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Supervisory Letter on FHLBank Membership Issues - September 202135450FHL Banks9/9/2021 4:00:00 AM<p>​A number of issues relating to Federal Home Loan Bank (FHLBank or Bank) membership eligibility have arisen recently both through the examination process and as a result of inquiries to the Federal Housing Finance Agency (FHFA). FHFA has issued this supervisory letter to ensure that all FHLBanks are aware of these issues and to provide uniform guidance in the event other Banks encounter similar circumstances.<br></p>9/9/2021 4:30:40 PMHome / Supervision & Regulation / Advisory Bulletins / Supervisory Letter on FHLBank Membership Issues - September 2021 Advisory Bulletin A number of issues relating to 2118https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention34027FHLB & Fannie Mae & Freddie Mac8/25/2021 4:00:00 AMAB 2021-03​​​​​​​​​​<br> <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2021-03&#58;&#160;&#160;FRAMEWORK FOR ADVERSELY CLASSIFYING LOANS, OTHER REAL ESTATE OWNED, AND OTHER ASSETS AND LISTING ASSETS FOR SPECIAL MENTION</strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"> <em> <strong></strong></em></em></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;"><strong><em></em></strong></span></p><p> <em style="text-decoration&#58;underline;"><strong>Purpose</strong></em><br></p><p>​This Advisory Bulletin (Advisory Bulletin, or guidance) establishes guidelines for adverse and non-adverse classification of assets (assets refer to on-balance sheet or off-balance sheet credit exposures) at Fannie Mae and Freddie Mac (Enterprises) and the Federal Home Loan Banks (FHLB​anks) (collectively, the regulated entities).&#160; These guidelines describe sound practices for managing credit risk at the regulated entities.&#160; This guidance does not apply to investment securities.<a href="#footnote1">[1]</a>&#160; ​This Advisory Bulletin rescinds and replaces <em>Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets For Special Mention</em> (AB 2012-02), and rescinds <em>Clarification of Implementation for Advisory Bulletin 20</em><em>12-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention</em>&#160;(AB 2013-02).<br></p><p>FHFA examiners will evaluate how the regulated entities apply this guidance to their classification practices.</p><p style="text-decoration&#58;underline;"> <strong> <em>Background</em></strong></p><p>The purpose of this Advisory Bulletin is to establish a standard and uniform methodology for classifying regulated entity assets based on their credit quality, as well as to affirm the basis for writing off loans classified as Loss.&#160; Asset classification is a critical element in evaluating the risk profile of the regulated entities.&#160; Asset classification also provides a mechanism to validate the regulated entity's internal risk identification processes and establishes a common set of classification definitions to serve as the basis for asset quality metrics.&#160; In addition, this Advisory Bulletin describes procedures for listing assets for Special Mention, which can be an effective method to identify and rectify weaknesses in credit management practices before deterioration occurs.&#160; This guidance considers and is generally consistent with the <em>Uniform Retail Credit Classification and Account Management Policy&#160;&#160;</em>issued by the Federal Financial Institutions Examination Council (FFIEC) in June 2000, which established specific procedures for the adverse classification of residential mortgage loans and other retail loans.<br></p><p>This Advisory Bulletin is intended to be consistent with applicable statutes, regulations, and Generally Accepted Accounting Principles (GAAP).&#160; It does not relieve or diminish the responsibility of a regulated entity's board of directors or management to follow applicable laws, rules, and regulations and to conform to applicable accounting standards, <em>i.e.,</em>&#160;GAAP.&#160; Any conflicts should be resolved to comply with applicable laws and regulations, and to conform to applicable accounting standards.&#160;&#160;<br></p><p style="text-decoration&#58;underline;"> <strong> <em>Guidance</em></strong></p><p> <strong>I. Definitions</strong></p><p>The following definitions apply when considering the adverse classification of assets at the regulated entities.<br></p><p>An asset classified <strong> <em>Substandard </em></strong>is protected inadequately by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any.&#160; Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.&#160;&#160;They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.<br></p><p>An asset classified <strong> <em>Doubtful</em></strong> has all the weaknesses inherent in one classified <strong> <em>Substandard </em></strong>with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.<br></p><p>An asset, or portion thereof, classified <strong> <em>Loss </em></strong>is considered uncollectible, and of such little value that its continuance on the books is not warranted.&#160; This classification does not mean that the asset has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing off an essentially worthless asset (or portion thereof), even though partial recovery may occur in the future.<br></p><p></p><p> <strong>II. Adverse Classification of Assets</strong></p><blockquote style="margin&#58;0px 0px 0px 40px;border&#58;none;padding&#58;0px;"><p> <em>A. Single-Family Residential Mortgage Loans</em></p></blockquote><p> <strong></strong></p><p> <span style="color&#58;#444444;">Single-family residential mortgage loans, including FHLBank Acquired Member Assets (AMA),</span><a href="#footnote2" style="font-family&#58;&quot;source sans pro&quot;, sans-serif;font-size&#58;14px;">[2]</a><span style="color&#58;#444444;">&#160;​consist of first mortgages secured by one-to-four family residential real estate.&#160;&#160;Given their size, general homogeneity, and the volume of residential mortgage loans at the Enterprises and the FHLBanks, it may be impractical to individually review specific loans to determine credit quality.&#160; Such loans should be classified using the following guidelines&#58;</span></p><ul><li> <span style="color&#58;#444444;">​Single-family residential real estate loans that are delinquent 90 days or more with loan-to-value ratios greater than 60 percent, should be classified Substandard.</span></li><li> <span style="color&#58;#444444;">A current assessment of value should be made before a single-family residential mortgage loan with a loan-to-value ratio greater than 60 percent is more than 180 days past due.&#160; Any outstanding loan balance in excess of the sum of (i) current fair value of the collateral, less costs to sell, and (ii) any expected proceeds from non-freestanding</span><a href="#footnote3" style="font-family&#58;&quot;source sans pro&quot;, sans-serif;font-size&#58;14px;">[3]</a><span style="color&#58;#444444;">&#160;​credit enhancements should be classified Loss not later than when the loan is 180 days delinquent.&#160; Properly secured residential real estate loans with loan-to-value ratios equal to or less than 60 percent are generally not classified based solely on delinquency status.</span></li><li> <span style="color&#58;#444444;">When a borrower is in bankruptcy, a portion of the loan should be classified as Loss and written down to the fair value of the collateral, less costs to sell, within 60 days of receipt of the notification of filing from the bankruptcy court or within the delinquency time frames specified in this policy, whichever is shorter, unless it can be clearly demonstrated and documented that repayment is likely to occur.&#160; Any loan balance remaining after write-off should be classified Substandard until the borrower demonstrates the ability and willingness to repay for a period of at least six consecutive months.</span></li><li> <span style="color&#58;#444444;">Fraudulent loans, if not covered by any existing representations and warranties in the loan purchase agreement, should be classified as Loss and written off within 90 days of discovery of the fraud, or within the delinquency time frames specified in this adverse classification policy, whichever is shorter.</span></li></ul><p>Regulated entities should write off the portion of the asset adversely classified as Loss except in certain limited circumstances.<a href="#footnote4">[4]</a>&#160; ​A write-off should result in the balance of the asset being reduced by the amount of the loss.&#160; The write-off associated with any Loss classification should be taken by the end of the month in which the applicable time period elapses.<br></p><p>If the regulated entity can clearly document that the delinquent loan is well-secured and in the process of collection, such that collection will occur regardless of delinquency status, then the loan need not be adversely classified.&#160; A well-secured loan is collateralized by a perfected security interest in real property with an estimated fair value, less costs to sell, sufficient to recover the loan balance.&#160; &quot;In the process of collection&quot; means that either a collection effort or legal action is proceeding and is reasonably expected to result in recovery of the loan balance or restoration of the loan to a current status, generally within the next 90 days.&#160; Other exceptions to this adverse classification policy might be for loans that are supported by valid insurance claims, such as federal loan guarantee programs.</p><p>In determining a single-family mortgage loan's delinquency status, the regulated entity should use one of two methods to recognize partial payments.&#160; A payment equivalent to 90 percent or more of the contractual payment may be considered a full payment in computing delinquency.&#160; Alternatively, the regulated entity may aggregate payments and give credit for any partial payment received.&#160; For example, if a regular payment is $300 and the borrower makes payments of only $150 per month for a six-month period, the loan would be $900, or three full months delinquent.&#160; A regulated entity may use either or both methods for loans in its portfolio but may not use both methods simultaneously with a single loan.<br></p><blockquote style="margin&#58;0px 0px 0px 40px;border&#58;none;padding&#58;0px;"><p> <em>B. Multifamily Residential Mortgage Loans</em><br></p></blockquote><p>Multifamily residential mortgage loans consist of first mortgages secured by multifamily (5 units or more) residential real estate.&#160; Multifamily real estate loans should not be adversely classified if they are current and are adequately protected by the underlying collateral value and debt service capacity of the property, or a guarantor with demonstrated ability and willingness to perform on the loan.&#160; The following applies to the adverse classification of multifamily residential mortgage loans.</p><p>To determine the appropriate adverse classification, examiners will evaluate the prospects that the loan will be repaid in the normal course of business considering all relevant information.&#160; This includes information on the borrower's creditworthiness and payment record, the nature and degree of protection provided by the cash flow and value of the underlying collateral, and any support provided by financially responsible guarantors.&#160; As a general principle, a performing multifamily real estate loan should not automatically be adversely classified or written off solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.&#160; Similarly, loans to sound borrowers that are refinanced or renewed in accordance with prudent underwriting standards and have not been formally restructured due to troubled condition should not be adversely classified unless well-defined weaknesses exist that jeopardize repayment in the normal course of business.&#160; However, it would be appropriate to adversely classify a performing loan when well-defined weaknesses exist that jeopardize repayment – such as the lack of credible support from reliable sources – using the definitions of Substandard, Doubtful, and Loss set forth above.<br></p><p>Multifamily loans with well-defined weaknesses that subject the regulated entity to the possibility of loss, even if the loan is not seriously delinquent (90 days or more), should be classified Substandard.&#160; For a multifamily loan where there are no available and reliable sources of repayment other than the sale of the underlying real estate collateral, any portion of the loan balance that exceeds the sum of&#160;(i) current fair value of the collateral, less costs to sell, and (ii) any expected proceeds from non-freestanding credit enhancements, should be classified Loss and written off.&#160; The remaining portion of the loan balance that is adequately secured should generally be classified no worse than Substandard.&#160; The amount of the loan balance in excess of the value of the collateral, or portions thereof, should be classified Doubtful, and not Loss, only when the potential for loss may be mitigated by the outcome of certain near-term (generally, within 90 days) pending events.&#160; The Doubtful classification is seldom used and is reserved for situations like those described here.<br></p><p>Regulated entities should write off the portion of the asset adversely classified as Loss except in certain limited circumstances.<a href="#footnote5">[5]</a>&#160;&#160;A write-off should result in the balance of the asset being reduced by the amount of the loss.&#160; The write-off associated with any Loss classification should be taken by the end of the month in which the applicable time period elapses.<br></p><p>When analyzing a formally restructured multifamily loan, the examiner will focus on the borrower's ability to repay the loan in accordance with its modified terms.&#160; Adversely classifying a formally restructured loan would be appropriate, if, after the restructuring, well-defined weaknesses continue to exist that jeopardize the repayment of the loan in accordance with the modified terms.<br></p><blockquote style="margin&#58;0px 0px 0px 40px;border&#58;none;padding&#58;0px;"><p> <em>C. Other Real Estate Owned</em></p></blockquote><p>Other Real Estate Owned (REO) should be evaluated for possible adverse classification of Substandard, Doubtful or Loss.&#160; The regulated entity should make periodic (at least annual) reappraisals of the value of the REO.&#160;&#160;In cases when a reliable appraisal is not available, or the appraisal on file is outdated, there are other acceptable methods the regulated entity can use for determining and documenting the value of the REO.&#160; For purposes of classification, any portion of the balance of the REO in excess of fair value, less costs to sell, should be classified Loss.&#160; However, the portion of the held-for-sale REO classified as Loss should not be written off.&#160; Examiners will review all relevant factors in evaluating the regulated entity's adverse classification of the remaining book value of the REO.<br></p><blockquote style="margin&#58;0px 0px 0px 40px;border&#58;none;padding&#58;0px;"><p> <em style="font-family&#58;&quot;source sans pro&quot;, sans-serif;font-size&#58;14px;font-weight&#58;400;">D. Other Assets (including Off-Balance Sheet Credit Exposures)</em></p></blockquote><p>Although not specifically enumerated, the regulated entities may have other assets such as accrued interest receivables, property tax and insurance advance receivables, reverse repurchase (repo) receivables, and insurance benefit receivables that warrant adverse classification.&#160; Similarly, off-balance sheet credit exposures such as standby letters of credit and financial guarantees may also warrant adverse classification.&#160; Examiners will review all relevant factors in evaluating the regulated entity's adverse classification of the assets and off-balance sheet credit exposures.<br></p><blockquote style="margin&#58;0px 0px 0px 40px;border&#58;none;padding&#58;0px;"><p> <em>E. FHLBank Advances</em></p></blockquote><p>Advances made by the FHLBanks to their members and housing associates generally pose minimal credit risk.&#160; Advances must be fully secured by eligible collateral and, in the case of member advances, are further secured by the borrowing members'&#160;FHLBank capital stock.&#160; In addition, the Federal Home Loan Bank Act grants each FHLBank a priority lien over the liens of other similarly-situated creditors on assets securing member advances.<a href="#footnote6">[6]</a> &#160;However, there may be instances in which collateral adequacy may be uncertain and/or the priority lien may not be relied upon, such as in the case of advances to&#160; housing associates, or where another creditor has a superior lien under applicable law (for example, where the other creditor's lien is perfected, but the FHLBank's lien is not).&#160; In such cases, examiners will evaluate the facts and circumstances to determine whether it is appropriate to adversely classify the advance.</p><p> <strong>III. Non-Adverse Classification of Assets – Special Mention</strong><br></p><p>In some instances, it may be appropriate to list an asset for Special Mention.&#160; The following definition should be used for listing an asset for Special Mention&#58;<br></p><p>A <strong> <em>Special Mention </em></strong>asset has potential weaknesses that deserve management's close attention.&#160; If left uncorrected, these potential weaknesses may result in deterioration of the assets'&#160;repayment prospects or may cause deterioration in the regulated entity's credit position at some future date.&#160; <strong> <em>Special Mention</em></strong> assets are not adversely classified and do not expose a regulated entity to sufficient risk to warrant adverse classification.<br></p><p>Ordinarily, assets listed for Special Mention have deficiencies in the administration of those assets which corrective management action might remedy, for example, weak loan origination and/or weak servicing policies.&#160; While inadequate policies and practices could ultimately result in deterioration of the asset and adverse classification, an asset should not be adversely classified unless it also meets one or more of the adverse classification indicators.&#160; The Special Mention classification serves as an indicator of the quality of the asset portfolio and should be used to provide direction to management on corrective measures that might be taken to strengthen an asset to avoid potential deterioration in the asset's quality.<br></p><p>Mortgages held by the regulated entities that are in loss mitigation, or have been modified and are performing according to the terms of the modification, should be listed as Special Mention but not adversely classified.&#160; The loan no longer needs to be listed as Special Mention after performance according to the terms of the modification has occurred for a period of six consecutive months.&#160; If the loan becomes delinquent after modification, adverse classification could apply according to the previously described criteria.<br></p><p>The level of adversely classified assets or assets listed for Special Mention is an indicator of the regulated entity's asset quality and overall risk profile, and may indicate whether risk management practices regarding underwriting and loan administration are effective.&#160; At a minimum, management and boards of directors of the regulated entities should evaluate risk management and other asset-specific policies and procedures annually to ensure that appropriate risk controls have been implemented.