proposed rule under the Regulatory Flexibility Act. The General Counsel 
of FHFA certifies that this proposed rule, if adopted as a 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 
regulated entities and the Office of Finance, which are not small 
entities for purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1236

    Administrative practice and procedure, Federal home loan banks, 
Government-sponsored enterprises, Office of Finance, Prudential 
Management and Operations Standards, Reporting and recordkeeping 
requirements.

    Accordingly, for the reasons stated in the Preamble, FHFA proposes 
to amend part 1236 of chapter XII of title 12 of the Code of Federal 
Regulations as follows:

PART 1236--PRUDENTIAL MANAGEMENT AND OPERATIONS STANDARDS

0
1. The authority citation for part 1236 continues to read as follows:


[[Page 28437]]


    Authority:  12 U.S.C. 4511, 4513(a) and (f), 4513b, and 4526.

0
2. Revise Sec.  1236.1 to read as follows:


Sec.  1236.1  Purpose.

    This part addresses prudential management and operations standards 
that are required and authorized by 12 U.S.C. 4513b, including 
establishment of Standards by Federal Housing Finance Agency (FHFA) and 
the processes by which FHFA can notify a regulated entity or the Office 
of Finance of its failure to operate in accordance with a Standard and 
can direct the regulated entity or the Office of Finance to take 
corrective action. This part further specifies the possible 
consequences if any regulated entity or the Office of Finance fails to 
operate in accordance with an applicable Standard or otherwise fails to 
comply with this part.
0
3. Revise Sec.  1236.2 introductory text, remove the definition of 
``Standards'', and add the definition of ``Standard(s)'' to read as 
follows:


Sec.  1236.2  Definitions.

    Unless otherwise indicated, terms used in this part have the 
meanings that they have in part 1201 of this chapter, in the Safety and 
Soundness Act, 12 U.S.C. 4501 et seq., or in the Bank Act, 12 U.S.C. 
1421 et seq.
* * * * *
    Standard(s) means any one (or more) of the prudential management 
and operations standards established by the Director pursuant to 12 
U.S.C. 4513b(a). Standard includes the introductory statement of 
general responsibilities of boards of directors and senior management 
of the regulated entities set forth in the appendix to this part.
0
4. Revise Sec.  1236.3 to read as follows:


Sec.  1236.3  Prudential standards as regulations or guidelines.

    (a) Form. As expressly authorized by 12 U.S.C. 4513b(a), FHFA may 
establish Standards as regulations or guidelines.
    (b) Standards established as guidelines. Each Standard that has 
been established as a guideline is located in the appendix to this 
part. FHFA will provide public notice of, and seek public comment on, 
any Standard it plans to establish as a guideline, or on any material 
modification to any Standard established as a guideline. FHFA may 
revoke any Standard established as a guideline at any time by order or 
notice. Standards established as guidelines are subject to the remedial 
provisions of Sec. Sec.  1236.4 and 1236.5.
    (c) Standards established as regulations. When establishing a 
Standard as a regulation or amending such a Standard, FHFA shall follow 
applicable rulemaking procedures of the Administrative Procedure Act, 
12 U.S.C. 553. Standards established as regulations may be set forth as 
subparts or provisions of this part; or as other parts or subparts, or 
as provisions of such other parts or subparts, of this chapter XII of 
title 12. When not set forth as a subpart of this part, the regulation 
or any provision thereof that is a Standard shall be identified as a 
Standard in the body of the regulation. Standards established as 
regulations are subject to this part, including the remedial provisions 
of Sec. Sec.  1236.4 and 1236.5, and to the enforcement provisions of 
12 U.S.C. chapter 46, subchapter III.
    (d) Conflicts. In the case of a direct conflict between a Standard 
established as a guideline and any FHFA regulation, when it is not 
possible to comply with both that Standard and the FHFA regulation, the 
FHFA regulation shall control.
0
5. Revise Sec.  1236.4 to read as follows:


Sec.  1236.4  Failure to meet a Standard; corrective plans.

