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Statement of Need: An increasing number of FHLBank member institutions are opting to transfer mortgage assets that were previously held directly by such members to REITs, security corporations, or other similarly structured subsidiaries, in order to gain certain tax advantages. Because many of these mortgage assets are eligible to secure FHLBank advances and, in fact, are currently being used to secure such advances, it is important that the Finance Board establish a regulatory structure under which FHLBanks will continue to be able to accept this transferred collateral--which will still be under the ultimate control of the member--as security for advances. It is anticipated that the rule will establish such a structure. In addition, through this rulemaking, the Finance Board plans to make clear that FHLBanks are permitted by statute to accept as collateral for advances federally-guaranteed mortgages (to the extent of the guarantee), irrespective of their delinquency status, although FHLBanks may not normally accept as collateral mortgages that are more than 90 days delinquent.

Summary of the Legal Basis: Section 10 of the Bank Act sets forth requirements for FHLBank advances to members and specifies the types of member collateral that are eligible to secure such advances. While, under section 10, FHLBank members are required to assume a primary, unconditional obligation to repay any advance, such advances may be secured by pledges of collateral by affiliates of members. In addition, under section 10, FHLBanks are not precluded from obtaining an interest in eligible collateral by accepting pledges of shares of corporations or trusts whose assets comprise only eligible assets. Regarding federally-guaranteed mortgages, although section 10(a)(1) of the Bank Act requires that whole mortgage loans be not more than 90 days delinquent in order to constitute eligible collateral, section 10(a)(2) permits FHLBanks to accept any federally-guaranteed securities as collateral. Because, to the extent that it is federally-guaranteed, the delinquency status of a mortgage loan is immaterial as a matter of safety and soundness, the Finance Board may permit FHLBanks to accept delinquent federally-guaranteed mortgages as collateral for advances under section 10(a)(2) of the Bank Act. Section 2B(a) of the Bank Act authorizes the Finance Board to supervise the FHLBanks and to promulgate such regulations as are necessary to carry out the provisions of the Act. This regulatory action is not required by statute or court order.

Alternatives: As an alternative to this rulemaking, the Finance Board could choose to prohibit FHLBanks from accepting as security for advances delinquent federally-guaranteed mortgages, or collateral held by member-controlled REITs, security corporations, or similar structures. Also, the Finance Board could decide to permit the FHLBanks to accept such collateral pursuant only to a staff legal interpretation of the statute and the existing Advances regulation, or to decide these issues on a case-by-case basis. The agency will consider all alternatives suggested by the public during the notice and comment period.

Anticipated Costs and Benefits: Although the Finance Board cannot quantify precisely the costs and benefits of this rulemaking at this time, the agency anticipates that the regulatory amendments will benefit both FHLBanks and their members by expressly permitting the FHLBanks to accept as security for advances collateral that might not appear to be eligible under a technical reading of the current text of the Advances regulation.

Risks: Regarding eligible collateral held by member-controlled REITs, State security corporations, or other similar business structures, the Finance Board is considering ways to minimize or eliminate any risk that a FHLBank would have more difficulty in foreclosing upon such third-party collateral upon the default of a member than if the same assets were to be pledged by the member directly. Regarding delinquent federally-guaranteed mortgages, the Finance Board seeks to ensure that the guarantee attached to each such mortgage is sufficient to negate the credit risks associated with the delinquency status of the mortgage. The control of these risks is of paramount concern to the Finance Board, which is charged by statute with ensuring that the FHLBanks operate in a safe and sound manner.