<a href="#footnote7">[7]</a>&#160;&#160;If the level of adversely classified assets suggests deterioration in any asset category, more frequent evaluations of the related policies and procedures are appropriate.&#160; Risk management and other policies will be reviewed by FHFA as part of its supervision program.<br></p><p> <strong> <em>Related Guidance and Regulations</em></strong><br></p><p>FASB ASC 326-20, Financial Instruments - Credit Losses – Measured at Amortized Cost<br></p><p>Uniform Retail Credit Classification and Account Management Policy, FFIEC<br></p><div><p> <a name="footnote1">[1]</a>&#160;Investment securities refer to securities subject to the guidance of the Financial Accounting Standards Board (FASB)'s Accounting Standards Codification (ASC), Topic 320, Investments – Debt Securities, and Subtopic 325-40, Investments – Other - Beneficial Interests in Securitized Financial Assets.<br></p><p> <a name="footnote2">[2]</a>&#160;The AMA regulation (12 CFR part 1268) authorizes FHLBanks to acquire certain assets (principally, conforming residential mortgage loans) from their members and housing associates and prescribes the parameters within which each FHLBank may do so.&#160;<br></p><p> <a name="footnote3">[3]</a>&#160;Examples of non-freestanding credit enhancements include, but are not limited to, private mortgage insurance, the Federal Housing Administration's (FHA) insurance, the Department of Veteran Affairs'&#160;(VA) guarantee, and for the FHLBanks'&#160;Acquired Member Assets (AMA) program, the various types of permissible agreements to share credit losses in purchased loans with the selling members.</p><p> <a name="footnote4">[4]</a>&#160;1) As required to maintain compliance with GAAP.&#160; 2) For loans classified as Held For Sale (HFS) and loans which a regulated entity has elected to account for under the Fair Value Option (FVO), no portion classified as Loss would be written off.<br></p><p> <a name="footnote5">[5]</a>&#160;1) As required to maintain compliance with&#160; GAAP. 2) For loans classified as Held For Sale (HFS) and loans which a regulated entity has elected to account for under the Fair Value Option (FVO), no portion classified as Loss would be written off.<br></p><p> <a name="footnote6">[6]&#160;</a><em>See </em>12 U.S.C. §&#160;1430(e).&#160; Although this provision grants FHLBank liens priority over those of similarly-situated creditors, it does not grant FHLBank liens priority over those of creditors with liens entitled to priority under otherwise applicable law.<br></p><p> <a name="footnote7">[7]</a>&#160;<em>See </em>12 CFR part 1236, Appendix (Prudential Management and Operations Standards).​&#160;&#160;<br></p></div><div> <br> </div><table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure the safe and sound operations of the regulated entities and the Office of Finance.&#160; Advisory&#160;bulletins describe FHFA supervisory expectations for safe and sound operations in particular areas and are used in FHFA examinations of the regulated entities and the Office of Finance.&#160;&#160;Questions about this advisory bulletin should be directed to&#58;&#160; <a href="mailto&#58;SupervisionPolicy@fhfa.gov">SupervisionPolicy@fhfa.gov</a>. </p></td></tr></tbody></table> <br>8/25/2021 2:00:32 PMHome / Supervision & Regulation / Advisory Bulletins / Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special 2412https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Agency Commercial Mortgage-Backed Securities Risk Management35784FHL Banks8/16/2021 4:00:00 AMAB 2021-02<p> <br> </p><table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2021-02&#58; AGENCY COMMERCIAL MORTGAGE-BACKED SECURITIES RISK MANAGEMENT</strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"><em><strong></strong></em></em></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;"><strong><em>Purpose</em></strong></span><br>This Advisory Bulletin (AB) provides Federal Housing Finance Agency (FHFA) guidance regarding Federal Home Loan Banks' (individually Bank, or collectively Banks) investments in Agency Commercial Mortgage-Backed Securities (CMBS) issued and guaranteed by either the U.S. Government (Ginnie Mae) or by one of the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac, or collectively the Enterprises).&#160;The guidance recommends risk management practices, including the establishment of certain limits, to address the risks associated with unexpected prepayments of Agency CMBS investments.&#160; FHFA encourages early adherence to this AB.&#160; However, by December 31, 2021, all Banks should have appropriate Agency CMBS concentration risk limits in place.&#160; <br></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;"><strong><em>Background</em></strong></span><br>The Banks have exposures to Agency CMBS within their investment portfolios.<a href="#footnote1">[1]</a>&#160; Agency CMBS include prepayment protection clauses that are not offered on Agency Residential Mortgage-Backed Securities (RMBS).&#160; Prepayment (i.e., call) protection features included on the underlying loans within Agency CMBS are designed to discourage borrower prepayments and protect investors through the payment of fees if voluntary prepayments occur.&#160; The additional prepayment protection offered by Agency CMBS makes these investments attractive alternatives to Agency RMBS.&#160; <br></p><p style="text-align&#58;justify;">The loans included in Agency CMBS may include varying call protection features such as lockout periods, yield maintenance, point penalties, and defeasance.&#160; In addition, these loans may have complex structures, including amortization schedules beyond thirty years and floating interest rates.&#160; The variability of call protection features combined with the complexity of loan structures make estimating Agency CMBS prepayments difficult, leaving investors at risk when prepayments occur unexpectedly.&#160; <br></p><p style="text-align&#58;justify;">Voluntary prepayments may occur when borrowers determine that the benefits associated with prepayment exceed the cost of any resulting penalties.&#160; For example&#58;&#160; </p><ul><li>When short term interest rates rise and the interest rate curve flattens, borrowers with floating-rate loans may refinance into fixed-rate products.&#160; </li><li>When interest rates decrease, borrowers with fixed-rate loans may refinance into lower fixed- or floating-rate loans.</li><li>Borrowers with loans secured by properties with significant appreciation may leverage the equity through cash-out refinances or more favorable loan terms and/or rates.</li><li>Certain loans are structured so that the penalties decline over their lives.&#160; Borrowers may be more likely to prepay these loans when they become more seasoned.<br></li></ul><p style="text-align&#58;justify;">Additionally, Agency CMBS may include floating-rate loans where borrowers are assessed only partial or no penalties for early prepayments, provided the loans are refinanced with specified loan products.<a href="#footnote2">[2]</a>​&#160; When this occurs, Agency CMBS investors receive minimal or no compensation for voluntary prepayments.&#160; <br></p><p style="text-align&#58;justify;">Furthermore, involuntary prepayments, or defaults, may occur.&#160; Involuntary prepayments are more likely to occur in periods of economic downturn generally driven by weakened real estate market fundamentals, such as declining property values, rising vacancies, breaches of lender representations and warranties, and possibly rising interest rates for adjustable rate borrowers.&#160; Although Ginnie Mae and the Enterprises guarantee timely principal payments to bondholders upon default, investors do not receive any prepayment fees under these involuntary prepayment scenarios.&#160; <br></p><p style="text-align&#58;justify;">In summary, unexpected prepayments may force Banks to reinvest in lower yielding assets, write off any premiums when valued above par, and incur the costs of associated debt overhang and transactions to unwind hedges.&#160; Depending on the nature of Agency CMBS and prepayment, a Bank may receive limited or no penalty fees to cover these costs.&#160; <br></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;"><strong><em>Guidance</em></strong></span></p><p style="text-align&#58;justify;">As described above, prepayments on Agency CMBS investments expose Banks to potential losses.&#160; Agency CMBS investments with a relatively high premium to par value increase Banks' exposure to prepayment risk and the resulting losses.&#160; To minimize the risk of losses from Agency CMBS investments, Banks should consider incorporating the following risk management practices into their existing market and model risk management programs.<br></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;">Pre-purchase Analytics</span><br>Banks should analyze each Agency CMBS prior to purchase.&#160; The analysis should include a careful assessment of the security's structure, including prepayment protection features, price variability, and prepayment history for a comparable benchmark Agency CMBS.&#160; Most importantly, the pre-purchase analysis should include stress scenarios to compare the amount of call protection premiums or fees the Bank will receive versus any loss of income resulting from the reinvestment of the prepayment proceeds under various stressed interest rate scenarios.&#160; In addition, a Bank's pre-purchase analysis should ensure that the security the Bank is considering for purchase conforms to the Bank's investment strategy and is consistent with the Bank's board-approved strategic plans and risk appetite.<br></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;">Minimum Risk-Adjusted Spread Requirement</span></p><p style="text-align&#58;justify;">Each Bank should establish a minimum acceptable risk-adjusted spread requirement for Agency CMBS investments.&#160; Banks should consider factors such as their risk appetite when establishing the required minimum.<a href="#footnote3">[3​]</a>&#160; Regardless of the approach, Banks should make certain each Agency CMBS purchase meets the established minimum risk-adjusted spread requirement.<br></p><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;">Concentration Limits</span></p><p style="text-align&#58;justify;">To limit exposure to both voluntary and involuntary prepayments, Banks should diversify their Agency CMBS investments to prevent concentrations of loans with shared characteristics.&#160; To accomplish this, Banks should establish appropriate limits based on the characteristics of the underlying loans within Agency CMBS investments.&#160; For example, Banks should consider individual loan size limits within a securitization, especially for single loan pool CMBS.&#160; In addition, Banks should consider implementing limits for loans, as a percentage of all Agency CMBS loans, for the following&#58;</p><ul><li>Floating-rate securities versus fixed-rate securities;</li><li>Geographic location of collateral such as region, state, city, zip code, or Metropolitan Statistical Area (MSA);</li><li>Collateral types – multifamily, student housing, senior living;</li><li>Loan products with minimal or no prepayment penalties under certain conditions of refinance, as available and determined by the Bank at acquisition; and</li><li>Loan originators.</li></ul><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;">Reporting</span><br>Banks should monitor and report on Agency CMBS investments as a separate investment segment.&#160; A Bank's Asset-Liability Committee (ALCO) and a responsible board committee should receive quarterly reporting on Agency CMBS investments.&#160; At a minimum, quarterly reporting should include the following&#58;</p><ol><li> <em>Minimum Risk-adjusted Spread</em> – Current minimum acceptable risk-adjusted spread requirement and monthly conformance with this minimum.</li><li> <em>Concentration Limits</em> – Current limits for Agency CMBS loans with specific characteristics and monthly conformance with these limits.</li><li> <em>E​arnings - </em>Income or loss associated with Agency CMBS investments.</li><li> <em>Strategy </em>– Any planned changes to the existing funding and hedging strategies for purchases and portfolio rebalancing.</li></ol><p style="text-align&#58;justify;"> <span style="text-decoration&#58;underline;">Prepayment Projections</span><br>Currently, Banks use static prepayment assumptions and/or vendor supplied multifamily prepayment models for Agency CMBS valuations.&#160; To support and improve the accuracy of Agency prepayment projections, Banks may use Bank-derived curves or vendor models which meet the principles outlined in FHFA AB 2013-07, and should further consider the following&#58;</p><ol><li>Developing research-based prepayment curves for fixed- and floating-rate Agency CMBS.&#160; Once developed, Banks should perform periodic reevaluations of the constructed curves by comparing them to appropriate third-party curves (if using static prepayment assumptions). </li><li>Performing prepayment back-testing at appropriate levels to provide meaningful assessments of the Agency CMBS portfolio's performance.</li><li>When relying on a prepayment model, benchmarking the model's performance against third-party prepayment projections as appropriate.&#160; </li><li>Based on portfolio composition, periodically assessing and stress-testing the key drivers of prepayment performance, for example, stressful interest rate levels, yield curve shape changes, and spread widening scenarios. </li><li>Establishing appropriate analytical threshold(s) for prepayment differences ascertained during prepayment back-testing and benchmarking analyses that would trigger investigations into the causes of differences in prepayment behavior and changes to prepayment modeling assumptions.</li></ol><p style="text-align&#58;justify;">While the above actions will improve upon current prepayment estimations, a Bank may need a vendor-provided prepayment model in concert with a stochastic interest rate model to more accurately estimate the prepayment behavior of Agency CMBS.&#160; Each Bank should carefully evaluate the available modeling alternatives and determine if any single model, or a combination of multiple models, is suitable to meet its Agency CMBS portfolio's analytical needs.&#160; In acquiring the model(s), Banks should make certain that the model's estimation process fully and accurately incorporates the prepayment penalties charged to borrowers and passed on to the investors.&#160; Any mitigating risk factors such as tranche priority in sequential pay structures should be documented.<br><span style="text-decoration&#58;underline;"><strong><em>&#160;</em></strong></span><br><span style="text-decoration&#58;underline;"><strong><em>Related Guidance and Regulations</em></strong></span><br>The following provides a summary of some of FHFA's regulation and guidance for governance and investments&#58;<br></p><ul><li> <em>Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance Regulation. </em> <em>&#160;</em>This regulation provides that the management of each regulated entity shall be by or under the direction of its board of directors.<a href="#footnote4">[4]</a> &#160;It states, “while a board of directors may delegate the execution of operational functions to officers and employees of the regulated entity, the ultimate responsibility of each entity's board of directors for that entity's oversight is non-delegable.&quot;<a href="#footnote5">[5]</a>&#160;Included in the responsibilities of each Bank's board of directors is the establishment of a risk management program that aligns with the Bank's risk appetite and that each of the Bank's business lines has appropriate risk limitations.<a href="#footnote6">[6]</a><br></li></ul><ul><li> <em>Prudential Management and Operating Standards (PMOS). </em> <em>&#160;</em>FHFA addresses limits on investments and management of assets in guidelines set out in the appendix to its PMOS regulation, including the following&#58;<a href="#footnote7">[7]</a><br></li></ul><ul><ul><li>Standard 3 (Management of Market Risk Exposure) which highlights the expectation that each regulated entity has a clearly defined and well documented strategy for managing market risk and establishes responsibilities for the board and senior management;</li><li>Standard 4 (Management of Market Risk – Measurement Systems, Risk Limits, Stress Testing, and Monitoring and Reporting) includes guidelines for market risk management in these areas;</li><li>Standard 6 (Management of Asset and Investment Portfolio Growth);</li><li>Standard 7 (Investments and Acquisitions of Assets);</li><li>Standard 8 (Overall Risk Management Processes) includes responsibilities for internal audit, the board, and senior management along with an independent risk management function; and</li><li>Standard 9 (Management of Credit and Counterparty Risk).</li></ul></ul>The failure to meet any of the PMOS may constitute an unsafe or unsound practice for purposes of FHFA's administrative enforcement authority<a href="#footnote8">[8]</a>&#160; If FHFA determines that a Bank has failed to meet a standard, it also may require the Bank to submit a corrective plan.<a href="#footnote9">[9]</a><br><br> <p></p><hr />​​ <br> <p></p><p> <a name="footnote1"><span style="text-decoration&#58;underline;">[1]</span></a> The Federal Home Loan Bank Investments regulation permits investments in Agency CMBS.&#160; <em>See</em> 12 CFR part 1267.</p><p> <a name="footnote2"> <span style="text-decoration&#58;underline;">[2]</span></a> For example, Fannie Mae's Structured Adjustable-Rate Mortgages (SARM) allow borrowers to convert their floating-rate loans to one of Fannie Mae's fixed-rate loan programs by paying a one percent premium which is not passed on to investors.</p><p> <a name="footnote3"> <span style="text-decoration&#58;underline;">[3]</span></a> If a Bank cannot use an option-adjusted spread approach to determine the risk-adjusted spread for each Agency CMBS, then the Bank may choose to apply a purchase price premium, duration, or net interest income spread approach.&#160; </p><p> <a name="footnote4"> <span style="text-decoration&#58;underline;">[4]</span></a> 12 CFR § 1239.4.</p><p> <a name="footnote5"><span style="text-decoration&#58;underline;">[5]</span></a> 12 CFR § 1239.4(a).</p><p> <a name="footnote6"> <span style="text-decoration&#58;underline;">[6]</span></a> 12 CFR § 1239.11(a).</p><p> <a name="footnote7"> <span style="text-decoration&#58;underline;">[7]</span></a> 12 CFR part 1236, Appendix.</p><p style="text-align&#58;left;"> <a name="footnote8"><span style="text-decoration&#58;underline;">[8]</span></a> 12 CFR § 1236.3(d).&#160; FHFA has authority to address unsafe or unsound practices through issuance of an order to cease-and-desist, assessment of civil money penalties, or removal from office.&#160; <em>See</em> 12 U.S.C. §§ 4631(a)(1), 4636(b)(2)(A), 4636a(a)(1), 4636a(a)(2)(A).</p><p> <a name="footnote9" style="text-decoration&#58;underline;"><span style="text-decoration&#58;underline;">[9]</span></a>&#160;12 CFR § 1236.4.