FEDERAL HOUSING FINANCE BOARD

Policy and Procedures

For Pilot Proposals that Support

Housing and Community Investment

Purpose: To establish procedures to be followed by staff of the Federal Housing Finance Board (Finance Board) in the processing and analysis of proposed Federal Home Loan Bank (Bank) pilot programs through which the Banks would make other investments that support housing and community development. These procedures shall apply also to the processing and analysis of proposed amendments to existing pilot programs. In establishing these procedures, it is the Finance Board’s intent that the pilot review process proceed in an efficient, expeditious fashion at all stages.

Introduction: The Federal Home Loan Bank Act (Bank Act) provides that certain assets of each Bank not required for advances to members, may be invested in certain specified securities and investments. The Finance Board has implemented the investment provisions of the Bank Act through its regulations and the Financial Management Policy (FMP). Under Section 934.1 of the Finance Board’s regulations and Section II.B.12 of the FMP, certain Bank investments that support housing and community development, and that are not specifically authorized under the FMP or otherwise, may be submitted to the Finance Board for approval. This policy establishes general procedures to be followed by Finance Board staff in reviewing pilot proposals or pilot amendment proposals (Proposal) for compliance with the statutory, regulatory, and FMP requirements.

References: 12 U.S.C. Sections 1431(g), 1431(h), and 1436(a); 12 C.F.R. Section 934.1, of the Finance Board regulations; and Section II.B.12 of the FMP.

Procedures for Review of Proposals

1. Receipt of Proposal. Copies of a Proposal shall be distributed to Finance Board Directors and appropriate Finance Board staff.
2. Review of Proposal. The Office of Policy and the Office of General Counsel shall review the Proposal to ensure that it is complete and to determine whether there is evidence of a market for the proposal and whether it prima facie satisfies the FMP requirements (detailed below) and responds to the Finance Board’s Pilot Proposal Submission Guidelines (Attachment).
3. FMP Requirements. Section II of the FMP specifies certain types of assets as permissible investments to the extent they are specifically authorized under 12 U.S.C. 1431(g), 1431(h), or 1436(a), or to the extent a Bank has determined that they are securities in which fiduciary or trust funds may be invested under the laws of the State in which the Bank is located. Other investments that support housing and community development are permitted, provided that the Bank:
4. 1. Ensures the appropriate levels of expertise, establishes policies, procedures, and controls, and provides for any reserves required to effectively limit and manage risk exposure and preserve the Bank’s and the Federal Home Loan Bank System’s triple-A rating;
   2. Ensures that the Bank’s involvement in such investment activity assists in providing housing and community development financing that is not generally available, or that is available at lower levels or under less attractive terms;
   3. Ensures that such investment activity promotes (or at the very least, does not detract from) the cooperative nature of the System;
   4. Provides a complete description of the contemplated investment activity (including a comprehensive analysis of how the above three requirements are fulfilled) to the Finance Board; and
   5. Receives written confirmation from the Finance Board, prior to entering into such investments, that the above investment eligibility standards and requirements have been satisfied.
5. The Office of Policy and the Office of General Counsel shall identify any policy or legal issues or questions, identify and discuss with the Office of Supervision the management of any potential risks involved in the Proposal, discuss the Proposal with other staff as necessary, call Bank personnel to clarify any uncertain or unclear aspects, and discuss issues or questions with the Director of the Office of Policy and the General Counsel, as appropriate.
6. If the Office of Policy and the Office of General Counsel deem the Proposal incomplete, staff shall contact the Bank and afford Bank officials the opportunity to submit the necessary additional information.
7. If the Proposal is deemed complete by the Office of Policy and the Office of General Counsel but is not believed to meet the requirements of the FMP, the Director of the Office of Policy shall notify the Bank, either formally or informally, and afford the Bank the opportunity either to withdraw, modify, or insist upon the Proposal, as structured, being published for comment.
8. If the Office of Policy and the Office of General Counsel determine that the Proposal is complete and appears to address the requirements of the FMP and all issues or questions are satisfactorily resolved, the Office of Policy and the Office of General Counsel shall draft a Notice for publication in the Federal Register. The Notice shall be a summary of the Proposal that is sufficiently detailed to allow meaningful comments from interested parties through a comment period. However, it need not contain the staff’s analysis of whether or how the proposal meets the FMP requirements. Publication of a Notice does not imply any level of approval or support of the Proposal by the Finance Board. The Board of Directors of the Finance Board will not review and render a decision on the Proposal until after public comments received on the Proposal are reviewed and analyzed by staff, as is discussed below.
9. VIII. Prior to publication, the Office of Policy shall provide the Bank a copy of the section of the Notice that describes the Proposal and solicit the Bank’s comments on the accuracy and completeness of the section.

