Voluntary Mergers of Federal Home Loan Banks

SUMMARY: Section 1209 of the Housing and Economic Recovery Act of 2008 (HERA) amended section 26 of the Federal Home Loan Bank Act (Bank Act) to permit any Federal Home Loan Bank (Bank) to merge with another Bank with the approval of its board of directors, its members, and the Director of the Federal Housing Finance Agency (FHFA). This final rule establishes the conditions and procedures for the consideration and approval of voluntary Bank mergers.

EFFECTIVE DATE: The final rule is effective on December 28, 2011.

FOR FURTHER INFORMATION CONTACT: John P. Foley, Senior Financial Analyst, Policy and Program Development, [email protected], (202) 408-2828 (this is not a toll-free number), Federal Housing Finance Agency, 1625 Eye Street NW., Washington, DC 20006; Eric M. Raudenbush, Assistant General Counsel, [email protected], (202) 414-6421 (this is not a toll-free number); Federal Housing Finance Agency, Fourth Floor, 1700 G Street NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Federal Home Loan Bank System

The 12 regional Banks are instrumentalities of the United States organized under the Bank Act. /1/ The Banks are cooperatives; only members of a Bank may purchase the capital stock of a Bank, and only members or certain eligible housing associates (such as state housing finance agencies) may obtain access to secured loans, known as advances, or other products provided by a Bank. /2/ Each Bank is managed by its own board of directors and serves the public interest by enhancing the availability of residential mortgage and community lending credit through its member institutions. /3/ Any eligible institution (generally a federally insured depository institution or state-regulated insurance company) may become a member of a Bank if it satisfies certain criteria and purchases a specified amount of the Bank's capital stock. /4/

FOOTNOTE 1 See 12 U.S.C. 1423, 1432(a). END FOOTNOTE

FOOTNOTE 2 See 12 U.S.C. 1426(a)(4), 1430(a), 1430b. END FOOTNOTE

FOOTNOTE 3 See 12 U.S.C. 1427. END FOOTNOTE

FOOTNOTE 4 See 12 U.S.C. 1424; 12 CFR part 1263. END FOOTNOTE

B. HERA Provisions Addressing Voluntary Mergers

Section 1209 of HERA added new paragraphs (b)(1) and (b)(2) to section 26 of the Bank Act to address voluntary mergers of Banks. Section 26(b)(1) authorizes any Bank to merge voluntarily with another Bank with the approval of the Director of FHFA (Director) and the boards of directors of the Banks involved in the merger. Section 26(b)(2) requires FHFA to promulgate regulations establishing the conditions and procedures for the consideration and approval of voluntary mergers, including approval by Bank members. /5/ The HERA amendments do not provide any further details about the terms on which Banks may merge or on which FHFA may approve such mergers.

FOOTNOTE 5 See 12 U.S.C. 1446(b)(1), (2). END FOOTNOTE

As required by section 26(b)(2), the final rule establishes the conditions and procedures for the consideration and approval of voluntary mergers of Banks. The rule does not relate to liquidations, reorganizations, conservatorships, or receiverships undertaken by the Director pursuant to the authority set forth at section 26(a) of the Bank Act and section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act). /6/

FOOTNOTE 6 See 12 U.S.C. 1446(a), 4617. END FOOTNOTE

C. The Proposed Rule

On November 26, 2010, FHFA published in the Federal Register a proposed rule to implement section 26(b) of the Bank Act by adding to FHFA's regulations a new part 1278 to govern voluntary mergers of Banks. /7/ The 60-day comment period closed on January 25, 2011.

FOOTNOTE 7 See 75 FR 72751 (Nov. 26, 2010). END FOOTNOTE

The proposed rule would have established procedures for Banks to follow in order to consummate a merger, including: Execution of a written merger agreement that has been authorized by each merging Bank's board of directors; joint submission of a merger application to FHFA by the merging Banks; preliminary approval of the terms of the merger by the Director; ratification of the merger by the merging Banks' member institutions; and final approval by the Director. In developing the proposed rule, FHFA looked for guidance to governance practices that are common under general principles of corporate law, disclosure practices that are required under the federal securities laws, and the approval standards required under federal banking laws relating to mergers of insured depository institutions.