<br><br></p><table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure the safe and sound operations of the regulated entities and the Office of Finance. Advisory bulletins describe FHFA supervisory expectations for safe and sound operations in particular areas and are used in FHFA examinations of the regulated entities and the Office of Finance. Questions about this advisory bulletin should be directed to <a href="mailto&#58;SupervisionPolicy@fhfa.gov">SupervisionPolicy@fhfa.gov</a>. </p></td></tr></tbody></table><p>&#160;​<br></p><p> <br>​<br>​​<br></p>8/18/2021 3:44:30 PMHome / Supervision & Regulation / Advisory Bulletins / Agency Commercial Mortgage-Backed Securities Risk Management Advisory Bulletin FHFA encourages early adherence to this 4885https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Board Diversity Data Collection33110FHLB & Office of Finance3/17/2021 4:00:00 AMAB 2021-01<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2021-01&#58; BOARD DIVERSITY DATA COLLECTION</strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"><em><strong>​</strong></em></em></p><p> <em style="text-decoration&#58;underline;"> <em> <strong>Purpose</strong></em></em></p><p>This Advisory Bulletin (AB) applies to the Federal Home Loan Banks (Banks) and the Banks’ Office of Finance (OF). The AB provides guidance on standards for data collection relating to the diversity of boards of directors (Boards) of each Bank and the OF. This AB outlines the expectations set by the Federal Housing Finance Agency (FHFA or Agency) Office of Minority and Women Inclusion (OMWI) regarding the content and frequency of data reporting on the demographic makeup of the Boards.</p><p style="text-decoration&#58;underline;"> <strong><em>Background</em></strong></p><p>Section 1116 of the Housing and Economic Recovery Act of 2008 requires the regulated entities to develop and implement standards and procedures to ensure the inclusion and utilization of minorities and women, and minority- and women-owned businesses, in all business and activities of the regulated entity at all levels.<a href="#footnote1">[1]</a> FHFA’s regulations implementing those statutory requirements, located at 12 CFR Part 1223,&#160; include several provisions addressing the diversity of Banks’ boards. The regulations include a provision&#160; encouraging the consideration of diversity in nominating or soliciting nominees for positions on the Boards of each regulated entity, see 12 CFR 1223.21(b)(7), and require each Bank and the OF to report annually the numbers of individuals who comprise their Boards by minority and gender classification, see 12 CFR 1223.23(b)(10)(i).</p> <a> <p>Among other things, the regulation also requires the regulated entities to adopt strategic plans to promote and ensure the inclusion of minorities, women, and individuals with disabilities in their workforce at all levels of the organization, as well as minority-, women-, and disabled-owned businesses in their contracting activities and financial activities. See 12 CFR 1223.21(d). Consistent with FHFA’s corporate governance regulation, the Board has ultimate responsibility for its regulated entity’s achievement of the&#160; requirements of the regulation. See 12 CFR 1239.4(a).</p> </a> <p> On July 9, 2020, FHFA issued an AB on Board diversity, <a href="#footnote2">[2]</a> which provides guidance on how each Board should oversee the regulated entity’s diversity and inclusion (D&amp;I) efforts and how the Banks and the OF should routinely assess the skills of Board members to ensure that they are able to meet their obligations to manage the regulated entity’s D&amp;I efforts and initiatives. The 2020 AB also speaks to the importance of Board diversity and notes that a Board’s efforts to develop, maintain, and sustain a diverse Board should be a combination of seeking diverse representation on the Board, as well as looking for individuals possessing the required knowledge, skills, and abilities to contribute to the execution of the Board’s D&amp;I oversight responsibilities.</p><p>In conjunction with AB 2020-02, and to assist the Banks and the OF in thoroughly assessing the results of their D&amp;I efforts, the Banks and the OF should implement diversity data collection standards to evaluate the levels of diversity on their Boards. In furtherance of FHFA’s efforts to ensure that the Banks and the OF are taking appropriate steps to promote D&amp;I within their organizations and on their Boards, and to clarify the steps the regulated entities should take for data collection, FHFA is issuing this AB to illustrate standards all Banks and the OF should adopt for the collection of Board diversity data required to be reported under 12 CFR 1223.23(b)(10)(i).</p><p style="text-decoration&#58;underline;"> <em><strong>Guidance</strong></em></p><p>Collecting Board diversity data in accordance with the standards outlined herein is the responsibility of the full Board at each Bank and the OF, with key support from each Board Chair, Vice Chair, and OMWI Officer. Board diversity data collection and handling requirements should be included in the regulated entity’s policies such as the D&amp;I policy, and Board diversity data collection and handling processes should be defined through documented roles and responsibilities in a procedures document. Data collection standards adopted by a Bank or the OF in accordance with this AB should align with and adhere to other internal Bank and OF D&amp;I program data handling requirements and FHFA OMWI data reporting guidelines, as noted in the FHFA OMWI Data Reporting Manual (DRM). Data collection standards should protect the confidentiality of the demographic information of individual Board members. Data handling practices should adhere to Bank and OF policies on information security and records retention.</p><p> <strong>Board Diversity Data Collection Standards</strong></p><p>The following Board Diversity Data Collection standards are intended to address all aspects of Board diversity data collection, handling, and reporting in accordance with applicable regulations and other requirements as communicated in other forms of supervisory guidance, as well as individual management policies. Each regulated entity is responsible for meeting the criteria within each standard described herein. Furthermore, each Bank and the OF should ensure policies, processes, and procedures are in place to ensure Board diversity data collection and reportingadheres to FHFA OMWI DRM and OMWI Annual Report and quarterly data reporting (QDR) instructions and guidance.</p> <p style="margin-left&#58;10px;">1. Board Diversity Data Collection and Reporting Frequency</p><p>Each regulated entity should, no less than annually, perform a voluntary Board diversity self-identification survey to capture the diversity demographics of the full Board (existing and newly elected). The survey should be provided to all directors (current and newly elected), and each regulated entity should establish a deadline for timely response. Non-responses to surveys should be clearly noted in the Bank and the OF’s OMWI Annual Report and QDR submissions and be captured separately from responses that did not self-identify demographic information.</p><p>In situations where incumbent directors vacate positions mid-term (planned or unplanned), the regulated entity has the option to relaunch the Board diversity self-identification survey to the full Board, capturing all new and existing director responses. This practice supports confidentiality of all director submissions and avoids confidentiality issues that might arise with the collection of only one response from a new director. FHFA recognizes, however, that this practice may become impractical or burdensome in the event a Bank or the OF encounters multiple Board vacancies in a single year. Therefore, at a minimum, the regulated entities should collect the diversity information of all new directors when they onboard. FHFA is not suggesting that the regulated entities conduct a full survey every time a new director onboards if the entities are able to ensure the confidentiality of the data collection process when they have only a single response. Further, the regulated entities are not required to submit a new report to FHFA each time this happens if a report is not otherwise due. To ensure the confidentiality of the data, the regulated entity should adhere to the data reporting schedules in the FHFA OMWI DRM and OMWI Annual Report and QDR guidance.</p><p style="margin-left&#58;10px;">2. Self- Identification Survey Template Attributes</p><p>Each Bank and the OF should develop a Board diversity self-identification survey (survey) template with defined attributes that comply with current FHFA OMWI reporting requirements and guidance. The survey will capture gender, race/ethnicity, and disability data using defined Equal Employment Opportunity Commission categories consistent with FHFA OMWI Board of Directors and Workforce Reporting for QDR submissions. The survey template may be electronic or paper, and handling of the directors’ survey responses should adhere to Bank or OF policies on information security and records retention. The survey template should include the following attributes <a href="#footnote3">[3]</a> in each reporting section&#58;</p><p style="margin-left&#58;10px;"> <span style="text-decoration&#58;underline;">Gender&#58;</span> Male, Female</p><p style="margin-left&#58;10px;"> <span style="text-decoration&#58;underline;">Race/Ethnicity&#58;</span> Hispanic or Latino, White (Not Hispanic or Latino), Black or African American (Not Hispanic or Latino), Native Hawaiian or Pacific Islander (Not Hispanic or Latino), Asian (Not Hispanic or Latino), American Indian or Alaska Native (Not Hispanic or Latino), and Two or More Races </p><p style="margin-left&#58;10px;"> <span style="text-decoration&#58;underline;">Disability&#58;</span> I do not have a disability; I have a disability </p><p>&#160;</p><p style="text-decoration&#58;underline;"> <strong> <em></em></strong>&#160;</p><p style="text-align&#58;left;">Entities may elect to collect other diversity attributes (such as veteran status), or they may choose to add other descriptors within a designated attribute (such as non-binary gender options under the gender reporting section). Additional attributes, however, are not needed for reporting to FHFA OMWI at this time.</p><p style="text-align&#58;left;"> <strong>Survey Administration and Data Handling Practices</strong></p><p>Each Bank and OF’s D&amp;I Policy should require that the regulated entities develop a documented process or procedure for administering the Board diversity self-identification survey. This process or procedure should identify roles and responsibilities that establish and define involvement of the Bank and OF’s OMWI Officer in reviewing the reported data, as well as the subsequent reporting of Board diversity demographics to the FHFA OMWI in both QDR and OMWI Annual Reports. Each Bank and the OF should define the records retention period for the data, consistent with their records retention policies and practices. Survey administration timing may be determined by the Board’s election and incumbent seat lifecycles.</p><p style="text-align&#58;left;"> <strong>Data Reporting/Submissions</strong></p><p>The Banks’ and the OF’s OMWI Officers (or OMWI staff as directed by the OMWI Officer) are responsible for oversight of the Board diversity demographic data collection and reporting in the aggregate. All data reporting should comply with FHFA OMWI data reporting guidelines.</p><p>All data reporting and data reporting frequency should comply with FHFA requirements for reporting under 12 CFR Part 1223.</p><p style="text-align&#58;left;">&#160;</p><hr width="25%" align="left" /><p> <a> </a><a name="footnote1"><span style="text-decoration&#58;underline;">[1]</span></a>&#160;P.L. 110-289, July 30, 2008, codified at 12 U.S.C. § 4520.</p><p> <a name="footnote2"> <span style="text-decoration&#58;underline;">[2]</span></a>&#160;AB 2020-02, Board Diversity, <a href="/SupervisionRegulation/AdvisoryBulletins/Pages/Board-Diversity.aspx">https&#58;//www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Board-Diversity.aspx</a>.</p><p> <a name="footnote3"> <span style="text-decoration&#58;underline;">[3]</span></a><em>&#160;</em>The Banks and the OF are permitted to include additional descriptors, including a response option of “Wish to Not Self Identify.” However, any additional information collected beyond the data points listed herein may or may not be collected in the annual or quarterly reports to FHFA.</p><p> <em>&#160; </em></p> <em> <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure that the regulated entities carry out their missions consistently with the provisions and purposes of FHFA's statute and the regulated entities' authorizing statutes. Advisory Bulletins describe supervisory expectations in particular areas and are used in FHFA examinations of the regulated entities. For comments or questions pertaining to this Advisory Bulletin, contact Paul Priest at <a href="mailto&#58;Paul.Priest@fhfa.gov">Paul.Priest@fhfa.gov</a> or (202) 649-3490, or Felicia Bland at <a href="mailto&#58;Felicia.Bland@fhfa.gov">Felicia.Bland@fhfa.gov</a> or (202) 365-7471.</p></td></tr></tbody></table> <p>&#160;</p></em>3/17/2021 6:00:54 PMHome / Supervision & Regulation / Advisory Bulletins / Board Diversity Data Collection Advisory Bulletin AB 2021-01: BOARD DIVERSITY DATA COLLECTION The 2020 AB also speaks to 2939https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Financial Reporting and Disclosure and External Audit28435All8/20/2020 4:00:00 AMAB 2020-04<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2020-04&#58; FINANCIAL REPORTING AND DISCLOSURE AND EXTERNAL AUDIT</strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"><em><strong>​Purpose</strong></em></em></p><p>This Advisory Bulletin (AB) articulates the Federal Housing Finance Agency's (FHFA) supervisory expectations for oversight and management of financial reporting and disclosures and of the external audit function. </p><p>This AB applies to Fannie Mae and Freddie Mac (the Enterprises), the Federal Home Loan Banks (FHLBanks), and the FHLBanks' Office of Finance (OF) (collectively, the regulated entities) <a href="#footnote1"> <span style="text-decoration&#58;underline;">[1]</span></a> and is effective immediately. &#160;This AB rescinds, and along with AB 2016-05 Internal Audit Governance and Function, replaces FHFA's Examination for Accounting Practices guidance.&#160; </p><p>Transparent financial reporting and disclosures, subject to strong internal control over financial reporting (ICFR) and confirmed by a high-quality external audit, help ensure that published financial information is reliable and free from material misstatements for all stakeholders.&#160; &#160;&#160;Timely, accurate, complete, and meaningful reporting and disclosures regarding financial condition and performance support FHFA's risk-focused supervision of the regulated entities.&#160; For FHFA as a prudential regulator, such reporting facilitates effective risk assessments, off-site monitoring, and examination planning. &#160;Financial condition and performance metrics for capital adequacy, liquidity, earnings adequacy, and asset quality are based on information in these reports.</p><p style="text-decoration&#58;underline;"> <strong><em>Background</em></strong></p><p>The Office of Federal Housing Enterprise Oversight (OFHEO) issued the Examination for Accounting Practices guidance to the Enterprises in 2006. &#160;FHFA revised and updated that guidance in 2009 and expanded its application to the FHLBanks. &#160;With the issuance of this financial reporting and external audit guidance and AB 2016-05 Internal Audit Governance and Function, FHFA has updated and revised the 2009 guidance to reflect our regulatory experience and that of other financial regulators, and to more clearly communicate FHFA's supervisory expectations in these areas to the regulated entities.&#160;</p><p>Regarding financial reporting and external audit, the regulated entities are governed by different, yet generally concordant, FHFA and/or Securities and Exchange Commission (SEC) regulations and auditing standards. <a href="#footnote2"> <span style="text-decoration&#58;underline;">[2]</span></a>&#160; Notably&#58;&#160;</p><ul><li>The Enterprises are SEC registrants. Their external audits are subject to Public Company Accounting Oversight Board (PCAOB) auditing standards.&#160; Under FHFA regulations, the Enterprises are subject to specified New York Stock Exchange (NYSE) requirements.</li><li>The FHLBanks are SEC registrants.&#160; Their external audits are subject to PCAOB auditing standards and under FHFA regulations, are subject to Generally Accepted Auditing Standards (GAAS) and Generally Accepted Government Auditing Standards (GAGAS). <a href="#footnote3"> <span style="text-decoration&#58;underline;">[3]</span></a>&#160; Applicable FHFA rules further detail specific requirements for audit committees regarding external audit and financial reporting oversight.</li><li>The OF is not an SEC registrant.&#160; Under FHFA regulations, FHLBank System combined financial reports are subject to GAAS and GAGAS. <a href="#footnote4"> <span style="text-decoration&#58;underline;">[4]</span></a>&#160; The regulations also address oversight of the external auditor for the combined financial reports. <a href="#footnote5"> <span style="text-decoration&#58;underline;">[5]</span></a></li></ul><p>Each Enterprise and FHLBank is covered by FHFA's Prudential Management and Operations Standards (PMOS) and each regulated entity reports financial information in conformance with U.S. Generally Accepted Accounting Principles (GAAP). <a href="#footnote6"> <span style="text-decoration&#58;underline;">[6]</span></a>&#160; Enterprise and FHLBank management assess the effectiveness of their respective entity's ICFR based on the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).&#160;</p><p>The referenced FHFA, SEC, and NYSE rules and regulations, as applicable, address a wide range of audit committee governance topics including&#58;&#160;</p><ul><li>Committee composition and members' qualifications, including financial literacy and expertise, and independence requirements;</li><li>Committee oversight of the integrity of financial statements and earnings releases and compliance with legal and regulatory requirements;</li><li>Committee charter content and minimum frequency of reviews and re-approval;</li><li>Boards' responsibility to provide the audit committee sufficient funding for payments to the external auditor and to advisors/counsel that the committee retains as it deems necessary to carry out its duties;</li><li>Committee duties and responsibilities regarding external auditor oversight including&#58;</li><ul><li>Responsibility for selecting the auditor, evaluating the auditor's performance, replacing the auditor if needed, and ensuring that the auditor is solely responsible to the committee;</li><li>Ensuring that the external auditor submits a formal written statement regarding relationships and services that may adversely affect independence and discussing any disclosed relationships that may impact objectivity and independence with the external auditor;</li><li>Reviewing the auditor's internal quality control procedures;</li><li>Meeting with, including in executive sessions, auditors and management;</li><li>Reviewing and approving procedures for handling complaints received by the regulated entity regarding accounting, internal accounting controls, or auditing matters; and confidential, anonymous submission by regulated entity staff of concerns regarding questionable accounting or auditing matters; and</li><li>Providing for an annual committee self-evaluation or external review.</li></ul></ul><p>The guidance in this AB is intended to be consistent with applicable statutes, regulations, GAAP, and auditing standards.&#160; In some instances, substantive elements of guidance herein for all regulated entities may be addressed by FHFA regulation, SEC regulation, or applicable accounting or auditing standards for one or more regulated entities.