   IX. The Notice must be approved by the Director of the Office of Policy and the Office of General Counsel, with copies provided to the Directors of the Office of Supervision and the Office of Public Affairs, prior to going to the Executive Secretariat and then to the Managing Director for signature.

   X. After publication of the Notice in the Federal Register, the Office of Policy and the Office of General Counsel shall respond to calls from the general public concerning the Proposal. The Office of Policy may answer questions about the program but requests for written information should be referred to the Office of General Counsel.

   XI. The Office of Policy and the Office of General Counsel shall analyze comments received and discuss them with other Finance Board staff as necessary.

   XII. To the extent necessary and appropriate, the Office of Policy or the Office of General Counsel shall contact the Bank and request a response to the issues or questions raised by commenters.

   XIII. Following publication of the Notice, the Bank shall submit to the Finance Board proposed policies and procedures to address risks inherent in its proposed pilot program (e.g., credit risk, market risk, interest rate risk, and other risks).

   XIV. Prior to Finance Board consideration, the Office of Policy and the Office of General Counsel shall review the proposed policies and procedures submitted by the Bank; the Bank’s identification of, and plans for, managing risk; and the adequacy of expertise and number of staff planned by the Bank for its proposed pilot program. If necessary, staff may request additional information, clarification, etc.

   XV. Following review and analysis of the Proposal, public comments received, and the above three factors, the Office of Policy and the Office of General Counsel, in consultation with the Office of Supervision, shall make a determination as to whether to recommend approval or disapproval to the Board of Directors of the Finance Board. The following shall result from this determination:

   1. A briefing shall be held for Finance Board Directors regarding the Proposal and staff’s recommendation.
   2. A Board package shall be prepared for the Proposal and include the staff’s recommendation and a summary of public comments.
   3. Finance Board staff shall present the Proposal and their recommendation to the Board of Directors of the Finance Board.

Pilot Proposal Initial Submission Guidelines

The following criteria should be addressed and included in a Bank’s pilot proposal or pilot amendment proposal (Proposal) submitted to the Finance Board for approval.

1. Overall goals and objectives
2. Pilot size and basis for determination
3. Pilot operations
4. Profitability goals and timeline
5. The marketplace: Potential competitors (size, sophistication, typical staffing, expertise, etc.) typical margins, historical loss experience, and whether marketplace is expanding or contracting and why.
6. Discuss which components of the program the Bank will have to create, hire, etc. This could include personnel, management, policies, procedures, hardware, software, facilities, etc.
7. How the Proposal would benefit membership
8. Expected benefits for the end user of the pilot product
9. Identification and management of potential risks
10. Explanation/basis for loan loss or risk reserves anticipated

4. Pilot Documentation, Support and Reporting: Discussion of anticipated program documentation, support, and reporting, including each of the following:

1. Evidence of a market for the pilot product. This could include letters of support from anticipated participants, market surveys, etc., and should include anticipated participants’ estimates of the dollar volume of their participation within the first three years of the program.
2. Examples of required documentation between the Bank, members and other related counterparties, as well as any legal agreements drafted for the pilot.

4. A listing, description, and examples of management reports necessary to adequately monitor ongoing pilot activities.

4. 5. Measurement of Pilot Success: A discussion of criteria the Bank intends to utilize to measure the success of the program, such as:

2. The existence of a sunset provision.
3. The factors or conditions that might trigger a decision to terminate the pilot.

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