    (a) Determination. FHFA may determine, based upon an examination, 
inspection, or any other information, that a regulated entity or the 
Office of Finance has failed to meet one or more of the Standards. 
Failure to meet any Standard may constitute an unsafe and unsound 
practice for purposes of the enforcement provisions of 12 U.S.C. 
chapter 46, subchapter III.
    (b) Submission of corrective plan. When a regulated entity or the 
Office of Finance is required to submit a corrective plan, FHFA shall 
inform the regulated entity or the Office of Finance of that 
requirement by written notice, which shall also set forth FHFA's 
determination that the regulated entity or the Office of Finance has 
failed a particular Standard or Standards. FHFA shall require a 
regulated entity or the Office of Finance to submit a corrective plan 
if FHFA determines that the regulated entity or the Office of Finance 
has failed to meet a Standard established as a regulation. FHFA may 
require a regulated entity or the Office of Finance to submit a 
corrective plan for failure to meet a Standard established as a 
guideline.
    (c) Corrective plans--(1) Contents of plan. A corrective plan shall 
be in writing and shall describe the actions the regulated entity or 
the Office of Finance will take to correct its failure(s) as determined 
by FHFA, and the time within which each action will be taken.
    (2) Filing deadline--(i) In general. A regulated entity or the 
Office of Finance must file a corrective plan with FHFA within thirty 
(30) calendar days of being notified by FHFA of the requirement to file 
a corrective plan, unless FHFA notifies the regulated entity or the 
Office of Finance in writing that the plan must be filed within a 
different time period.
    (ii) Other plans or submissions. If a regulated entity must file a 
capital restoration plan submitted pursuant to 12 U.S.C. 4622, it may 
submit the corrective plan required under this section as part of the 
capital restoration plan, subject to the deadline established in 
accordance with paragraph (c)(2)(i) of this section. If a regulated 
entity or the Office of Finance is operating under a cease-and-desist 
order entered into pursuant to 12 U.S.C. 4631 or 4632, or a formal or 
informal agreement, or must file a response to a report of examination 
or report of inspection, it may, with the permission of FHFA, submit 
the corrective plan required under this section as part of its 
compliance with that order, agreement, or response, subject to the 
deadline established in accordance with paragraph (c)(2)(i) of this 
section, but the corrective plan would not become a part of the order, 
agreement, or response. FHFA may also permit a regulated entity or the 
Office of Finance to submit a corrective plan required under this 
section as part of another type of required plan or submission by a 
regulated entity or the Office of Finance, as deemed appropriate by 
FHFA.
    (d) Amendment of corrective plan. A regulated entity or the Office 
of Finance that is operating in accordance with an approved corrective 
plan may submit a written request to FHFA to amend the plan as 
necessary to reflect any changes in circumstance. Until such time that 
FHFA approves a proposed amendment, the regulated entity or the Office 
of Finance must continue to operate in accordance with the terms of the 
corrective plan as previously approved.
    (e) Review of corrective plans and amendments. Within thirty (30) 
calendar days of receiving a corrective plan or proposed amendment to a 
plan, FHFA will notify the regulated entity or the Office of Finance in 
writing of its decision on the plan, will direct the regulated entity 
to submit additional information, or will notify the regulated entity 
in writing of any extended deadline for review that FHFA has 
established.
0
6. Amend Sec.  1236.5 by revising the introductory text to paragraph 
(a), paragraph (a)(6), the introductory text to paragraph (c)(1), 
paragraphs (c)(1)(i), (c)(2) through (4), paragraph (d), and the

[[Page 28438]]

introductory text to paragraph (e) to read as follows:


Sec.  1236.5  Failure to submit a corrective plan; noncompliance.