&#160; This guidance does not relieve or diminish the responsibility of a regulated entity's board of directors or management to follow applicable laws, rules, and regulations and to conform to applicable accounting standards.&#160; Any perceived conflicts should be resolved so as to comply with applicable laws and regulations, and in conformance with accounting standards.</p><p style="text-decoration&#58;underline;"> <em><strong>Guidance</strong></em></p><p> <strong>I. Financial Reporting and Disclosure Oversight and Management</strong></p><p>Regulated entities' boards of directors and senior managers are responsible, within their respective roles as described in FHFA's corporate governance regulation and prudential standards, for the institution operating in a safe and sound manner. &#160;Entities should maintain effective accounting and reporting systems and ICFR to produce reliable and accurate financial reports and meaningful disclosures.&#160;</p><p>To address accounting, financial reporting, and disclosure, audit committees should&#58;&#160;</p><ul><li>Review and discuss annual audited financial statements, quarterly SEC filings or equivalent financial statements, and earnings releases;</li><li>Meet regularly with management and external auditors and hold regular executive sessions with the external auditor;</li><li>Oversee that management establishes, implements, and maintains accounting policies and procedures that comply with applicable laws, rules, and regulations and conform to applicable guidance, including GAAP and other relevant reporting and disclosure standards;</li><li>Ensure that the regulated entity has policies in place to notify FHFA of any accounting treatments or policies identified as posing significant legal, reputation, or safety and soundness risk, with a focus on accounting treatments or policies that do not employ GAAP or preferred methods; and</li><li>Direct management to provide the committee with adequate information and reports to carry out its duties and responsibilities and challenge management and auditors where appropriate.&#160;</li></ul><p> <em>A. Assessing Materiality&#160;</em></p><p>An entity's audit committee should review and clearly understand how management and the external auditor assess financial statement materiality. &#160;For public financial disclosures, FHFA's regulated entities should follow materiality guidelines established by the SEC and other U.S. standard-setters and regulators as appropriate.&#160; FHFA is informed by the SEC's statements regarding materiality and generally considers them as part of its ongoing review of regulated entities' accounting practices and controls.&#160;</p><p>A regulated entity's determination that an accounting matter is material or presents a materiality issue may be a factor in FHFA's oversight of a regulated entity. &#160;An item not being deemed to be “material&quot; or not having “materiality&quot; for financial reporting purposes, however, would not necessarily preclude FHFA from having supervisory concerns about the item. &#160;Further, FHLBanks may be required to provide information that is less than material to their individual financial statements to the OF in order to support FHLBank System combined financial filings.&#160;</p><p> <em>B. Accounting Policies and Procedures&#160;</em></p><p>FHFA expects each regulated entity's management, with appropriate audit committee oversight, to establish and maintain&#58;&#160;</p><ul><li>A formal written procedure for developing accounting policies;</li><li>A process for disclosing those policies and the regulated entity's compliance with applicable regulatory requirements and GAAP to the committee;</li><li>Accounting and disclosure policies and procedures that reflect applicable regulatory requirements and GAAP; and</li><li>A complete and current accounting guide that lists all of the regulated entity's accounting policies, including a procedure for documenting the business purpose of all significant types of transactions.&#160;</li></ul><p>Each regulated entity currently submits its accounting guide to FHFA annually, and significant revisions to FHFA quarterly, although the FHFA Chief Accountant may request more frequent submissions.&#160;&#160;&#160;</p><p> <em>C. Internal Control over Financial Reporting</em></p><p>Each regulated entity is responsible for designing, implementing, monitoring, and maintaining its ICFR. <a href="#footnote7"> <span style="text-decoration&#58;underline;">[7]</span></a> &#160;&#160;Each regulated entity should ensure that its ICFR system is designed to minimize the risk of a material financial misstatement, whether due to reporting error, fraud, or other external or company-specific risks.&#160;</p><p>FHFA expects regulated entities to develop, implement, and maintain robust business and accounting systems and processes subject to rigorous quality controls to minimize the possibility of material misstatements.&#160; Regulated entities should remediate identified deficiencies timely and should not allow significant control deficiencies to persist.&#160;&#160;</p><p>ICFR review functions <a href="#footnote8"> <span style="text-decoration&#58;underline;">[8]</span></a> should be structured to ensure that those persons performing and evaluating testing are appropriately independent of the controls being tested. &#160;Each regulated entity should ensure that it has protocols in place for its employees and vendors to comply with the regulated entity's ICFR-related policies and procedures.&#160;</p><p>Each regulated entity should have a system in place to provide reasonable assurance that accounting and disclosure policies and procedures reflect regulatory and GAAP requirements and should have proper procedures and processes in place to evaluate compliance with those requirements.&#160; The ICFR risk assessment process should include assessing new products and business lines, as well as significant growth, shrinkage, and other changes in existing products and business lines. &#160;This should help ensure that key controls are identified and tested so that potential control deficiencies are identified timely and properly addressed.&#160;</p><p>Each regulated entity's management should ensure, and its audit committee should oversee, that the regulated entity establishes, implements, and maintains effective controls over information reported to FHFA through FHFA's Call Report System and in formal data requests.&#160;</p><p> <em>D. Regulated Entity Accounting Staff</em></p><p>Each regulated entity's management should hire sufficient numbers of technically competent accounting staff and that staff should remain professionally competent and current in professional standards. &#160;Accounting departments should implement and maintain quality control procedures to ensure that they follow accounting policies and procedures.&#160; Further, accounting staff should be charged with reporting any non-compliance with GAAP to appropriate management and/or auditors.&#160;</p><p> <em>E. Financial Statements</em></p><p>As SEC registrants, each FHLBank and Enterprise must prepare and timely file with the SEC periodic financial statements and disclosures that comply with applicable SEC regulations. &#160;Each regulated entity also should prepare and timely file financial statements and information as required by FHFA regulations.&#160; FHFA encourages the regulated entities to maximize transparency in their public financial reporting and disclosures, and to establish and implement policies that lead to comparable and consistent accounting and disclosures to the extent practicable. <a href="#footnote9"> <span style="text-decoration&#58;underline;">[9]</span></a></p><p>FHFA expects each FHLBank and Enterprise to submit to FHFA any financial information, disclosures, or other items it submits to the SEC that are not available to FHFA in public filings. &#160;FHFA also expects each regulated entity to provide additional information about the financial information, disclosures, and other items it submits to the SEC when and in the manner requested by FHFA.</p><p> <em>F. Non-GAAP Measures in Financial Statements</em></p><p>Regulated entities should consider risks associated with presenting non-GAAP measures in public financial reports, along with their responsibilities to transparently inform stakeholders about the entity's financial condition and results of operations.&#160; If a regulated entity decides to disclose a non-GAAP measure in its periodic filings, that measure should be subject to rigorous internal controls, should not be presented more prominently than similar GAAP measures, and should otherwise conform to applicable regulations.&#160; Any new proposed non-GAAP measure should be discussed with the audit committee, as appropriate, prior to initial publication.&#160; </p><p> <em>G. Alternate and Preferable GAAP Accounting Treatments</em></p><p>At least quarterly, each regulated entity's audit committee should review management's analyses of significant financial reporting issues and accounting judgments made in preparing the entity's financial statements.&#160; To facilitate this review, management should highlight, and the committee should review, significant new or unusual items arising during the financial quarter, and management's anticipated implementation of significant new or revised GAAP.&#160; These reviews should include effects of alternative GAAP methods.&#160; The audit committee should also review and discuss these areas (and others as described in applicable rules, regulations, and guidance) with the external auditor.&#160;</p><p>FHFA believes that it is prudent for the regulated entities' audit committees to assess the costs and benefits of engaging an independent third party to evaluate one or more accounting policy areas at least every two years.&#160; Committees should report their findings to their board of directors and to FHFA.&#160; Such a review may be appropriate for new or revised GAAP guidance and/or for new types of transactions that the regulated entity expects to become material, especially those for which the accounting may involve significant estimates and/or management judgments.&#160;&#160;&#160;</p><p>If the audit committee determines that the results of any such assessment warrant a targeted evaluation, it should then consider the appropriate form and scope of the engagement.&#160; Given the potential relevance of such assessments to FHFA's supervisory responsibilities, the regulated entity should structure any targeted evaluation engagement so as to make reports and workpapers available for review by FHFA.&#160;</p><p> <strong>II. External Audit Function Oversight</strong></p><p>Rigorous and effective audit committee oversight of external audit functions is critical to secure the benefits of an independent, high-quality audit.&#160; FHFA expects each regulated entity's audit committee to perform this role in accordance with applicable FHFA, SEC, and NYSE requirements.&#160; Further, FHFA expects each audit committee to establish and maintain appropriate charter elements, and well-documented policies where needed, around this oversight role. &#160;Finally, FHFA encourages regulated entities to develop, and audit committees to regularly review and approve for publication, disclosures that provide insight and information to stakeholders about how the committees oversee their external auditors.</p><p>A. Overseeing the External Audit Relationship</p><p>The concepts in this section should be considered when appointing, retaining, or terminating an external auditor.</p><p>1. Monitoring Performance</p><p>Each regulated entity's audit committee should perform and document a comprehensive assessment of the external audit firm's performance at least annually.&#160; As part of the review, the committee should request and review input from audit committee members, management, and internal auditors regarding the performance of the external auditors.&#160; The current external auditor's tenure should be considered as a factor in the assessment.&#160;</p><p>FHFA expects each audit committee to identify and consider Audit Quality Indicators (AQIs) to inform dialogue and discussions with the external auditor. &#160;AQIs are qualitative and quantitative performance metrics to help inform stakeholders, including audit committees, about key conditions or attributes that may contribute to audit quality. &#160;AQIs may be defined at both the auditing firm and the audit engagement team levels.&#160; While there is no regulation or auditing standard requiring firms to report or audit committees to use AQIs, larger auditing firms provide firm-level AQIs and/or similar information to their stakeholders. <a href="#footnote10"> <span style="text-decoration&#58;underline;">[10]</span></a> &#160;FHFA views identifying and assessing AQIs as a best practice in assessing external auditor performance.&#160;</p><p>The audit committee should consider the external auditor's internal quality control procedures, including the auditing firm's processes for performing quality control reviews, when evaluating the external auditor.&#160; The committee should discuss the auditing firm's internal quality control reviews and external PCAOB inspection results with the external auditors as part of their performance assessment. &#160;The committee should pay particular attention to any deficiencies or non-compliance issues identified by the PCAOB or internal reviews that are relevant to their regulated entity's audit.&#160; To aid in this process, the audit committee should request that the external auditor align any PCAOB inspection deficiencies with potential areas of exposure to the audit of the regulated entity.&#160; The audit committee should have a good understanding of how the audit firm is addressing any identified deficiencies, including remediation plans and timetables.</p><p>Auditing firm tenure is not explicitly addressed by FHFA or SEC regulations. &#160;Even if an incumbent auditing firm has performed satisfactorily, FHFA considers it prudent for audit committees to periodically consider, and document their consideration of, the potential costs and benefits of changing or retaining their incumbent auditing firms at least every five years, or more frequently if circumstances warrant. <a href="#footnote11"> <span style="text-decoration&#58;underline;">[11]</span></a> &#160;</p><p>2. Monitoring Independence</p><p>External auditor independence is necessary for a reliable audit. &#160;Therefore, each regulated entity's audit committee should carefully consider regulatory and professional requirements regarding independence in fact and appearance during all phases of the audit engagement. <a href="#footnote12"> <span style="text-decoration&#58;underline;">[12]</span></a>&#160; Independence requirements apply to the external auditing firm, to engagement and concurring partners, and to auditing firm staff and contractors working on the engagement. The audit committee should have a robust process for monitoring and assessing the external auditor's independence, including understanding how the external auditor assesses and monitors independence within the auditing firm.&#160;</p><p>The external auditor's communications to the audit committee regarding independence and the committee's related discussions and decisions regarding the auditor's independence should be appropriately documented.&#160; Arrangements regarding any permissible non-audit services to be provided by the audit firm should be clear and transparent, should not involve contingent compensation other than appropriate arrangements for tax work, and should be pre-approved by the audit committee.&#160; If the committee delegates some of its pre-approval authority to, for example, its Chair, it should subsequently ratify the delegate's approval.&#160;&#160;</p><p>At least annually, the committee should review the nature of all services performed by the external audit firm and assess the relative magnitude of fees and personnel involved.&#160; The committee should then consider establishing safeguards, as needed, to mitigate potential threats to audit independence that may arise as a result of providing these other services.&#160; Further, the audit committee should be informed about and consider business and financial relationships between the auditor and the regulated entity or its officers, directors, or significant shareholders, and about employment of former regulated entity employees by the auditing firm and vice versa, as necessary to identify and address circumstances that could indicate a lack of independence or the appearance thereof.&#160;</p><p> <em>B. Communication with External Auditor and Audit Engagement Letters</em></p><p>Each regulated entity's audit committee and its external auditor should have an open working relationship.&#160; Communications should be frank and robust and should cover the full range of potential topics related to financial reporting and audit risks.&#160; Significant discussions during scheduled audit committee meetings should be clearly documented in committee minutes.&#160; Other relevant substantive discussions should be appropriately documented in audit committee packages or minutes.&#160; Audit committees can promote effective communications by&#58;&#160;</p><ul><li>Maintaining a direct line of communication with the external auditor, including periodic, informal contact by the committee chair and regular executive sessions;</li><li>Requesting periodic involvement of other external audit partners, such as concurring, review, and tax partners at the audit committee meetings; </li><li>Discussing the external auditor's audit risk assessment and audit plan for the regulated entity;</li><li>Discussing with the auditor (and management, as applicable) any new, unusual, or non-standard representations made by management in their management representations letter; and</li><li>Requesting and reviewing insights from audit committee members, management, and internal auditors regarding the performance of the external auditors, at least annually.&#160;</li></ul><p>It is also important for the audit committee to have ongoing communication with the external auditor regarding its audit fees.&#160; One objective of those communications is to provide assurance to the audit committee that negotiations for the fees and the fee arrangements themselves encourage the external auditor to conduct rigorous, high-quality audits and reviews.&#160;</p><p>The engagement letter is the key document defining the relationship between the regulated entity and its external auditor.&#160; FHFA's authority to examine the regulated entities allows it to have access to all regulated entity documents, including accounting records. &#160;FHFA expects regulated entities' external audit engagement letters to be consistent with FHFA's examination authority. &#160;Accordingly, FHFA expects that each regulated entity's engagement letter should&#58;&#160;</p><ul><li>Provide that the external auditor may, upon FHFA's request, provide FHFA with access to the senior audit partners on the engagement and any other personnel whom such partners deem necessary, as well as to the external auditor's working papers prepared in the course of performing the services set forth in the engagement letter, and that such access to the external auditor may be without regulated entity personnel in attendance;</li><li>Not contain any provisions that would be characterized as unsafe and unsound under the “Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability Provisions in External Audit Engagement Letters&quot;;<a href="#footnote13"><span style="text-decoration&#58;underline;">[13]</span></a> and</li><li>Provide that the external auditor, without the approval of the regulated entity, may meet with FHFA with such frequency and about such matters as determined by FHFA, and may provide reports or other communications arising from the audit engagement directly to FHFA.