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On April 25, the Federal Housing Finance Agency (FHFA) issued advisory bulletin AB 2018-02 to provide guidance for Federal Home Loan Banks (FHL Banks) on the use of models and methodologies when assessing mortgage asset credit risk. The advisory bulletin applies to FHL Banks that acquire Acquired Member Asset loans, mortgage-backed securities (MBS), and collateralized mortgage obligations. Exclusions from application of the guidance include certain mortgage-related assets that are guaranteed by, or operating with the capital support of, the U.S. government, including Fannie Mae and Freddie Mac. When selecting a credit risk model that is “sufficiently robust to produce meaningful loss estimates,” FHFA advises FHL Banks to consider the following when complying with regulatory requirements: (i) mortgage asset credit risk model selection; (ii) macroeconomic stress scenarios; (iii) stress scenario determinations; and (iv) credit enhancements. The guidance permits the exclusion of legacy private label MBS from application of the guidance where the stress loss estimates would be de minimis, and provides methods for determining estimated credit losses associated with securities that cannot be modeled.
The new guidance supplements general FHFA guidance on model risk management and takes effect January 1, 2019.
On July 26, the FDIC released an update to its Affordable Mortgage Lending Guide, Part II: State Housing Finance Agencies (Guide) and Quick Links: State Links for Housing Finance Agencies. The Guide provides information for community banks about the programs and products offered by each State Housing Finance Agency (HFAs), and discusses, among others things: (i) first-lien mortgage products; (ii) down payment and closing cost assistance; (iii) mortgage tax credit certificates; and (iv) mortgage lending homeownership education and counseling programs. Updates to the Guide include program updates to 40 out of the 54 HFAs and changes to the State HFA Product Matrix. A review of Part II, completed July 1, 2017, reflects the FDIC’s commitment to provide the most up-to-date borrower and loan criteria information available.
On June 13, Representatives Randy Hultgren (R-Ill.) and Gwen Moore (D-Wis.) introduced legislation to strengthen the Federal Home Loan Bank (FHLB) System by ensuring access to mortgage credit and affordable housing assistance for millions of consumers. As set forth in a June 15 press release issued by Rep. Hultgren’s office, the Housing Opportunity Mortgage Expansion (HOME) Act (H.R. 2890) would allow lenders to regain membership in the FHLB System provided they (i) joined before the Federal Housing Finance Agency (FHFA) proposed its recently finalized membership rule, and (i) are able to “demonstrate a commitment to residential mortgage activities.”
As previously discussed in InfoBytes, FHFA’s final rule added a revision intended to help streamline membership applications. However, Hultgren asserts that the rule “restricts FHLB membership eligibility” by excluding “captive insurers” under its definition of an “insurance company” thereby prohibiting membership. The HOME Act, Hultgren states, “would clarify that companies with a history and mission of supporting residential housing should be able to continue to serve our communities.”
On June 5, the Federal Housing Finance Agency (FHFA) issued a final rule amending its regulations to allow certain state-chartered credit unions without Federal share insurance to obtain Federal Home Loan Bank memberships. The final rule is substantially the same as the proposed rule issued by the FHFA in September 2016 with the exception of an added revision intended to help streamline credit union Bank membership applications. The amendment was adopted in order to implement a provision of the Fixing America's Surface Transportation Act and goes into effect July 5, 2017.
FHFA Includes New Classifications for Reporting Adverse Examination Findings; Amends FOIA Regulations
On March 14, the Federal Housing Finance Agency (“FHFA”) issued an Advisory Bulletin establishing classifications of adverse examination findings for Fannie Mae, Freddie Mac, Federal Home Loan Banks (“FHLBs”), and the FHLB’s Office of Finance (AB 2017-01). Effective for the 2017 examination cycle, the bulletin establishes three designated “classifications,” which can be used by examination staff to communicate adverse examination findings more effectively. The three classifications are meant both to identify priorities for remediation and also to guide FHFA in the development of supervisory strategies. These supervisory strategies include: (i) Matters Requiring Attention—both high-priority critical supervisory matters that pose substantial risk to safety and soundness and deficiencies that, if not corrected, have the potential to escalate and negatively affect a regulated entity or the Office of Finance; (ii) Recommendations—advisory suggestions regarding changes to a policy, procedure, practice, or control; and (iii) Violations—non-compliance with laws, regulations, or orders that requires action by a regulated entity or the Office of Finance to correct, if possible.