    (a) Remedies. If a regulated entity or the Office of Finance fails 
to submit an acceptable corrective plan under Sec.  1236.4(b), or fails 
in any material respect to implement or otherwise comply with an 
approved corrective plan, FHFA shall order the regulated entity or the 
Office of Finance to correct that deficiency, and may:
* * * * *
    (6) Require the regulated entity or the Office of Finance to take 
any other action that the Director determines will better carry out the 
purposes of the statute by bringing the regulated entity or the Office 
of Finance into conformance with the Standards.
* * * * *
    (c) * * *
    (1) Notice. Except as provided in paragraph (c)(4) of this section, 
FHFA will notify a regulated entity or the Office of Finance in writing 
of FHFA's intent to issue an order requiring the regulated entity or 
the Office of Finance to correct its failure to submit or its failure 
in any material respect to implement or otherwise comply with an 
approved corrective plan. Any such notice will include:
    (i) A statement that the regulated entity or the Office of Finance 
has failed to submit a corrective plan under Sec.  1236.4, or has not 
implemented or otherwise has not complied in any material respect with 
an approved plan;
* * * * *
    (2) Response to notice. A regulated entity or the Office of Finance 
may file a written response to a notice of intent to issue an order, 
which must be delivered to FHFA within fourteen (14) calendar days of 
the date of the notice, unless FHFA determines that a different time 
period is appropriate in light of the safety and soundness of the 
regulated entity or the Office of Finance or other relevant 
circumstances. The response should include:
    (i) An explanation of why the regulated entity or the Office of 
Finance believes that the action proposed by FHFA is not an appropriate 
exercise of discretion;
    (ii) Any recommended modification of the proposed order; and
    (iii) Any other relevant information, mitigating circumstances, 
documentation or other evidence in support of the position of the 
regulated entity or the Office of Finance regarding the proposed order.
    (3) Failure to file response. The failure of a regulated entity or 
the Office of Finance to file a written response within the specified 
time period will constitute a waiver of the opportunity to respond and 
will constitute consent to issuance of the order.
    (4) Immediate issuance of final order. FHFA may issue an order 
requiring a regulated entity or the Office of Finance immediately to 
take actions to correct a Standards deficiency or to take or refrain 
from taking other actions pursuant to paragraph (a) of this section. 
Within fourteen (14) calendar days of the issuance of an order under 
this paragraph, or other time period specified by FHFA, a regulated 
entity or the Office of Finance may submit a written appeal of the 
order to FHFA. FHFA will respond in writing to a timely filed appeal 
within sixty (60) days after receiving the appeal. During this period, 
the order will remain in effect unless FHFA stays the effectiveness of 
the order.
    (d) Request for modification or rescission of order. A regulated 
entity or the Office of Finance subject to an order under this part may 
submit a written request to FHFA for an amendment to the order to 
reflect a change in circumstance. Unless otherwise ordered by FHFA, the 
order shall continue in place while such a request is pending before 
FHFA.
    (e) Agency review and determination. FHFA will respond in writing 
within thirty (30) days after receiving a response or amendment 
request, unless FHFA notifies the regulated entity or the Office of 
Finance in writing that it will respond within a different time period. 
After considering the response or amendment request from a regulated 
entity or the Office of Finance, FHFA may:
* * * * *
0
7. Amend the appendix to part 1236 by:
0
a. Revising the introductory text to the appendix;
0
b. Revising the introductory text and paragraphs 1. through 8. and 10. 
under the undesignated heading ``General Responsibilities of the Board 
of Directors and Senior Management'';
0
c. In Standard 1, revising paragraphs 1., 4., 5. through 14., and 16.;
0
d. In Standard 2, revising paragraphs 1., 3., 5. through 7., and 11.;
0
e. In Standard 8, revising paragraphs 1. through 3. and 7. through 12.; 
and
0
f. Revising Standard 10.
    The revisions read as follows:

Appendix to Part 1236--Prudential Management and Operations Standards

    The following provisions constitute the prudential management 
and operations standards established as guidelines pursuant to 12 
U.S.C. 4513b(a). The General Responsibilities of the Board of 
Directors and Standards 1, 2, 8, and 10 apply to the Office of 
Finance as appropriate.