</li></ul><p> <em>C. Audit Committee Transparency</em></p><p>FHFA regulations and guidelines require that the audit committees for the regulated entities review their charters annually and that the boards of directors reapprove them at least every three years. <a href="#footnote14"> <span style="text-decoration&#58;underline;">[14]</span></a> &#160;&#160;FHFA's regulated entities regularly publish their audit committee charters.&#160; Besides serving as the committee's roadmap to help ensure that it fulfills all of its duties and obligations, a well-drafted charter can provide outside readers with insights on the committee's governance and functions.&#160;</p><p>Under the PCAOB standards, auditor tenure is now a required element of the independent auditor's report.&#160; Also, critical audit matters—which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment—must be reported by the auditor beginning in the next few years. <a href="#footnote15"> <span style="text-decoration&#58;underline;">[15]</span></a>&#160; While this reporting is the responsibility of public companies' external auditors, we believe that these requirements evidence increased demand by financial statement users for information on audits and audit governance.&#160;&#160;</p><p>While effective audit committee oversight of and engagement with the external auditor are keys to obtaining a high-quality audit, there are no formal rules or standards that require those topics to be reported to shareholders. &#160;That said, industry studies confirm an increasing trend among public companies to make enhanced voluntary disclosures about their audit committees' oversight of the external audit function. &#160;Examples include disclosures about the factors that the audit committee considers when appointing or retaining an external auditor, the role of the audit committee in fee negotiations and compensation, the length of time the auditor has been engaged, whether evaluations of the auditing firm are done annually, and audit partner selection and rotation. <a href="#footnote16"> <span style="text-decoration&#58;underline;">[16]</span></a>&#160;</p><p>FHFA encourages each regulated entity's audit committee to consider providing such voluntary disclosures regarding its role in supporting a quality audit. &#160;The audit committee should remain aware of industry trends and developments regarding audit committee transparency and should work to provide the regulated entity's stakeholders with relevant information regarding their activities to the extent practicable.&#160;</p><p> <strong>III. Annual Review by Audit Committee</strong></p><p>At least annually, each regulated entity's audit committee should review, with any appropriate professional assistance, the committee's performance in light of the requirements of laws, rules, and regulations that are applicable to its activities and duties.&#160; The committee should also assess whether it is operating consistent with applicable regulatory guidance.&#160; The audit committee should provide the FHFA Chief Accountant with the materials and procedures employed in such review, as well as the final report. &#160;The review may be done as part of a committee self-assessment, an outside review, or a combination of approaches.&#160;</p><p> <strong>Related Regulations and Guidance</strong></p><p>12 CFR Part 1236 and Appendix – Prudential Management and Operations Standards&#160;</p><p>12 CFR Part 1239 – Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters&#160;</p><p>12 CFR Part 1273 – Office of Finance&#160;</p><p>12 CFR Part 1274 – Financial Statements of the Banks&#160;</p><p>Securities and Exchange Commission Guidance Regarding Management's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 72 Fed. Reg. 35324 (June 27, 2007) (codified at 17 CFR Part 241)</p><p>Securities and Exchange Commission Rule 10A-3&#58; Listing Standards Relating to Audit Committees (National Securities Exchanges), 17 CFR § 240.10A-3</p><p>Securities and Exchange Commission Rule Reg. S-X&#58; Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975 (Qualifications and Reports of Accountants), 17 CFR § 210.2-01 through -07</p><p>Securities and Exchange Commission Rule Reg. S-K&#58; Standard Instructions for Filing Forms under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975, 17 CFR Part 229</p><p>Public Company Accounting Oversight Board Rule 3526&#58; Auditor Communications with Audit Committees Concerning Independence</p><p>NYSE, Inc., Listed Company Manual, § 303A (Corporate Governance Standards) (2018)</p><p> <br>&#160;</p><hr width="25%" align="left" /><p> <a name="footnote1"><span style="text-decoration&#58;underline;">[1]</span></a>&#160;The OF is not a “regulated entity&quot; as the term is defined by 12 U.S.C. 4502(20), but for convenience, references to the “regulated entities&quot; in this AB should be read to also apply to the OF as regards its roles in issuing combined financial reports and engaging the external auditor for those reports, and to regulated entities' affiliates as regards their roles, if any, in issuing public financial reports and in engaging external auditors.</p><p> <a name="footnote2"><span style="text-decoration&#58;underline;">[2]</span></a>&#160;Duties of FHLBank audit committees are described in 12 CFR 1239.32. Duties of the OF audit committee are described in 12 CFR 1273.9. Part 1239 stipulates that the duties and responsibilities of Enterprise audit committees are set forth under rules issued by the New York Stock Exchange, and further requires that those committees comply with requirements set forth under section 301 of the Sarbanes-Oxley Act, 15 U.S.C.§ 78j-1(f). The Prudential Management and Operations Standards set forth in the Appendix to 12 CFR Part 1236 also include standards applicable to the audit committees of the FHLBanks and Enterprises.</p><p> <a name="footnote3"> <span style="text-decoration&#58;underline;">[3]</span></a><em>&#160;See </em>12 CFR 1274.2(c).</p><p> <a name="footnote4"> <span style="text-decoration&#58;underline;">[4]</span></a><em>&#160;See </em>12 CFR 1274.2(c).</p><p> <a name="footnote5"> <span style="text-decoration&#58;underline;">[5]</span></a><em>&#160;See </em>12 CFR 1274.2(d), (e).</p><p> <a name="footnote6"> <span style="text-decoration&#58;underline;">[6]</span></a><em>&#160;See </em>12 CFR Part 1236, Appendix (Standard 10.1) and 12 CFR 1273.6(b) (2).</p><p> <a name="footnote7"> <span style="text-decoration&#58;underline;">[7]</span></a> SEC Exchange Act Rule 13a-15(f) defines the term “internal control over financial reporting&quot; as&#58; a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that&#58;</p><ol><li>Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;</li><li>Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and</li><li>Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.</li></ol><p> <em>See </em>17 CFR 240.13a-15(f).</p><p> <a name="footnote8"> <span style="text-decoration&#58;underline;">[8]</span></a> For the OF, this refers to the ICFR over the OF's process for producing the FHLBanks' combined financial reports.&#160;</p><p> <a name="footnote9"> <span style="text-decoration&#58;underline;">[9]</span></a> On comparability and consistency, see FASB Statement of Financial Accounting Concepts No. 8 as amended August 2018.</p><p> <a name="footnote10"> <span style="text-decoration&#58;underline;">[10]</span></a> See Center for Audit Quality, “Audit Quality Indicators&#58;&#160; The Journey and Path Ahead,&quot; Jan. 12, 2016.</p><p> <a name="footnote11"> <span style="text-decoration&#58;underline;">[11]</span></a> The FHLBanks and the OF, in light of the FHLBank System's requirement to issue combined financial statements, have historically engaged the same external audit firm.&#160; Therefore, they undertake external auditor performance reviews and decisions on which audit firm to engage jointly.</p><p> <a name="footnote12"> <span style="text-decoration&#58;underline;">[12]</span></a> The external auditor must meet the requirements of independence set forth by the PCAOB Auditing Standard 1005 and in the SEC regulations at 17 CFR § 210.2-01.&#160;</p><p> <a name="footnote13"> <span style="text-decoration&#58;underline;">[13]</span></a> 71 Fed. Reg. 6847 (Feb. 9, 2006).</p><p> <a name="footnote14"> <span style="text-decoration&#58;underline;">[14]</span></a><em>&#160;See </em>12 CFR Part 1236, Appendix (Prudential Management and Operations Standard 2.2) (regulated entity boards); 12 CFR 1239.32(d) (1), (2) (Bank audit committees and boards of directors); 12 CFR 1273.9(c) (1) (i), (ii) (Office of Finance). Enterprise boards of directors must adopt a written charter for each board committee and comply with the committee requirements of the NYSE rules and section 301 of the Sarbanes-Oxley Act, 15 U.S.C. § 78j-1. <em>See </em>12 CFR 1239.5(b). Neither those incorporated provisions nor the regulation itself imposes any requirements with respect to the review or re-approval of committee charters.</p><p> <a name="footnote15"> <span style="text-decoration&#58;underline;">[15]</span></a><em>&#160;See </em>PCAOB Auditing Standard 3101.</p><p> <a name="footnote16"> <span style="text-decoration&#58;underline;">[16]</span></a><em>&#160;See </em>2018 Audit Committee Transparency Barometer prepared by the Center for Audit Quality and by Audit Analytics (November 2018).</p><p> <em>&#160; </em></p> <em> <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure the safe and sound operations of the regulated entities and the Office of Finance. Advisory bulletins describe FHFA supervisory expectations for safe and sound operations in particular areas and are used in FHFA examinations of the regulated entities. Questions about this advisory bulletin should be directed to <a href="mailto&#58;SupervisionPolicy@FHFA.gov">SupervisionPolicy@FHFA.gov</a>. </p></td></tr></tbody></table> <p>&#160;</p></em>8/20/2020 5:00:54 PMHome / Supervision & Regulation / Advisory Bulletins / Financial Reporting and Disclosure and External Audit Advisory Bulletin AB 2020-04: FINANCIAL REPORTING AND DISCLOSURE 4919https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Guidance on the Use of Proxies28094FHL Banks7/20/2020 4:00:00 AMAB 2020-03<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2020-03&#58; GUIDANCE ON THE USE OF PROXIES FOR DETERMINING THE INCOME OF SUBSEQUENT PURCHASERS OF OWNER-OCCUPIED UNITS SOLD BY AHP-ASSISTED HOUSEHOLDS DURING THE AHP RETENTION PERIOD </strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"> <em> <strong>​Purpose</strong></em></em></p><p>This Advisory Bulletin (AB) contains guidance, pursuant to the Affordable Housing Program (AHP) regulation, on the Federal Home Loan Banks’ (FHLBanks) or their designees’ use of proxies for determining whether the subsequent purchaser of an owner-occupied unit sold, transferred, or assigned by an AHP-assisted household during the AHP five-year retention period is low- or moderate-income (LMI). Specifically, the guidance provides for the use of a proxy based on the U.S. Department of Housing and Urban Development’s (HUD) HOME Investment Partnerships Program (HOME) and Housing Trust Fund (HTF) homeownership value limits for existing housing. The AB also discusses the option for FHLBanks to adopt an alternative proxy or proxies that are reliable indicators that the subsequent purchaser is LMI. In addition, the AB provides guidance on documentation requirements as well as content of a FHLBank’s AHP Implementation Plan.</p><p style="text-decoration&#58;underline;"> <strong><em>Background</em></strong></p><p>The Federal Housing Finance Agency’s (FHFA) AHP regulation provides that, for each household that receives AHP subsidy for purchase, for purchase in conjunction with rehabilitation, or for construction of an owner-occupied unit, the unit must be subject to a retention agreement. <a href="#footnote1">[1]</a> The retention agreement must provide that, if the AHP-assisted household sells, transfers, or assigns (hereafter referred to as &quot;sells,&quot; for ease of reading) the unit within five years of closing on the unit, the FHLBank is to be repaid a pro rata portion of the AHP subsidy from any net proceeds realized by the household minus the household’s investment, subject to certain exceptions. <a href="#footnote2">[2]</a> One such exception is when the AHP-assisted household sells the unit to a LMI household, i.e., a household with income at or below 80 percent of the area median income (AMI). <a href="#footnote3">[3]</a> This exception predates the 2018 AHP final rule. <a href="#footnote4">[4]</a> Because subsequent purchasers of units sold by AHP-assisted households are under no obligation to provide income documentation to the FHLBanks or their designees for purposes of determining the AHP-assisted household’s AHP subsidy repayment obligation, it has been difficult for FHLBanks and their designees to determine subsequent purchasers’ actual incomes and, therefore, whether this subsidy repayment exception applies. Accordingly, FHFA requested comments in the 2018 AHP proposed rule preamble on potential geographically-based and person-based proxy approaches for determining subsequent purchaser income. </p><p>After reviewing the comments received on the proposed rule, FHFA determined in the 2018 AHP final rule that the use of proxies for determining subsequent purchaser income would facilitate the FHLBanks’ implementation of the LMI subsequent purchaser exception.<a href="#footnote5"> [5]</a> Accordingly, the final rule revised the regulation to provide for the use of proxies pursuant to guidance to be issued by FHFA for determining a subsequent purchaser’s income. Specifically, the final rule provides that for any sale by an AHP-assisted household of an owner-occupied unit after a date established by FHFA in the guidance, a FHLBank or its designee must determine the subsequent purchaser’s income using one or more proxies that are reliable indicators of the subsequent purchaser’s income, which may be selected by the FHLBank pursuant to the guidance, unless documentation demonstrating the subsequent purchaser’s actual income is available.<a href="#footnote6"> [6]</a> This AB contains the guidance referenced in the final rule on the use of proxies for this purpose. </p><p style="text-decoration&#58;underline;"> <em> <strong>Guidance</strong></em></p><p> <span style="text-decoration&#58;underline;">The Proxy&#58; HUD HOME and HTF Homeownership Value Limits for Existing Housing </span></p><p>FHFA has determined that the sale of an owner-occupied unit by an AHP-assisted household at a price that is at or below the applicable HUD HOME and HTF homeownership value limit for existing housing (hereinafter &quot;value limit&quot;) is a reliable indicator that the subsequent purchaser of the unit is LMI.<a href="#footnote7"> [7]</a> In reaching this conclusion, FHFA analyzed Home Mortgage Disclosure Act (HMDA) data which indicates that, in 2018, approximately 58 percent of national HMDA-reported home sales at or below the applicable value limit were to LMI purchasers. Significantly, in the ten states in which the greatest number of AHP owner-occupied subsidies under the FHLBanks’ competitive application programs and homeownership set-aside programs were awarded in 2018, over 65 percent of such sales were to LMI purchasers. </p><p>FHFA also analyzed the 2018 HMDA income data to determine the percentage of homebuyers who purchased a home above the applicable value limit that were LMI. FHFA found that only 14.6 percent of 2018 HMDA homebuyers who purchased a home above the applicable value limit were LMI, making it relatively unlikely that applying the HOME and HTF price limits as a proxy would be under-inclusive of low-and-moderate income subsequent purchasers. </p><p>Because proxies are approximations, no proxy can definitively determine the income of a subsequent purchaser. FHFA acknowledges this limitation of proxies generally, and the possibility that any proxy based on house sales price might fail to fully account for gentrification of areas in which the home is located, as noted by some commenters on the proposed rule. In rapidly gentrifying areas, a comparatively higher percentage of non-LMI purchasers may purchase homes at or below the value limit than in areas experiencing lower rates of gentrification. </p><p>However, as noted above, the data generally suggest that house sales price at or below the applicable value limit reliably indicates that the subsequent purchaser is LMI. This proxy indicates subsequent purchaser LMI status even more reliably when the review analyzes the ten states with the highest number of AHP owner-occupied subsidies historically. </p><p>In addition, although FHFA’s priority in selecting a proxy is identifying one that reliably indicates subsequent purchaser income, FHFA has selected one that, as applied to AHP-assisted households, weighs in favor of allowing households to retain AHP subsidy and thereby enjoy the full benefits of homeownership. FHFA analyzed data available under the FHLBanks’ homeownership set-aside programs to determine the likelihood that any particular AHP-assisted household would be required to repay AHP subsidy under the value limits proxy. In 2018, only 7.7 percent of AHP-assisted households who received set-aside grants in connection with purchase purchased their homes at a price greater than the applicable value limit, which suggests that the large majority of home sales by AHP-assisted households will qualify for the LMI subsequent purchaser exception under this proxy. <a href="#footnote8">[8]</a> </p><p style="text-decoration&#58;underline;">Implementing the Proxy</p><p>The FHLBanks or their designees may use the value limits, posted on the HUD Exchange, as a proxy for determining whether the exception to the AHP subsidy repayment requirement for sales to subsequent LMI purchasers applies. HUD calculates and posts the value limits annually on the HUD Exchange website. FHFA will also post the value limits on its website and notify the FHLBanks when new annual value limits are available. </p><p>However, if a FHLBank or its designee has documentation demonstrating the subsequent purchaser’s actual income, the FHLBank may not apply the value limits proxy or any other proxy to determine subsequent purchaser income. If neither the FHLBank nor its designee has such documentation, and the FHLBank elects to apply the value limits proxy, the FHLBank or its designee must use the value limits in effect at the time the AHP-assisted household sells its unit during the AHP five-year retention period. The FHLBank or its designee will determine the applicable value limit based on the specific county where the unit is located and the size of the unit (i.e., 1-unit, 2-unit, 3-unit, or 4-unit). The FHLBank or its designee will then compare the price at which the AHP-assisted household sold the unit to that value limit. If the sales price is less than or equal to the value limit, the subsequent purchaser is regarded as LMI under the value limits proxy. If the sales price is more than the applicable value limit, the subsequent purchaser is not regarded as LMI under the value limits proxy. The FHLBank or its designee must document its determinations under the value limits proxy.