Prudential Management and Operations Standards

<RULE> FEDERAL HOUSING FINANCE AGENCY <CFR>12 CFR Part 1236</CFR> <RIN>RIN 2590-AB10</RIN> <SUBJECT>Prudential Management and Operations Standards</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Federal Housing Finance Agency. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Federal Housing Finance Agency (FHFA) is amending its prudential management and operations standards rule (rule) to clarify that procedural requirements for corrective plans apply to prudential management and operations standards (Standards) established as regulations as well as guidelines, and to make the Office of Finance of the Federal Home Loan Bank System (OF) subject to the rule and some of the existing Standards in the appendix to the rule. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This rule is effective February 20, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Clinton Jones, General Counsel, (202) 649-3006, <E T="03">Clinton.Jones@fhfa.gov;</E> or Francisco Medina, Assistant General Counsel, (202) 649-3076, <E T="03">Francisco.Medina@fhfa.gov.</E> These are not toll-free numbers. The mailing address is: Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected to any of the contact numbers above. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Introduction</HD> <HD SOURCE="HD2">A. Background</HD> The Federal Housing Enterprises Financial Safety and Soundness Act (the Safety and Soundness Act) requires the Director of FHFA to establish Standards that address ten subjects relating to the management and operation of the regulated entities, authorizes the Director to establish other Standards in addition to those on the ten listed subjects, and authorizes the Director to establish Standards by regulation or guideline. <SU>1</SU> <FTREF/> The Safety and Soundness Act also addresses FHFA corrective actions if a regulated entity fails to comply with a Standard and requires FHFA to establish some procedures for corrective actions by regulation. <SU>2</SU> <FTREF/> FHFA currently implements these requirements through a procedural rule, 12 CFR part 1236, and Standards that FHFA has established as guidelines set forth in an appendix to the rule, as well as Standards established as regulations or as parts of regulations. <SU>3</SU> <FTREF/> <FTNT> <SU>1</SU>  12 U.S.C. 4513b (“section 4513b”). </FTNT> <FTNT> <SU>2</SU>   <E T="03">Id. at</E> 4513b(b)(1)(C). </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> 12 CFR 1242.1(b), identifying the Enterprise Resolution Planning Regulation as a Standard, and 1240.1(e)(3), identifying provisions of the Enterprise Capital Adequacy Regulation as Standards. </FTNT> The current rule and initial Standards, all of which were established as guidelines, were promulgated in 2012. Because FHFA did not then identify any regulations as Standards, the current rule addresses only Standards established as guidelines, which could imply that Standards FHFA has since established as regulations are not covered by the rule's procedures. Neither the current rule nor any Standards apply to OF. <HD SOURCE="HD2">B. Overview of Proposed Amendments to the Rule</HD> On May 4, 2023, FHFA proposed to amend part 1236 to reflect the scope of FHFA's statutory authority to establish Standards as regulations as well as guidelines, and to clarify that the rule's procedural aspects related to corrective actions that may result from failure to comply with a Standard apply equally to Standards established as guidelines or as regulations. <SU>4</SU> <FTREF/> FHFA also proposed to follow a notice-and-comment process to establish Standards as guidelines or to make material modifications of such Standards, and reaffirmed its intention to locate Standards established as guidelines in the appendix to the rule. <FTNT> <SU>4</SU>  88 FR 28433 (May 4, 2023); correction notice at 88 FR 35780 (June 1, 2023). </FTNT> FHFA further proposed to amend the rule and the appendix to part 1236 so that OF would be subject to the rule and certain Standards. The Standards FHFA proposed to apply to OF are the General Responsibilities of the Board of Directors and Senior Management, and Standards 1, 2, 8, and 10. Standard 1 addresses “Internal Controls and Information Systems.” Standard 2 addresses “Independence and Adequacy of Internal Audit Systems.” Standard 8 addresses “Overall Risk Management Processes.” Standard 10 addresses “Maintenance of Adequate Records.” Consistent with the foregoing changes, FHFA also proposed to revise and clarify definitions and make conforming changes to part 1236 and its appendix. <HD SOURCE="HD1">II. Discussion of Comments and Agency Response</HD> <HD SOURCE="HD2">A. Overview of Comments Received</HD> FHFA received two comments on its proposed amendments to the rule: one from the Council of Federal Home Loan Banks (Council) and one from the Federal Home Loan Mortgage Corporation (Freddie Mac). The Council commented on the proposed amendments to apply the rule and identified Standards to OF and on the applicability of notice-and-comment rulemaking to the establishment of Standards by guideline. Freddie Mac also commented on the applicability of notice-and-comment rulemaking to the revision or revocation of Standards that had been established by guideline. After carefully reviewing and considering the comments, FHFA has determined to issue the final rule as it was proposed. <HD SOURCE="HD2">B. Applying the Rule and Identified Standards to OF</HD> The Council observed that OF is not a “regulated entity” as defined in the Safety and Soundness Act and is therefore not explicitly subject to section 4513b, which applies to regulated entities. The Council nonetheless noted that FHFA has express general regulatory authority over OF under 12 U.S.C. 4511(b)(2), as FHFA also noted in its proposal, which provides a statutory basis for FHFA to apply the rule and identified Standards to OF. The Council suggested FHFA clarify its authority regarding OF in the rule. FHFA observes that the rule's authority provision already references 12 U.S.C. 4511; on that basis, further clarification of FHFA's authority is not necessary. The Council asked that FHFA identify the specific purposes of section 4513b that would be served by subjecting OF to the rule and Standards. As the Council noted in its letter, however, OF “is an integral component of the FHLBank System.” OF is the fiscal agent for the Federal Home Loan Bank System, through which the Banks issue consolidated obligations of the System in the public capital markets. OF's role and the activities OF performs for the Banks require OF to have appropriate governance, adequate internal controls and information systems, appropriate risk management, and adequate records maintenance. For those reasons, applying the rule and identified Standards to OF would further the purposes of section 4513b in the same manner that subjecting the Banks to the rule and Standards does. The Council also requested that FHFA specify “the matters that are not relevant” to OF for purposes of compliance with the identified Standards and raised concerns about potential conflicts between existing regulations and the Standards in the appendix. FHFA notes that its proposal particularly specified the Standards and portions of Standards that would apply to OF; in other words, the proposed amendments specified the matters that are relevant to OF. Moreover, the current version of the rule and the proposed amendments to the rule both specify that in the case of a conflict between a Standard and a regulation, “the regulation shall control.”  <SU>5</SU> <FTREF/> <FTNT> <SU>5</SU>  In the current rule, <E T="03">see</E> 12 CFR 1236.3(c). In the proposed amendments to the rule, <E T="03">see</E> 12 CFR 1236.3(d). </FTNT> Finally, the Council requested that FHFA establish an implementation timeframe for OF to comply with the rule and identified Standards. FHFA expects that the interim between publication of the final rule and its effective date will provide OF sufficient time either to come into compliance with the identified Standards or to engage with appropriate FHFA supervision staff on a reasonable timeframe to come into compliance with an identified Standard. <HD SOURCE="HD2">C. Notice-and-Comment Procedures and Standards Established by Guidelines</HD> The Council and Freddie Mac both offered comments on the applicability of notice-and-comment rulemaking to Standards established by guidelines. The current version of the rule provides that the Director may “modify, revoke, or add to the Standards” established by guidelines “by order or notice,”  <SU>6</SU> <FTREF/> consistent with FHFA's authority to issue guidance without going through notice-and-comment rulemaking. <SU>7</SU> <FTREF/> <FTNT> <SU>6</SU>  12 CFR 1236.3(b). </FTNT> <FTNT> <SU>7</SU>   <E T="03">See generally Perez</E> v. <E T="03">Mortgage Bankers Ass'n,</E> 575 U.S. 92, (2015) (“Not all `rules' must be issued through the notice-and-comment process. Section 4(b)(A) of the [Administrative Procedure Act] provides that . . . the notice-and-comment requirement `does not apply' to `interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.' ”). </FTNT> Based on FHFA's past practice of establishing Standards as guidelines and because FHFA has determined to continue locating all Standards established as guidelines in the appendix to the rule, which would require a <E T="04">Federal Register</E> notice, FHFA proposed amending the rule to require FHFA to provide public notice of and seek public comment on any Standard it planned to ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 46k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━