D. Considerations of Differences Between the Banks and the Enterprises

Section 1313 of the Safety and Soundness Act, as amended by HERA, requires the Director, when promulgating regulations relating to the Banks, to consider the following differences between the Banks and the Enterprises (Fannie Mae and Freddie Mac) with respect to the Banks' cooperative ownership structure; mission of providing liquidity to members; affordable housing and community development mission; capital structure; and joint and several liability. /8/ In preparing this final rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors, and determined that the rule is appropriate. No commenters raised any issues relating to this statutory requirement.

FOOTNOTE 8 See 12 U.S.C. 4513. END FOOTNOTE

II. The Final Rule

FHFA received six comment letters in response to the proposed rule. All twelve Banks jointly submitted one comment letter which addressed the issues raised in the proposed rule in a comprehensive manner. Three Banks submitted individual comment letters to supplement the Banks' joint letter, and two trade associations also provided comments. All six of the comment letters expressed general support for the proposed rule, although there were a number of recommendations regarding changes to be made in the final rule.

FHFA considered all of the comments in developing the final rule, which establishes merger conditions and procedures that are substantially similar to those that were proposed, except that the two-step preliminary/final FHFA approval process embodied in the proposed rule has been replaced with a single-step approval in the final version, as suggested by some commenters. FHFA has made a number of minor revisions to the rule in order to address concerns raised by commenters, as well as to provide greater clarity. Specific comments, FHFA's responses, and changes adopted in the final rule are described in greater detail below in the sections describing the relevant rule provisions.

A. Section 1278.1--Definitions

Proposed SEC 1278.1 set forth definitions of terms used in proposed part 1278. With two minor exceptions, all of these definitions have been adopted as proposed and are set forth in SEC 1278.1 of the final rule. A definition for the term "Financial Statements" has been added to the final rule to refer to statements of condition, income, capital, and cash flows, with explanatory notes, in such form as the Banks are required to include in their filings made under the Securities and Exchange Act of 1934 (Exchange Act). /9/ In addition, definitions for the terms "GAAP" (referring to accounting principles generally accepted in the United States as in effect from time to time) and "Record Date" (referring to the date established by a Bank's board of directors for determining the members that are entitled to vote on the ratification of a merger agreement) have been added. A definition for the term "Office of Finance," which was inadvertently omitted from the proposed rule, has also been added. The terms "Record Date" and "Financial Statements," as well as comments received on certain proposed definitions and revisions to the definitions of the terms "Disclosure Statement" and "Effective Date" are discussed below in the context of the relevant substantive provisions of the final rule.

FOOTNOTE 9 15 U.S.C. 78a, et seq. END FOOTNOTE

B. Section 1278.2--Authority

Section 1278.2 of the proposed rule would have authorized any two or more Banks to merge, provided that they satisfied the various procedural and substantive requirements of proposed part 1278 relating to the merger agreement, merger application, approval by the Director, ratification by the members, and final consummation of the merger. Proposed SEC 1278.1 defined the words "merge" and "merger" broadly to include not only a traditional merger (where one surviving entity absorbs another disappearing entity), but also a consolidation, a purchase and assumption transaction, and any other type of business combination that could occur between or among Banks. The intent behind proposed SEC 1278.2 was to permit each Bank wide latitude to pursue beneficial business combinations with other Banks, subject to the proviso that any such combination could be consummated only with the express approval of the Director, obtained in accordance with the conditions and procedures set forth in proposed part 1278. The Banks expressed support for the broad definition of "merge" and "merger," and no commenters opposed the definition, which the final rule retains without change.

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Part 1278"

RIN Number: "RIN 2590-AA37"

Citation: "76 FR 72823"

Federal Register Page Number: "72823"

"Rules and Regulations"