</p><p style="text-decoration&#58;underline;">Alternative Bank Proxies</p><p>In lieu of or in addition to the value limits proxy, a FHLBank may, in its discretion, adopt an alternative proxy or proxies that are reliable indicators that the subsequent purchaser of an owner-occupied unit sold by an AHP-assisted household is LMI. The FHLBank should retain documentation and data that provide a sufficient basis for the adoption of the alternative proxy or proxies, including an explanation of how the proxy or proxies reliably indicate(s) that the subsequent purchaser is LMI. In addition, as with application of the value limits proxy, the FHLBank should document its determinations under an alternative proxy for each subsequent purchaser’s income. </p><p style="text-decoration&#58;underline;">AHP Implementation Plans</p><p>The FHLBanks must ensure that their AHP Implementation Plans include the specific proxy or proxies they have chosen to adopt pursuant to this AB. <a href="#footnote9">[9]</a> If a FHLBank adopts more than one proxy, its AHP Implementation Plan must include the policies determining which proxy or set of proxies will be applied in any particular circumstance. If these policies provide for the application of more than one proxy per sale, they must specify how conflicting determinations of subsequent purchaser LMI income will be resolved. <a href="#footnote10">[10]</a> </p><p style="text-decoration&#58;underline;">Effective Date</p><p>This AB is effective for any sale of an owner-occupied unit by an AHP-assisted household that occurs on or after January 1, 2021 and is during the unit’s AHP five-year retention period. However, FHFA strongly encourages the FHLBanks to implement this AB before that date as practicable. </p><p>&#160;</p><hr width="25%" align="left" /><p> <a name="footnote1"> <span style="text-decoration&#58;underline;">[1]</span></a> 12 CFR 1291.23(d)(1); 1291.42(e); 1291.15(a)(7); <em>see also Questions and Answers on the November 28, 2018 Final Rule--Part I (July 2019)</em>, available at fhfa.gov. </p><p> <a name="footnote2"> <span style="text-decoration&#58;underline;">[2]</span></a> 12 CFR 1291.15(a)(7)(v); 1291.1 (par. (1) of the definition of &quot;retention period&quot;). </p><p> <a name="footnote3"> <span style="text-decoration&#58;underline;">[3]</span></a> 12 CFR 1291.15(a)(7)(ii)(B); 1291.1 (definition of &quot;low- or moderate-income household&quot;).&#160; </p><p> <a name="footnote4"><span style="text-decoration&#58;underline;">[4]</span></a> 12 CFR 1291.9(a)(7)(ii)(B) (Jan. 1, 2018 edition). </p><p> <a name="footnote5"> <span style="text-decoration&#58;underline;">[5]</span></a> 83 Fed. Reg. 61186, 61204 (Nov. 28, 2018). </p><p> <a name="footnote6"><span style="text-decoration&#58;underline;">[6]</span></a> 12 CFR 1291.15(a)(7)(ii)(B). </p><p> <a name="footnote7"> <span style="text-decoration&#58;underline;">[7]</span></a> For more information on these value limits, how they are derived, and their function in the applicable HUD programs, see the HOME and HTF program pages on the HUD Exchange website at www.hudexchange.info. </p><p> <a name="footnote8"> <span style="text-decoration&#58;underline;">[8]</span></a><em>&#160;</em>FHFA does not collect the prices at which competitive application program subsidy recipients purchase or sell their homes. FHFA also does not collect the prices at which homeownership set-aside program subsidy recipients purchase their homes, unless the subsidy is used in connection with purchase (e.g., down payment assistance). In 2018, 68 percent of all AHP owner-occupied subsidies were awarded through set-aside programs, and 92 percent of set-aside subsidies were used in connection with purchase. </p><p> <a name="footnote9"> <span style="text-decoration&#58;underline;">[9]</span></a> 12 CFR 1291.15(a)(7)(ii)(B). </p><p> <a name="footnote10"> <span style="text-decoration&#58;underline;">[10]</span></a>&#160;12 CFR 1291.13(b)(6).&#160;&#160;&#160;&#160;&#160;&#160;&#160;</p><p> <em>&#160; </em></p> <em> <p>&#160;</p> <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure that the regulated entities carry out their missions consistently with the provisions and purposes of FHFA's statute and the regulated entities' authorizing statutes. Advisory Bulletins describe supervisory expectations in particular areas and are used in FHFA examinations of the regulated entities. For comments or questions pertaining to this Advisory Bulletin, contact Ted Wartell at <a href="mailto&#58;Ted.Wartell@fhfa.gov">Ted.Wartell@fhfa.gov</a> or by phone at 1-202-649-3157; or Tiffani Moore at <a href="mailto&#58;Tiffani.Moore@fhfa.gov">Tiffani.Moore@fhfa.gov</a> or by phone at 1-202-649-3304. </p></td></tr></tbody></table> <p>&#160;</p></em> <p>&#160;</p>7/20/2020 8:58:52 PMHome / Supervision & Regulation / Advisory Bulletins / Guidance on the Use of Proxies Advisory Bulletin AB 2020-03: GUIDANCE ON THE USE OF PROXIES FOR DETERMINING THE INCOME 3237https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Board Diversity27914FHL Banks7/9/2020 4:00:00 AMAB 2020-02<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2020-02&#58; <strong>Board Diversity</strong></strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"><em><strong>​</strong></em></em></p><p> <em style="text-decoration&#58;underline;"> <em> <strong>Purpose</strong></em></em></p><p>This Advisory Bulletin (AB) applies to the Federal Home Loan Banks (Banks) and the Banks’ Office of Finance (OF) (collectively, the System). The AB provides guidance on the diversity and inclusion (D&amp;I) program oversight responsibilities of the System’s boards of directors (Board). The AB addresses D&amp;I programs required of the System and for which the Boards should exercise appropriate oversight. To meet oversight obligations, the Board should become familiar with the legal concepts related to D&amp;I, its administration by the System, the role of the Federal Housing Finance Agency (FHFA or Agency) related to statutory and regulatory authorities and expectations related to D&amp;I.</p><p style="text-decoration&#58;underline;"> <strong> <em>Background</em></strong></p><p>Congress adopted provisions regarding D&amp;I for regulated entities and FHFA as section 1116 of the Housing and Economic Recovery Act of 2008. 12 U.S.C. § 4520. The statute required the regulated entities to create an office or designate an office to carry out the section focused on diversity in management, employment, and business activities in accordance with standards and requirements as the Director of FHFA would establish. In December 2010, FHFA adopted a final rule implementing the law, at 12 CFR Part 1223, for its respective regulated entities. The regulation included a requirement to encourage the consideration of diversity in nominating or soliciting nominees for positions on the Board of Directors of each regulated entity. 12 CFR 1223.21(b)(7). </p><p>Formal D&amp;I supervision of the regulated entities began after the FHFA Office of Minority and Women Inclusion (OMWI) performed baseline reviews of their D&amp;I programs in 2015 and 2016 <a href="#footnote1">[1]</a>.</p><p>In 2015, the Agency amended the regulation to require each Bank and the OF to report annually on demographic information related to their Boards. 12 CFR 1223.23(b)(10)(i). Subsequently, the Agency developed and implemented a D&amp;I Examination Module that became effective on January 1, 2017 <a href="#footnote2">[2]</a>. In July 2017, FHFA finalized regulation amendments requiring the regulated entities, among other things, to adopt strategic plans to promote and ensure the inclusion of minorities, women, and individuals with disabilities in their workforce at all levels of the organization, as well as minority-, women-, and disabled-owned businesses in their contracting activities and financial activities. 12 CFR 1223.21(d). Consistent with FHFA’s corporate governance regulation, 12 CFR 1239.4(a), the Board has ultimate responsibility for its regulated entity’s achievement of the requirements of the regulation.&#160;</p><p style="text-decoration&#58;underline;"> <em><strong>Guidance</strong></em></p><p> <strong>Board Oversight </strong> </p><p>Each Board of Directors is responsible for oversight of the entity’s respective D&amp;I programs in their entirety, which includes setting the strategic goals and ensuring the appropriate management “tone at the top.” Each Board should oversee the entity’s D&amp;I program through review of its efforts as evidenced in reports provided by management, including the Chief Executive Officer and OMWI Officer. Such reports should include information and data on D&amp;I strategic goals; resource adequacy (human, technological, and financial); and integration of contractual parties with the entity’s businesses and activities. <br>To address management activities regarding D&amp;I, directors must have ongoing familiarity with D&amp;I requirements and pay due attention to the entity’s D&amp;I efforts and accomplishments. The Board should seek to assure itself that the entity’s D&amp;I program is conducted in line with statutory and regulatory requirements to promote diversity and ensure inclusion. The Board should expect ongoing reporting regarding the entity’s initiatives as well as D&amp;I accomplishments, progress, or challenges for the entity in areas identified by statute and regulation. </p><p> <strong>Board Directors — Effective Oversight</strong></p><p> In order to facilitate effective oversight of the D&amp;I program, the Board should be provided sufficient information on an ongoing basis on D&amp;I obligations and progress to oversee effectively the entity’s D&amp;I programs. The Board should assure that the reporting by management and the OMWI Officer is in line with law and regulation. If necessary, the Board should seek such external assistance, as it may require, to review, understand, and provide input on the entity’s D&amp;I program. The Board should consider, as well, efforts to enhance diversity among its membership in line with law and regulation.</p><p>With respect to Board skills assessments, FHFA notes the following areas of D&amp;I law, regulation, and programs that should be familiar to directors and be part of routine reporting by the management of each entity in the System&#58; </p><ol><li>Diversity. Ability to assess whether the management of each entity in the System seeks to promote D&amp;I based on its experience working with minorities, women, and individuals with disabilities and in seeking the skill sets from a diverse group for employment and contracting.&#160;</li><li>Equal Opportunity Principles. An understanding of fundamental equal employment opportunity and D&amp;I principles.</li><li>Managing Diversity Programs and Initiatives. The Board should be able to assess whether each entity’s management and OMWI Officer have the requisite ability to develop initiatives and to deploy programs that support inclusion of diverse populations in employment and contracting. Such assessment should be founded on reports with usable standards and metrics.&#160;</li><li>Change Management. The Board should be able to assess management and the OMWI Officer leading organizational development and corporate communication and facilitate outreach and new projects with various stakeholders internal or external to the regulated entity.&#160;</li><li>Strategic Leadership. The Board should adopt and communicate D&amp;I objectives.<br></li></ol><p> <strong>Enhancing Board Oversight</strong></p><p>Each Bank and the OF may conduct an annual assessment of skills and experience possessed by the members of its Board as a whole and may determine whether the capabilities of the Board would be enhanced through the addition of individuals with particular skills and experience. Board D&amp;I experience and knowledge should be included in any such Board assessments. The Board or its corporate governance committee should oversee the implementation of recommendations arising from Board self-assessments. As part of its oversight duties, the corporate governance committee also may identify skills and expertise gaps among the members of the Board and may recommend that the Bank or OF indicate that it seeks persons with those skills as nominees for directorship positions. In addition, the Board should implement training for existing Board members to develop or enhance their ability to meet their obligations to oversee the entity’s D&amp;I obligations.</p><p style="text-align&#58;left;"> <strong>Board Diversity</strong></p><p>A Board's efforts to develop, maintain, and sustain a diverse Board should be a combination of seeking diverse representation on, and providing support to, the Board to meet its D&amp;I oversight responsibilities. &#160;This requires the Board to articulate its role in performing D&amp;I oversight.&#160; At the same time, promoting diversity of the Board itself should be encouraged by the Board through communication of the Bank or OF's obligations under law and regulation and the value of fostering opportunities for diverse candidates for Board service to assist in this oversight responsibility. </p><p style="text-align&#58;left;">Boards may seek to increase director diversity by requiring the Bank or OF to communicate to members its goals of identifying potential diverse candidates.&#160; Boards may engage search firms for identifying potential independent director nominees, as appropriate, and taking such other steps as may promote diversity.&#160; &#160;</p><p style="text-align&#58;left;">&#160;</p><hr width="25%" align="left" /><p> <a name="footnote1">[1]</a> On December 19, 2012, FHFA issued Advisory Bulletin (AB) 2012-03, which implemented the Agency’s decision to include D&amp;I as a criterion in rating the Management component of CAMELSO.&#160; AB 2012-03 provides&#58;</p><blockquote dir="ltr"><p>MANAGEMENT – When rating a regulated entity's management, examiners determine the capability and willingness of the board of directors and management, in their respective roles, to identify, measure, monitor, and control the risks of the regulated entity's activities and to ensure that the regulated entity's safe, sound and efficient operations are in compliance with applicable laws and regulations. When making this determination, examiners assess&#58;</p></blockquote><ul><li><p>the regulated entity's compliance with laws and regulations, including Prudential Management and Operational Standards (PMOS), Office of Minority and Women Inclusion (OMWI) and relevant provisions of the Dodd-Frank Act[.]</p></li></ul><p> <em>See&#58; </em><a href="/SupervisionRegulation/AdvisoryBulletins/AdvisoryBulletinDocuments/FHFA_AB_2012-03.pdf">https&#58;//www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/AdvisoryBulletinDocuments/FHFA_AB_2012-03.pdf</a>.&#160; CAMELSO stands for Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Market Risk, and Operational Risk.&#160; </p><p> <a name="footnote2">[2]</a> The manual is available at&#58; <a href="/SupervisionRegulation/ExaminerResources/Documents/062717-OMWI-Exam-Module.pdf">https&#58;//www.fhfa.gov/SupervisionRegulation/ExaminerResources/Documents/062717-OMWI-Exam-Module.pdf</a> &#160;</p>&#160;&#160;&#160;&#160;&#160;&#160; <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"> <font color="#000000" face="Times New Roman" size="3"> </font> <p> FHFA has statutory responsibility to ensure that the regulated entities carry out their missions consistently with the provisions and purposes of FHFA's statute and the regulated entities' authorizing statutes.&#160; Advisory Bulletins describe supervisory expectations in particular areas and are used in FHFA examinations of the regulated entities.&#160; For comments or questions pertaining to this Advisory Bulletin, contact Sharron Levine at <a> </a><a href="mailto&#58;Sharron.Levine@fhfa.gov">Sharron.Levine@fhfa.gov</a>&#160;or James Jordan at <a> </a><a href="mailto&#58;James.Jordan@fhfa.gov">James.Jordan@fhfa.gov</a>.&#160;</p> <font color="#000000" face="Times New Roman" size="3"> </font></td></tr></tbody></table><p>&#160;</p>7/9/2020 1:54:55 PMHome / Supervision & Regulation / Advisory Bulletins / Board Diversity Advisory Bulletin This Advisory Bulletin (AB) applies to the Federal Home Loan Banks (Banks) and the 2781https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Acquired Member Assets Risk Management30323FHL Banks1/31/2020 5:00:00 AMAB 2020-01<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p> <strong>​ADVISORY BULLETIN</strong></p><p> <strong>AB 2020-01&#58; ACQUIRED MEMBER ASSETS RISK MANAGEMENT</strong></p></td></tr></tbody></table><p> <em style="text-decoration&#58;underline;"><em><strong>​Purpose</strong></em></em></p><p>This Advisory Bulletin (AB) provides Federal Housing Finance Agency (FHFA) guidance regarding a Federal Home Loan Bank's (Bank) risk management of Acquired Member Assets (AMA), including FHFA's expectations that Bank boards of directors establish certain limits. &#160;The Banks should be able to demonstrate their progress toward adherence to this guidance by September 30, 2020 and should have final limits in place by December 31, 2020.&#160; </p><p style="text-decoration&#58;underline;"> <strong> <em>Background</em></strong></p><p>The mission of the Banks is to provide to their members and housing associates financial products and services that assist and enhance such members' and housing associates' financing of housing and community lending.<a href="#footnote1"><span style="text-decoration&#58;underline;">[1]</span></a>&#160; Similar to taking an advance, when a member sells eligible mortgage loans to a Bank, the Bank serves as a funding source for the member's housing finance lending.&#160;&#160;&#160;&#160;&#160; </p><p>FHFA regulations and guidance related to AMA embody the principles that the Banks must acquire AMA safely and soundly and in a manner that is consistent with the Banks' mission.&#160; Sound governance of AMA programs is critical to safety and soundness and should include the establishment of limits to control the risks inherent in owning mortgage loans.&#160; AMA programs should at the same time fulfill the affordable housing mission requirements articulated in the Bank housing goals.&#160; The guidance in this Advisory Bulletin highlights FHFA's supervisory expectations with respect to sound risk management practices and how they relate to AMA. </p><p style="text-align&#58;left;"> <span style="text-decoration&#58;underline;">Regulatory Environment</span></p><p style="text-align&#58;left;">The following provides a summary of some of the regulation and guidance for governance and AMA.</p><ul style="list-style-type&#58;disc;"><li> <em>Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance Regulation.</em><em>&#160; </em>This regulation provides that the management of each regulated entity shall be by or under the direction of its board directors.&#160; It states, “the ultimate responsibility of each entity's board of directors for that entity's oversight is non-delegable.&quot;<a href="#footnote2"><span style="text-decoration&#58;underline;">[2]</span></a> &#160;Included in the responsibilities of each Bank's board of directors is the establishment of a risk management program that aligns with the Bank's risk appetite and that each of the Bank's business lines has appropriate risk limitations.<a href="#footnote3"><span style="text-decoration&#58;underline;">[3]</span></a><em></em></li></ul><ul style="list-style-type&#58;disc;"><li> <em>Prudential Management and Operating Standards (PMOS) Regulation.</em>&#160; FHFA addresses limits on investments and management of assets in its PMOS regulation, the appendix to which establishes eleven standards as guidelines, including Standard 6 (Management of Asset and Investment Portfolio Growth), Standard 7 (Investments and Acquisitions of Assets), and Standard 9 (Management of Credit and Counterparty Risk).