General Responsibilities of the Board of Directors and Senior 
Management

    The following provisions address the general responsibilities of 
the boards of directors and senior management of the regulated 
entities as they relate to the matters addressed by each of the 
Standards, and the general responsibilities of the board of 
directors and senior management of the Office of Finance to the 
extent a particular Standard is applicable to the Office of Finance. 
The descriptions are not a comprehensive listing of the 
responsibilities of either the boards or senior management, each of 
whom have additional duties and responsibilities to those described 
in these Standards.

Responsibilities of the Board of Directors

    With respect to the subject matter addressed by each applicable 
Standard, the board of directors of each regulated entity and of the 
Office of Finance is responsible for adopting business strategies 
and policies that are appropriate for the particular subject matter. 
The board should review all such strategies and policies 
periodically. It should review and approve all major strategies and 
policies at least annually and make any revisions that are necessary 
to ensure that such strategies and policies remain consistent with 
the overall business plan of the entity or the Office of Finance.
    2. The board of directors is responsible for overseeing 
management of the regulated entity or the Office of Finance, which 
includes ensuring that management includes personnel who are 
appropriately trained and competent to oversee the operation of the 
regulated entity and the Office of Finance as it relates to the 
functions and requirements addressed by each applicable Standard, 
and that management implements the policies set forth by the board.
    3. The board of directors is responsible for remaining informed 
about the operations and condition of the regulated entity or the 
Office of Finance, including operating consistently with the 
applicable Standards, and senior management's implementation of the 
strategies and policies established by the board of directors.
    4. The board of directors must remain sufficiently informed 
about the nature and level of the regulated overall risk exposures 
of the entity or the Office of Finance, including, as applicable, 
market, credit, operational, and counterparty risk, so that it can 
understand the possible short- and long-term effects of those 
exposures on the financial health of the regulated entity, including 
the possible short- and long-term consequences, as applicable, to 
earnings, liquidity, and economic value. The board of directors 
should: establish the risk tolerances of the regulated entity or the 
Office of Finance and provide management with clear guidance 
regarding the level of acceptable risks; review the entire risk 
management framework of the regulated entity or the Office of 
Finance, including policies and

[[Page 28439]]

entity-wide risk limits at least annually; oversee the adequacy of 
the actions taken by senior management to identify, measure, manage, 
and control the risk exposures of the regulated entity or the Office 
of Finance; and ensure that management takes appropriate corrective 
measures whenever risk limit violations or breaches occur.

Responsibilities of Senior Management

    5. With respect to the subject matter addressed by each 
applicable Standard, senior management is responsible for developing 
the policies, procedures and practices that are necessary to 
implement the business strategies and policies adopted by the board 
of directors. Senior management should ensure that such items are 
clearly written, sufficiently detailed, and are followed by all 
personnel. Senior management also should ensure that the regulated 
entity or the Office of Finance has personnel who are appropriately 
trained and competent to carry out their respective functions and 
that all delegated responsibilities are performed.
    6. Senior management should ensure that the regulated entity or 
the Office of Finance has adequate resources, systems, and controls 
available to execute effectively the business strategies, policies, 
and procedures of the entity or the Office of Finance, including 
operating consistently with each of the applicable Standards.
    7. Senior management should provide the board of directors with 
periodic reports relating to the condition and performance of the 
regulated entity or the Office of Finance, including the subject 
matter addressed by each of the applicable Standards, that are 
sufficiently detailed to allow the board of directors to remain 
fully informed about the business of the regulated entity or the 
Office of Finance.
    8. Senior management should regularly review and discuss with 
the board of directors information regarding the risk exposures of 
the regulated entity or the Office of Finance that is sufficient in 
detail and timeliness to permit the board of directors to understand 
and assess the performance of management in identifying and managing 
the various risks to which the regulated entity or the Office of 
Finance is exposed.

Responsibilities of the Board of Directors and Senior Management

* * * * *
    10. The board of directors and senior management should ensure 
that the overall risk profile of the regulated entity or the Office 
of Finance is aligned with its mission objectives.