On March 15, FHFA issued an interim final rule, amending its FOIA regulations (12 CFR Part 1202) in an effort to bring its internal policies into accord with guidelines established through the FOIA Improvement Act of 2016 (Pub. L. No. 114-185) and the “OPEN FOIA Act of 2009” (Pub. L. No. 111-83, 123 Stat. 2142, 2184 (2009)). The new FOIA rules – which are effective as of March 15—require agencies to, among other things, provide a minimum of 90 days (rather than 30 days) for requesters to file an administrative appeal; and provide notification to requesters about the availability of dispute resolution services.
On March 3, FHFA Director Melvin Watt issued orders directing FHFA regulated government-sponsored enterprises (GSEs)—Fannie Mae (Order No. 2017-OR-FNMA-01), Freddie Mac (Order No. 2017-OR-FHLMC-01), and the 11 Federal Home Loan Banks collectively (Order No. 2017-OR-B-01)—to report the results of their stress tests so that the financial regulators may determine whether the GSEs “have the capital necessary to absorb losses as a result of adverse economic conditions.” The orders were issued pursuant to the requirement under the Dodd-Frank Act that covered financial institutions with total consolidated assets of more than $10 billion conduct an annual stress test to determine whether they have sufficient capital to support operations in adverse economic conditions. Accompanying each order was a copy of the “2017 Report Cycle Dodd-Frank Stress Tests Summary Instructions and Guidance.”
On April 14, the FHFA order was officially published in the Federal Register.
FHFA Seeks Public Comment on Criteria for Evaluating Banks Subject to Review Under FHLB Community Support Program
In connection with its 2017 biennial review of all FHLB members under FHFA’s community support requirements regulation, FHFA is seeking public comment on the community support requirements regulation that establishes standards a FHLB member must meet in order to maintain access to long-term advances. The regulation also establishes review criteria that the FHFA must apply in evaluating a member’s’ Community Reinvestment Act performance and their record of lending to first-time homebuyers. Comments must be submitted to the agency by March 31.
On December 19, the FHFA published a final rule modifying, reorganizing and relocating the current regulation governing the Federal Home Loan Banks’ (FHLBs) Acquired Member Asset (AMA) programs. As required by the Dodd-Frank Act, the final rule removes and replaces references in the current regulation to ratings issued by a Nationally Recognized Statistical Ratings Organization. The rule also provides the FHLBs with greater flexibility in choosing a model for estimating the credit enhancement required for AMA loans. The final rule adds a provision allowing an FHLB to authorize the transfer of mortgage servicing rights on AMA loans to any institution, including a non-member of the FHLB System. The new rule also allows FHLBs to acquire mortgage loans that exceed the conforming loan limits where such loans are guaranteed or insured by a department or agency of the U.S. government. The final rule excludes a proposed provision that would have eliminated the use of private, loan-level, supplemental mortgage insurance in the member credit enhancement structure required for the AMA programs, but the final version does require FHLBs to establish financial and operational standards that insurers must meet before offering insurance on AMA loans. The new final rule goes into effect on January 18, 2017.
Also on December 19, FHFA issued another final rule (i) limiting the scope of “business activities” that would trigger an FHLB’s obligation to file a “new business activity” notice, (ii) modifying the submission requirements, and (iii) establishing new timelines for agency review and approval of such notices. The rule “narrows the scope of the [new business activity] regulation in two ways: (1) By limiting it to activities that introduce new material risks to the [FHLB]; and (2) By eliminating the need to file an NBA notice prior to accepting new types of collateral.” This new rule similarly goes into effect on January 18, 2017.
On January 12, the FHFA issued a final rule amending membership eligibility in the Federal Home Loan Bank (FHLBank) system. The final rule, which follows the FHFA’s September 2014 proposal to revise the requirements for financial institutions applying for and retaining membership in the FHLBank system, removes two provisions from the proposal “that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.” In addition, the final rule defines “insurance company” to exclude captive insurers, rendering such entities ineligible for FHLBank membership. According to the FHFA, a captive insurer’s primary business is to underwrite insurance for its “parent company or for other affiliates, rather than for the public at large.” According to the FHFA, “REITs and other entities have been forming captives solely for the purpose of providing ineligible institutions access to Bank advances,” and the FHFA’s final rule is “intended to prevent further use of captives to circumvent the membership eligibility of the Bank Act.” The final rule allows current captive insurer members who joined prior to the 2014 proposal up to five years to terminate their membership, and captive insurers who joined after the issuance of the 2014 proposal have one year to terminate. The final rule becomes effective 30 days from publication in the Federal Register.
On October 6, the FHFA announced that it would extend the comment period for its proposed rule on Federal Home Loan Bank membership. The proposed rule is intended to revise the requirements for financial institutions to apply for and retain membership in the FHLB. Comments are now being accepted until January 12, 2015.