<a href="#footnote4"><span style="text-decoration&#58;underline;">[4]</span></a>&#160;&#160; The failure to meet any of the PMOS may constitute an unsafe or unsound practice for purposes of FHFA's administrative enforcement authority.<a href="#footnote5"><span style="text-decoration&#58;underline;">[5]</span></a>&#160; If FHFA determines that a Bank has failed to meet a standard, it also may require the Bank to submit a corrective plan.<a href="#footnote6"><span style="text-decoration&#58;underline;">[6]</span></a><br></li><li> <em>AMA Regulation</em>. &#160;FHFA's AMA regulation prescribes the parameters within which the Banks may purchase mortgage loans from members and housing associates (known as participating financial institutions or PFIs).&#160; The core of the AMA rule is a three-part test, the first and second parts of which focus on asset eligibility and member nexus, respectively.&#160; The third part focuses on the transactions through which a Bank acquires AMA – specifically, credit risk-sharing.<a href="#footnote7"><span style="text-decoration&#58;underline;">[7]</span></a>&#160;&#160;&#160; <br></li><li> <em>Core Mission Achievement Advisory Bulletin</em>.&#160; FHFA's Core Mission Achievement Advisory Bulletin describes AMA, along with advances, as “Primary Mission Assets,&quot; which are fundamental to the business of a Bank and most directly contribute to its mission.<a href="#footnote8"><span style="text-decoration&#58;underline;">[8]</span></a>&#160; It states, “[b]ecause a portfolio of residential mortgage loans presents risks not present with advances, FHFA expects that each Bank's board of directors will establish a prudential limit on its maximum holding of AMA, which should be governed by the Bank's ability to manage the risks inherent in holding mortgages.&quot;&#160; FHFA included similar language in the preamble to the final AMA rule<a href="#footnote9"><span style="text-decoration&#58;underline;">[9]</span></a> and in the AMA Price Risk Governance Advisory Bulletin.<a href="#footnote10"><span style="text-decoration&#58;underline;">[10]</span></a>&#160; </li></ul><ul style="list-style-type&#58;disc;"><li> <em>AMA Price Risk Governance Advisory Bulletin.</em>&#160; FHFA's AMA Price Risk Governance Advisory Bulletin describes the practices a Bank should employ, through management and controls, to mitigate its exposure to AMA price risk.&#160; AMA price risk, for purposes of the Advisory Bulletin, is the risk that the price the Bank pays for an AMA mortgage loan is too high relative to intrinsic value based on prevailing and forecasted market conditions at the time of acquisition.<a href="#footnote11"><span style="text-decoration&#58;underline;">[11]</span></a><br></li><li> <em>Bank Housing Goals Regulation</em>.&#160; FHFA's Housing Goals regulation establishes housing goals for AMA purchases of loans to low-income borrowers, very low-income borrowers, and borrowers in low-income areas.<a href="#footnote12"><span style="text-decoration&#58;underline;">[12]</span></a>&#160;&#160;</li></ul><p> <em><strong>Guidance</strong></em></p><p style="text-align&#58;left;"> <em>Board-established Limits.</em>&#160; Each Bank's board of directors should establish limits on its AMA portfolios within the context of its risk appetite<a href="#footnote13"><span style="text-decoration&#58;underline;">[13]</span></a> and the unique characteristics of its membership and district. &#160;At the same time, the board should ensure that the Bank serves as a liquidity source for members – particularly smaller members who may not have the same capacity or access to sell loans in the secondary market that larger members may have. &#160;For purposes of this Advisory Bulletin, the term “smaller members&quot; includes all Bank members whose total assets are below the community financial institution (CFI) asset cap as defined in section 1263.1 of FHFA's regulations, and includes credit unions, insurance companies, and non-depository community development financial institutions.&#160; </p><p style="text-align&#58;left;"> <em>Management Thresholds.</em><em>&#160; </em>To support the board-established risk limits, management of each Bank should establish thresholds that would serve as monitoring tools to manage AMA-related risk exposure.&#160; Management thresholds typically should be set at levels sufficiently below the risk limits established by the board, so that management would have adequate time to address any relevant developments that might otherwise result in a breach of a board-established limit.&#160; If a Bank's AMA holdings were to breach a management threshold, it should have a formal process in place to assess and manage the resulting AMA-related risks.&#160; The process may require management to conduct a targeted analysis or additional ongoing monitoring, which would also provide the board information useful in fulfilling its governance responsibilities.&#160; Examples of actions management might take to avoid breaching management thresholds, or to avoid exceeding board-established limits if a management threshold is breached, might include&#58;</p><ul style="list-style-type&#58;disc;"><li>Imposing loan acquisition restrictions by loan type, e.g., high-balance loans or third-party loans,</li><li>&#160;Limiting loan purchases from a particular member that accounts for a disproportionate amount of total acquisitions, or</li><li>Participating or selling interests in some of its AMA mortgage loans to other Banks.</li></ul><p> <span style="text-decoration&#58;underline;">Establishing Board Limits</span></p><p style="text-align&#58;left;">FHFA expects each Bank's board of directors to approve a strong risk management program, to evaluate AMA-related risks, based on management's proposals, and to establish limits to control those risks.&#160; To accomplish these objectives, each Bank should have staff with a strong understanding of, and insight into, the secondary mortgage market and the risks that affect the acquisition, funding, and servicing of mortgages.&#160; The staff should have a skill set that allows them to evaluate AMA risk beyond the determination of credit enhancement obligations.&#160; Ultimately, the staff should have the necessary expertise to monitor portfolio and market issues before they adversely affect either the mission focus or the safe and sound operation of the Bank.&#160; </p><p style="text-align&#58;left;">FHFA expects that a prudent approach to managing risks associated with a Bank's AMA holdings would include the types of limits described in the paragraphs below.&#160; Boards may adopt other limits to control other AMA-related risks, as identified by Bank staff as being appropriate to the magnitude of the Bank's AMA portfolio.</p><p> <em>AMA Portfolio Limits</em></p><p>Given the risks associated with AMA, which include price, interest rate, operational, credit, model, and liquidity risks, each Bank's board should consider how it can safely and soundly manage its portfolio.&#160; In considering portfolio limits, a Bank should consider, for example, the cost for safely and soundly managing how market risk may evolve in response to fluctuations in the size of the mortgage portfolio,<a href="#footnote14"><span style="text-decoration&#58;underline;">[14]</span></a> and the risk of adverse effects on the Bank's profitability resulting from external factors that may occur in both the short and long term.&#160; Those risks may be magnified by concentrations of loan coupons or vintages.&#160; A board also should consider any risks associated with acquiring a large portion of its AMA mortgages from a single PFI.&#160; When a board is setting portfolio limits, FHFA expects a Bank to consider the needs of its smaller members, who may rely on the Bank as a liquidity source to a greater degree than its larger members, who may have alternative access to the secondary mortgage market. The Bank should ensure that its portfolio limits do not result in the Bank's acquisition of mortgages from smaller members being “crowded out&quot; by the acquisition of mortgages from larger members.&#160;&#160; </p><ul style="list-style-type&#58;disc;"><li> <em>Size of Portfolio. </em>Each Bank's board of directors should establish a limit on its maximum holdings of AMA that is consistent with its risk appetite and the long-term safety and soundness of the Bank.&#160; When establishing the limit on the size of its AMA portfolio, the board may develop its own metrics that it deems most appropriate for its business plans and the needs of its members, such as a percentage of assets or consolidated obligations, or as a multiple of capital.&#160; FHFA will assess the portfolio limit and the metrics used to set it as part of its regular supervisory process.&#160; If a board has considered multiple approaches to setting its portfolio limit and can demonstrate that it has used the most conservative of those approaches in establishing the binding board limit, FHFA generally would consider that to be consistent with the safe and sound operation of the Bank.&#160; FHFA also expects that the board of directors would monitor the appropriateness of its chosen metrics in light of changing conditions in the mortgage markets, capital markets, the Bank's financial condition, and the needs of its members, and consider any appropriate revisions to the metrics used to set the existing portfolio limits.&#160;&#160;</li></ul><ul style="list-style-type&#58;disc;"><li> <em>Growth.</em><em>&#160; </em>Each Bank's board of directors should establish a limit on the amount of AMA the Bank could acquire during a defined period of time in order to mitigate risks associated with rapid growth. &#160;Reasonable metrics for managing rapid growth could include limits based on gross dollar amount acquired and net growth in AMA holdings in dollars or as percent of balances outstanding.&#160;<br></li><li> <em>Single PFI Acquisition</em>. &#160;Each Bank's board of directors should establish annual limits on the dollar amount of AMA that the Bank may acquire from a PFI.&#160; PFI limits should be appropriate to the particular PFI, should be consistent with the Bank's overall AMA portfolio limit, should avoid undue concentrations of the overall AMA portfolio from particular PFIs, and should provide reasonable assurance that the Bank's smaller members will be able to continue to sell AMA to the Bank during the year, regardless of the amount of AMA purchased from the Bank's larger members.&#160;&#160;&#160;&#160;&#160;&#160;</li></ul><p> <em>Loan Concentration Limits</em>&#160;</p><p> FHFA expects each Bank's board of directors to consider the risks associated with an aggregation of loans that have common characteristics, i.e., concentration risk. &#160;Pools of loans that have common characteristics are sensitive to the same economic developments or downturns.&#160; This sensitivity can cause a pool of loans to perform as if it were a single, large exposure, which potentially exposes the Bank to disproportionately greater credit losses that could negatively affect a Bank's capital.&#160; Concentration risk may be further exacerbated for pools composed of loans that have multiple common characteristics, i.e., risk layering. &#160;Each Bank should identify characteristics that, when aggregated in a pool or in the Bank's portfolio, could increase the Bank's risk exposure.&#160; Loan characteristic concentrations each board should consider include&#58;&#160;<br></p><ul style="list-style-type&#58;disc;"><li> <em>Geographic area concentration,</em> which is determined by evaluating the amount or percentage of acquired loans secured by properties within a geographic location.&#160; The geographic areas of AMA loans held by a Bank could be evaluated by, for example, state, county,&#160;or metropolitan statistical area.<a href="#footnote15"><span style="text-decoration&#58;underline;">[15]</span></a> FHFA expects Banks to have specific limits on AMA concentrations in particular housing markets, both in- and out-of-district.&#160; The limits could be relative to a PFI's sales to a Bank, relative to total acquisitions in a given period, or relative to outstanding dollar balances.&#160; <br></li><li> <em>High-balance loan concentration,</em> which is determined by evaluating the amount or percentage of acquired loans that are high-balance loans. “High-balance loans&quot; are conforming loans secured by residential properties located in “high-cost areas&quot; with loan amounts exceeding the baseline conforming loan limits.&#160; Such loans may perform differently than loans at the baseline limits.<a href="#footnote16"><span style="text-decoration&#58;underline;">[16]</span></a>&#160;&#160;</li></ul><p> <em>Third-party Loan Origination Limits</em></p><p>The AMA regulation authorizes the Banks to purchase mortgage loans from a member only if the member (or an affiliate) had originated the loan or had acquired it from a third party for a “valid business purpose.&quot;<a href="#footnote17"><span style="text-decoration&#58;underline;">[17]</span></a>&#160; The Federal Housing Finance Board issued a regulatory interpretation that lists some factors that would be sufficient to demonstrate that a loan acquired from a third-party originator meets the valid business purpose requirement.<a href="#footnote18"><span style="text-decoration&#58;underline;">[18]</span></a>&#160; The interpretation also makes clear that a member must have meaningful influence or control over the mortgage assets it acquires or over the process by which it acquires them in order to demonstrate that the member has acquired them for a valid business purpose.&#160; The factors indicating the existence of a valid business purpose include&#58;&#160; (1) whether purchasing loans from third-party originators represents a core business of the member; (2) how long the member has been involved in purchasing such loans; (3) whether the member is familiar with the third-party originators and experienced with the type, quality, and volume of the assets being purchased from the originators; (4) whether the member has a clear opportunity to identify and address the potential for fraud on an operational level; (5) whether the member itself approves and contracts with the originators; and (6) whether the member itself sets the terms of its contractual relationship with the third party originators, including asset standards and pricing.&#160;&#160;</p><p>As a legal matter, Banks acquiring mortgage loans that have been originated by nonmember third parties must be able to demonstrate that the member has acquired those loans for a “valid business purpose,&quot; as required by the AMA regulations.&#160; The Banks should have processes in place that actively ensure that the member selling the loans to the Bank is exercising meaningful influence over or control of the assets it is selling, as described above.&#160; A perfunctory assessment of whether a member in fact exercises such influence or control would not demonstrate that a member has acquired mortgage loans from a third-party originator “for a valid business purpose,&quot; which could cause the mortgage loans not to qualify as AMA.&#160;&#160;&#160;&#160;&#160;</p><p>Generally, loans originated by third parties are acquired by a Bank from members that have banking services networks that involve nonmembers.&#160; Such loans can potentially carry greater risk than loans originated by a member.&#160; FHFA expects a Bank's board of directors to establish limits on the amount of loans it acquires that are originated by third parties.&#160; Those limits could be based on any reasonable metrics, such as a portion of the Bank's total AMA acquisitions or a portion of its acquisitions from a single member. &#160;FHFA expects Banks to consider the risks associated with the acquisition of third-party originated loans that are secured by properties located outside of the Bank's district.&#160;&#160;</p><p>In consideration of smaller members who may not have the same ability to sell loans in the secondary market that larger members may have, third-party loan origination limits need not apply to smaller members that do not have their own mortgage origination operations. &#160;Nonetheless, such members must still meet the valid business purposes requirements established in the AMA rule and Regulatory Interpretation 2000-RI-25.&#160;</p><p> <em>Pricing Limits</em></p><p>FHFA expects each Bank's board of directors to consider the price risk associated with AMA.&#160; The higher the price a Bank pays for an AMA mortgage loan, the lower its expected earnings will be, all else equal.&#160; If the expected yield on a risk-adjusted basis is too low, a Bank may not earn enough to cover operating costs.&#160; As stated in the AMA Price Risk Governance AB, a Bank “should set mortgage acquisition prices to ensure the resulting expected spread to funding covers its costs and provides adequate compensation for the risk assumed, e.g., option, interest rate, credit, and model risk.&#160; The [Bank's] management committee should provide oversight, which includes approving and periodically reevaluating the minimum expected spread to funding target that guides AMA pricing.&quot;&#160;&#160;</p><p>Each Bank's board of directors should establish a limit on the price at which the Bank will acquire AMA loans.&#160; Mortgages acquired with a relatively high premium to par increase the Bank's exposure to prepayment risk.&#160; The write down of a mortgage premium reduces returns to the Bank and may result in losses.&#160; Each board of directors should establish a price limit on an individual loan basis and a portfolio amortized cost basis as observed at a point in time.&#160; For the latter, a Bank's board should establish a limit on the volume of loans it acquires at a board-determined premium level.&#160; The board should also establish a limit on the percentage of the Bank's total outstanding portfolio that was acquired at the board-determined premium level. </p><p style="text-decoration&#58;underline;"> <strong> <em>FHFA Monitoring of AMA Risk Management</em></strong> </p><p>FHFA will consider each Bank's AMA risk management as part of its regular supervisory process, including the limits established by the Bank's board of directors.&#160; As part of its off-site monitoring of Bank safety and soundness, FHFA may request periodically that each Bank submit to FHFA its board-approved AMA risk limits or thresholds.&#160; </p><p> <span style="text-decoration&#58;underline;"> <strong> <em>Supervisory Letter</em></strong></span></p><p>A Bank or the Banks may receive a supervisory letter, as warranted, should FHFA determine adopted board limits are insufficient.&#160; Furthermore, examiners will issue findings during the examination process if a Bank does not have sufficiently safe and sound AMA limits approved by the board of directors.&#160; </p><p style="text-decoration&#58;underline;"> <strong> <em>Related Guidance</em></strong> </p><p>Federal Housing Finance Board Regulatory Interpretation 2000-RI-25, <em>Acquired Member Assets Held for a Valid Business Purpose </em>(Nov. 17, 2000).</p><p> <a name="footnote1"><span style="text-decoration&#58;underline;">[1]</span></a> 12 CFR § 1265.2</p><p> <a name="footnote2"><span style="text-decoration&#58;underline;">[2]</span></a> 12 CFR § 1239.4(a).</p><p> <a name="footnote3"><span style="text-decoration&#58;underline;">[3]</span></a> 12 CFR §§&#160;1239.4(c)(1) and 1239.11(a).&#160; </p><p> <a name="footnote4"> <span style="text-decoration&#58;underline;">[4]</span></a> 12 CFR Part 1236, Appendix.</p><p> <a name="footnote5"><span style="text-decoration&#58;underline;">[5]</span></a> 12 CFR § 1236.3(d).&#160; FHFA has the authority to address unsafe or unsound practices through issuance of an order to cease-and-desist, through assessment of civil money penalties, or removal from office.