Standard 1--Internal Controls and Information Systems

Responsibilities of the Board of Directors

    1. Regarding internal controls and information systems, the 
board of directors of each regulated entity and the Office of 
Finance should adopt appropriate policies, ensure personnel are 
appropriately trained and competent, approve and periodically review 
overall business strategies, approve the organizational structure, 
and assess the adequacy of senior management's oversight of this 
function.
* * * * *

Framework

    4. Each regulated entity and the Office of Finance should have 
an adequate and effective system of internal controls, which should 
include a board approved organizational structure that clearly 
assigns responsibilities, authority, and reporting relationships, 
and establishes an appropriate segregation of duties that ensures 
that personnel are not assigned conflicting responsibilities.
    5. Each regulated entity and the Office of Finance should 
establish appropriate internal control policies and should monitor 
the adequacy and effectiveness of its internal controls and 
information systems on an ongoing basis through a formal self-
assessment process.
    6. Each regulated entity and the Office of Finance should have 
an organizational culture that emphasizes and demonstrates to 
personnel at all levels the importance of internal controls.
    7. Each regulated entity and the Office of Finance should 
address promptly any violations, findings, weaknesses, deficiencies, 
and other issues in need of remediation relating to the internal 
control systems.

Risk Recognition and Assessment

    8. Each regulated entity and the Office of Finance should have 
an effective risk assessment process that ensures that management 
recognizes and continually assesses all material risks, including 
credit risk, market risk, interest rate risk, liquidity risk, and 
operational risk.

Control Activities and Segregation of Duties

    9. Each regulated entity and the Office of Finance should have 
an effective internal control system that defines control activities 
at every business level.
    10. The control activities of each regulated entity and the 
Office of Finance should include:
    a. Board of directors and senior management reviews of progress 
toward goals and objectives;
    b. Appropriate activity controls for each business unit;
    c. Physical controls to protect property and other assets and 
limit access to property and systems;
    d. Procedures for monitoring compliance with exposure limits and 
follow-up on non-compliance;
    e. A system of approvals and authorizations for transactions 
over certain limits; and
    f. A system for verification and reconciliation of transactions.

Information and Communication

    11. Each regulated entity and the Office of Finance should have 
information systems that provide relevant, accurate and timely 
information and data.
    12. Each regulated entity and the Office of Finance should have 
secure information systems that are supported by adequate 
contingency arrangements.
    13. Each regulated entity and the Office of Finance should have 
effective channels of communication to ensure that all personnel 
understand and adhere to policies and procedures affecting their 
duties and responsibilities.

Monitoring Activities and Correcting Deficiencies

    14. Each regulated entity and the Office of Finance should 
monitor the overall effectiveness of its internal controls and key 
risks on an ongoing basis and ensure that business units and 
internal and external audit conduct periodic evaluations.
* * * * *

Applicable Laws, Regulations, and Policies

    16. Each regulated entity and the Office of Finance should 
comply with all applicable laws, regulations, and supervisory 
guidance (e.g., advisory bulletins) governing internal controls and 
information systems.

Standard 2--Independence and Adequacy of Internal Audit Systems

Audit Committee

    1. The board of directors of each regulated entity and the 
Office of Finance should have an audit committee that exercises 
proper oversight and adopts appropriate policies and procedures 
designed to ensure the independence of the internal audit function. 
The audit committee should ensure that the internal audit department 
includes personnel who are appropriately trained and competent to 
oversee the internal audit function.
* * * * *
    3. The audit committee of the board of directors is responsible 
for monitoring and evaluating the effectiveness of the internal 
audit function of each regulated entity and the Office of Finance.
* * * * *

Internal Audit Function

    5. Each regulated entity and the Office of Finance should have 
an internal audit function that provides for adequate testing of the 
system of internal controls.
    6. Each regulated entity and the Office of Finance should have 
an independent and objective internal audit department that reports 
directly to the audit committee of the board of directors.
    7. The internal audit department of each regulated entity and 
the Office of Finance should be adequately staffed with properly 
trained and competent personnel.
* * * * *