&#160; 12 U.S.C. §§&#160;4631(a)(1), 4636(b)(2)(A), 4636a(a)(2)(A).&#160;&#160; </p><p> <a name="footnote6"> <span style="text-decoration&#58;underline;">[6]</span></a> 12 CFR § 1236.4.</p><p> <a name="footnote7"><span style="text-decoration&#58;underline;">[7]</span></a> 12 CFR §§&#160;1268.3 (asset test), 1268.4 (member nexus), and 1268.5 (credit risk sharing).</p><p> <a name="footnote8"><span style="text-decoration&#58;underline;">[8]</span></a><em>&#160;See </em> <em>FHLBank Core Mission Achievement</em> AB 2015-05, July 14, 2015.</p><p> <a name="footnote9"><span style="text-decoration&#58;underline;">[9]</span></a> 81 FR 91682 (Dec. 19, 2016).</p><p> <a name="footnote10"><span style="text-decoration&#58;underline;">[10]</span></a><em>&#160;See </em> <em>AMA Price Risk Governance</em> AB 2017-03, Nov. 21, 2017.</p><p> <a name="footnote11"><span style="text-decoration&#58;underline;">[11]</span></a><em>&#160;See </em> <em>Acquired Member Asset Price Risk Governance</em>&quot; AB 2017-03, Nov. 21, 2017.</p><p> <a name="footnote12"><span style="text-decoration&#58;underline;">[12]</span></a> 12 CFR Part 1281.</p><p> <a name="footnote13"><span style="text-decoration&#58;underline;">[13]</span></a> The <em>Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance</em> regulation defines “risk appetite&quot; as, “the aggregate level and types of risk the board of directors and management are willing to assume to achieve the regulated entity's strategic objectives and business plan, consistent with applicable capital, liquidity, and other regulatory requirements.&quot;&#160; 12 CFR §&#160;1239.2.&#160; </p><p> <a name="footnote14"> <span style="text-decoration&#58;underline;">[14]</span></a> A mortgage portfolio's prepayment optionality can result in unanticipated funding mismatches that can have a deleterious effect on a Bank's net income, market value of equity, market value of equity to book value of equity ratio, market value of equity to par value of capital ratio, and dividend payment capacity.&#160;&#160;&#160; </p><p> <a name="footnote15"> <span style="text-decoration&#58;underline;">[15]</span></a> In general, in-district state level concentrations are acceptable given Banks must serve their district.&#160; However, FHFA expects the Bank to monitor and analyze housing-market level concentrations both within and outside its district.&#160;&#160;&#160; </p><p> <a name="footnote16"> <span style="text-decoration&#58;underline;">[16]</span></a><em> See </em><a href="/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx">https&#58;//www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx</a><em>&#160;</em></p><p> <a name="footnote17"><span style="text-decoration&#58;underline;">[17]</span></a> 12 CFR § 1268.4(a)(1)(ii).</p><p> <a name="footnote18"><span style="text-decoration&#58;underline;">[18]</span></a><em>&#160;See </em>Regulatory Interpretation 2000-RI-25, <em>Acquired Member Assets Held for a Valid Business Purpose</em> (Nov. 17, 2000).&#160; </p>&#160;&#160;&#160;&#160;&#160;&#160; <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure the safe and sound operations of the regulated entities and the Office of Finance. Advisory bulletins describe FHFA supervisory expectations for safe and sound operations in particular areas and are used in FHFA examinations of the regulated entities and the Office of Finance. &#160;Questions about this advisory bulletin should be directed to&#58;&#160; <a href="mailto&#58;SupervisionPolicy@fhfa.gov">SupervisionPolicy@fhfa.gov</a>. </p></td></tr></tbody></table><p>&#160;</p>1/31/2020 9:48:42 PMHome / Supervision & Regulation / Advisory Bulletins / Acquired Member Assets Risk Management Advisory Bulletin AB 2020-01: ACQUIRED MEMBER ASSETS RISK MANAGEMENT 4727https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Capital Stock Management27088FHL Banks8/15/2019 4:00:00 AMAB 2019-03<table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>ADVISORY BULLETIN</p><p>AB 2019-03<br></p><p>CAPITAL STOCK MANAGEMENT<br></p></td></tr></tbody></table><p> &#160;&#160; <br></p><p> <strong style="text-decoration&#58;underline;"> <em>Purpose</em></strong><br></p><p>This Advisory Bulletin (AB)&#160;provides Federal Housing Finance Agency (FHFA) guidance for each Federal Home Loan Bank (Bank) regarding the manner in which it manages its capital accounts.&#160; This guidance augments existing statutory and regulatory capital requirements.&#160; </p><p>This guidance describes FHFA’s supervisory expectations regarding an appropriate level of capital stock that each Bank should maintain, expressed as a percentage of assets, in order to help preserve the cooperative nature of the Banks.&#160; Recent developments have resulted in the Banks responding to growth in their retained earnings, in part, by lowering their levels of capital stock, where both are measured as a proportion of total assets.&#160; Holding a higher proportion of total capital as retained earnings supports the maintenance of the par value of Bank capital stock, but also results in a declining proportion of capital stock which could, at some point, undermine the cooperative nature of the Banks by minimizing their members’ ownership interest in them.<br>&#160;</p><p> <strong style="text-decoration&#58;underline;"> <em>Background</em></strong></p><p> <span style="text-decoration&#58;underline;">Capital Composition</span><br></p><p>Bank regulatory capital is comprised of member paid-in Bank capital stock (capital stock) and retained earnings.<a href="#footnote1">[1]</a>&#160;&#160;&#160; Each Bank has a variety of means to manage the composition of its capital accounts between those two items.&#160; For example, a Bank can increase or decrease the proportion of capital attributable to capital stock by increasing or decreasing stock purchase requirements that an institution must make for membership or for conducting certain activities, primarily member advance borrowings.&#160; The Bank also can issue stock dividends, which converts retained earnings into capital stock.<br></p><p> <span style="text-decoration&#58;underline;">Cooperative Nature of the Bank System</span><br></p><p>Congress established the Banks as cooperative business organizations, meaning that the Banks are to be owned and managed by their members for the purpose of providing services to those members.&#160; Specifically, only members may own capital stock in the Banks or vote to elect persons to the boards of directors, a majority of which must be officers or directors of those member institutions.&#160; The members of the Banks also own the retained earnings of the Banks, in proportion to the amount of Class B capital stock that each member owns.&#160; Only members and certain eligible associates may receive an advance, which is the primary service provided by the Banks, or may sell qualifying mortgage loans to their Bank.<a href="#footnote2">[2]</a>&#160;&#160; </p><p>A fundamental aspect of the cooperative structure is that the members have a financial incentive to be fully engaged in the oversight and business of the Bank.&#160; Being so engaged helps to preserve the value of the members’ investment in the capital stock of the Bank, and to maintain the availability of Bank services that benefit members.&#160; As both owners and customers of the Bank, members also are financially motivated to ensure that the Bank operates in a safe and sound manner.&#160; As a practical matter, however, the members’ financial motivation to properly oversee the operations of the Bank will likely be positively correlated with the members’ tangible investment in the Bank.&#160; </p><p>In recent years, the Banks have achieved significant growth in retained earnings as a proportion of total assets.&#160; Consequently, the Banks have also managed a gradual decline in capital stock as a proportion of assets.&#160; FHFA believes that it is important for a Bank to maintain a minimum capital stock-to-assets ratio in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank.&#160; Determining an amount of capital stock that would provide some reasonable assurance that the members would continue to have a financial incentive to remain engaged in the oversight and use of the cooperative is not a matter that readily lends itself to precise calculation.&#160; Nonetheless, FHFA believes that the members of a Bank that maintains a ratio of at least two percent of capital stock to assets will continue to have adequate financial incentive to remain engaged in the cooperative, and encourages each Bank to maintain its capital stock at or above that ratio.&#160;&#160;&#160; </p><p>A factor suggesting that maintaining at least a two percent capital stock-to-assets ratio may align with sufficient member incentive to remain engaged in the cooperative is that this measure is related to the risk of capital stock impairment.&#160; Specifically, the risk of impairment is heightened as the Bank’s total capital declines to near the level of two percent of assets.&#160; This is the threshold at which the prompt corrective action regulation specifies that the Director of FHFA may appoint a conservator or receiver.<a href="#footnote3">[3]</a>&#160;&#160; Either of those actions would significantly increase the likelihood of impairment for the remaining amounts of capital stock.&#160; If a Bank that was approaching the two percent capital level were to be capitalized principally with retained earnings, its members would have little investment at risk if the Bank’s capital levels were to continue to decline, and thus less motivation to engage in actions to revive the safe and profitable operation of the Bank.&#160; Clearly, the motivation of the members to actively support the Bank would increase in step with the proportion of that capital that is capital stock and would be maximized when needed most in the circumstance of a Bank that has only about two percent of capital to assets, and all of that capital is capital stock.<br><br></p><p style="text-decoration&#58;underline;"> <strong> <em>Scope</em></strong></p><p>This Advisory Bulletin applies only to the Banks.<br>&#160;</p><p> <strong style="text-decoration&#58;underline;"> <em>Guidance</em></strong></p><p>Maintaining the level of capital stock in an amount that is equal to or greater than two percent of a Bank’s assets is consistent with helping preserve the cooperative nature of the Bank System. Beginning six months following the date of this Advisory Bulletin, FHFA will consider the proportion of capital stock, as measured on a daily average basis at month end, when assessing each Bank’s capital management practices.&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;</p><p>&#160;</p><hr width="25%" align="left" /><p> <a name="footnote1">[1]</a> For purposes of this Advisory Bulletin, capital stock includes all member paid-in Bank capital stock, including mandatorily redeemable stock.<br></p><p> <a name="footnote2">[2]</a> Most recently, in the amended Acquired Member Asset rule, FHFA stated that the objective of the member nexus requirement in that rule is to align the mortgage purchase programs with the cooperative structure of the Bank System. 81 Fed. Reg. 91674, 91676 (Dec. 19, 2016).<br></p><p> <a name="footnote3">[3]</a> <em>See</em> 12 CFR 1229.1, 1229.10(a). This threshold is also well known from commercial banking regulation, where the Federal Deposit Insurance Act requires that a bank’s “critical capital” be not less than two percent of total assets. 12 USC 1831o(c)(3)(B).<br></p><p> <br> &#160;</p><table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p>FHFA has statutory responsibility to ensure the safe and sound operations of the regulated entities and the Office of Finance. Advisory bulletins describe FHFA supervisory expectations for safe and sound operations in particular areas and are used in FHFA examinations of the regulated entities and the Office of Finance. Questions about this advisory bulletin should be directed to&#58; <a href="mailto&#58;SupervisionPolicy@fhfa.gov">SupervisionPolicy@fhfa.gov</a><br></p></td></tr></tbody></table>8/16/2019 7:22:36 PMHome / Supervision & Regulation / Advisory Bulletins / Capital Stock Management Advisory Bulletin This Advisory Bulletin (AB) provides Federal Housing Finance Agency (FHFA 3586https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx
Implementation of Streamlined Monitoring Requirements for Affordable Housing Program Projects Funded by Certain Other Federal Government Rental Housing Programs26200FHL Banks5/9/2019 4:00:00 AMAB 2019-02<div> <strong>DIVISION OF HOUSING MISSION AND GOALS</strong><br> <div> <br> <table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p style="text-align&#58;left;"> <strong>ADVISORY BULLETIN</strong><strong>&#160; </strong></p><p style="text-align&#58;left;"> <strong>AB 2019-02</strong><strong>&#160;&#160;</strong>&#160;<br></p><p style="text-align&#58;left;"> <strong>IMPLEMENTATION OF STREAMLINED MONITORING REQUIREMENTS FOR AFFORDABLE HOUSING PROGRAM PROJECTS FUNDED BY CERTAIN OTHER FEDERAL GOVERNMENT RENTAL HOUSING PROGRAMS</strong><br></p><p style="text-align&#58;left;"><strong>May 9, 2019</strong><br></p></td></tr></tbody></table><p style="text-decoration&#58;underline;"> <br> <strong> <em>Purpose</em></strong></p><p>The Federal Housing Finance Agency's (FHFA) Affordable Housing Program (AHP) regulation authorizes streamlined monitoring for AHP-subsidized projects that are also funded by certain other government housing programs and identified by FHFA in separate guidance.&#160; This Advisory Bulletin (AB) identifies those programs.</p><p style="text-decoration&#58;underline;"> <strong><em>Background</em></strong></p><p>FHFA published a final rule in the <em>Federal Register</em> on November 28, 2018 amending the AHP regulation, one component of which permits the Federal Home Loan Banks (Banks) to implement streamlined monitoring for AHP projects funded by certain other government housing programs that FHFA specifies in separate guidance.&#160; Specifically, the amended regulation requires that at initial monitoring of AHP projects funded by such other programs, the Banks review rent rolls (in the case of rental projects) and project sponsor certifications, and any other documentation to verify that the projects meet the requirements in 12 C.F.R. § 1291.50(a)(2), but not any other back-up documentation on household incomes or rents.&#160;<a href="#1">[1]</a>&#160;<span style="font-style&#58;normal;">&#160;</span>For long-term monitoring of AHP rental projects funded by such other programs, the regulation requires that the Banks review annual project sponsor certifications on household incomes and rents and information on the ongoing financial viability of the projects, but not any other back-up documentation on incomes and rents, including rent rolls.&#160;<a href="#2">[2]</a>&#160;<br></p><p style="text-align&#58;left;text-decoration&#58;underline;"> <strong> <em>Guidance</em></strong></p><p>As discussed in the proposed&#160;<a href="#3">[3]</a>&#160;and final&#160;<a href="#4">[4]</a>&#160;AHP rules, FHFA has analyzed the monitoring standards and practices of several federal government housing programs to identify programs with substantially equivalent rent, income, and retention requirements to the AHP, as well as very low noncompliance rates.&#160; FHFA's analysis also focused on each monitoring entity's demonstrated ability to monitor the program effectively.&#160; </p><p>FHFA found that the following four housing programs meet the criteria identified above&#58;<br></p><ul><li>HUD Section 202 Program for the Elderly;<br></li><li>HUD Section 811 Program for Housing the Disabled;</li><li>USDA Section 515 Rural Multifamily Program; and</li><li>USDA Section 514 Farmworker Multifamily Program.<br></li></ul><p> <span style="color&#58;#444444;font-style&#58;normal;">Accordingly, the Banks may implement the streamlined monitoring described above for AHP projects funded by any of these four programs.</span><span style="font-style&#58;normal;color&#58;#444444;">&#160;</span><br></p><p>Although the final AHP rule became effective on December 28, 2018, the compliance date for implementing the streamlined monitoring practices is January 1, 2021.&#160; However, Banks may implement the streamlined monitoring before this compliance date.&#160; Banks that opt to do so should provide notice to FHFA pursuant to the email of December 26, 2018, to the Banks from the Deputy Director of the Division of Bank Regulation at <a href="mailto&#58;DeputyDirector-FHLBanks@FHFA.gov">DeputyDirector-FHLBanks@fhfa.gov​</a>.&#160; Banks must also ensure that their AHP Implementation Plans set forth their requirements for monitoring.&#160;<a href="#5">[5​]</a>&#160;<br></p><p>Should a Bank identify potential noncompliance with AHP household income or rent requirements in a project that is subject to streamlined monitoring, it should evaluate whether an expansion of its review to include the back-up documentation, including rent rolls, is warranted to verify compliance with AHP requirements.&#160;</p><p style="font-style&#58;normal;">____________________________________<br></p><p style="font-style&#58;normal;text-decoration-line&#58;underline;"> <span style="font-size&#58;inherit;font-family&#58;inherit;font-weight&#58;700 !important;"> <em></em></span></p><p style="font-style&#58;normal;"> <a name="1">[1]</a>&#160;<em style="font-weight&#58;400;font-size&#58;14px;font-family&#58;&quot;source sans pro&quot;, sans-serif;">See</em><span style="font-style&#58;normal;">&#160;12 C.F.R. § 1291.50(a)(2), (a)(3).</span><br></p><p style="font-style&#58;normal;"> <a name="2">[2]</a>&#160;<em style="font-weight&#58;400;font-size&#58;14px;font-family&#58;&quot;source sans pro&quot;, sans-serif;">See</em><span style="font-style&#58;normal;">&#160;12 C.F.R. § 1291.50(c)(1)(i), (ii).</span>​</p><p> <a name="3">[3]</a>&#160;Affordable Housing Program Amendments, 83 Fed. Reg. 11344, 11365-11366 (Mar. 14, 2018).​<br></p><p> <a name="4">[4]</a>&#160;Affordable Housing Program Amendments, 83 Fed. Reg. 61186, 61126-61127 (Nov. 28, 2018).<br></p><p> <a name="5">[5]</a>&#160;See&#160;12 C.F.R. § 1291.13(b)(11).&#160;</p><p style="text-align&#58;left;">FHFA will continue to assess the monitoring standards and practices of other government housing programs and may make modifications to this guidance in a subsequent AB as appropriate.<br style="text-decoration&#58;underline;"></p><table width="100%" class="ms-rteTable-default" cellspacing="0"><tbody><tr><td class="ms-rteTable-default" style="width&#58;100%;"><p style="text-align&#58;left;">FHFA has statutory responsibility to ensure that the regulated entities carry out their missions consistently with the provisions and purposes of FHFA's statute and the regulated entities' authorizing statutes.&#160; Advisory Bulletins describe supervisory expectations in particular areas and are used in FHFA examinations of the regulated entities.&#160; For comments or questions pertaining to this AB, contact Ted Wartell at <a href="mailto&#58;Ted.Wartell@fhfa.gov">Ted.Wartell@fhfa.gov</a> or by phone at 1-202-649-3157; or Marcea Barringer at <a href="mailto&#58;Marcea.Barringer@fhfa.govl">Marcea.Barringer@fhfa.gov</a> or by phone at 1-202-649-3275.&#160;<br></p></td></tr></tbody></table> <br> </div></div>5/10/2019 7:33:45 PMHome / Supervision & Regulation / Advisory Bulletins / Implementation of Streamlined Monitoring Requirements for Affordable Housing Program Projects Funded by Certain Other 3106https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Forms/AllItems.aspxhtmlFalseaspx

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