Applicable Laws, Regulations, and Policies

    11. Each regulated entity and the Office of Finance should 
comply with applicable laws, regulations, and supervisory guidance 
(e.g., advisory bulletins) governing the independence and adequacy 
of internal audit systems.
* * * * *

Standard 8--Overall Risk Management Processes

Responsibilities of the Board of Directors

    1. Regarding overall risk management processes, the board of 
directors is

[[Page 28440]]

responsible for overseeing the process, ensuring senior management 
are appropriately trained and competent, ensuring processes are in 
place to identify, manage, monitor and control risk exposures (this 
function may be delegated to a board appointed committee), approving 
all major risk limits, and ensuring incentive compensation measures 
for senior management capture a full range of risks to the regulated 
entity or the Office of Finance.

Responsibilities of the Board and Senior Management

    2. Regarding overall risk management processes, the board of 
directors and senior management should establish and sustain a 
culture that promotes effective risk management. This culture 
includes timely, accurate and informative risk reports, alignment of 
the overall risk profile of the regulated entity or the Office of 
Finance with its mission objectives, and the annual review of 
comprehensive self-assessments of material risks.

Independent Risk Management Function

    3. A regulated entity or the Office of Finance should have an 
independent risk management function, or unit, with responsibility 
for risk measurement and risk monitoring, including monitoring and 
enforcement of risk limits.
* * * * *

Risk Measurement, Monitoring, and Control

    7. Each regulated entity and the Office of Finance should 
measure, monitor, and control its overall risk exposures, reviewing, 
as applicable, market, credit, liquidity, and operational risk 
exposures on both a business unit (or business segment) and 
enterprise-wide basis.
    8. Each regulated entity and the Office of Finance should have 
the risk management systems to generate, at an appropriate 
frequency, the information needed to manage risk. As applicable, 
such systems should include systems for market, credit, operational, 
and liquidity risk analysis, asset and liability management, 
regulatory reporting, and performance measurement.
    9. Each regulated entity and the Office of Finance should have a 
comprehensive set of risk limits and monitoring procedures to ensure 
that risk exposures remain within established risk limits, and a 
mechanism for reporting violations and breaches of risk limits to 
senior management and the board of directors.
    10. Each regulated entity and the Office of Finance should 
ensure that it has sufficient controls around risk measurement 
models to ensure the completeness, accuracy, and timeliness of risk 
information.
    11. Each regulated entity and the Office of Finance should have 
adequate and well-tested disaster recovery and business resumption 
plans for all major systems and have remote facilitates to limit the 
impact of disruptive events.

Applicable Laws, Regulations, and Policies

    12. As applicable, each regulated entity and the Office of 
Finance should comply with all applicable laws, regulations, and 
supervisory guidance (e.g., advisory bulletins) governing the 
management of risk.
* * * * *

Standard 10--Maintenance of Adequate Records

    1. Each regulated entity and the Office of Finance should 
maintain financial records in compliance with Generally Accepted 
Accounting Principles (GAAP), FHFA guidelines, and applicable laws 
and regulations.
    2. Each regulated entity and the Office of Finance should ensure 
that assets are safeguarded and financial and operational 
information is timely and reliable.
    3. Each regulated entity and the Office of Finance should have a 
records retention program consistent with laws and corporate 
policies, including accounting policies, as well as personnel that 
are appropriately trained and competent to oversee and implement the 
records management plan.
    4. Each regulated entity and the Office of Finance, with 
oversight from its board of directors, should conduct a review and 
approval of the records retention program and records retention 
schedule for all types of records at least once every two years.
    5. Each regulated entity and the Office of Finance should ensure 
that reporting errors are detected and corrected in a timely manner.
    6. Each regulated entity and the Office of Finance should comply 
with all applicable laws, regulations, and supervisory guidance 
(e.g., advisory bulletins) governing the maintenance of adequate 
records.

Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2023-09320 Filed 5-3-23; 8:45 am]
BILLING CODE 8070-01-P